FDIC Survey of Banks’ Effortsto Serve the Unbanked and

Underbanked

February 5, 2009

Presented by:

Barbara A. Ryan, Deputy to the Vice Chairman, FDIC

Ed Bachelder, Director, Blueflame Consulting

Professor Michael S. Barr, University of Michigan Law School

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Agenda

Background

Overview of FDIC Bank and Household Survey Efforts

Bank Survey Findings

Recommendations and Discussion

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Background

Survey required by the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (“Reform Act”).

Scope includes unbanked and underbanked.

Unbanked: Rarely, if ever, held a checking account, savings account, or other type of transaction or check cashing account at an insured depository institution.

Underbanked: Have an account with an insured depository institution but also rely on non-bank alternative financial service providers for transaction services or high-cost credit products.

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FDIC Bank Survey First bank survey was conducted in 2008.

Dove Consulting retained to help design and administer the survey.

Bank survey goals were designed to address factors identified in statute:

Identify the extent to which banks are serving the banking needs of unbanked and underbanked individuals,

Identify challenges affecting the ability of banks to serve unbanked and underbanked individuals, and

Identify innovative efforts banks use to serve unbanked and underbanked individuals.

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FDIC Household Survey

Reform Act also requests a “fair estimate of the size and worth of the ‘unbanked’ market” in the U.S.

Addressed by a separate FDIC/Census household survey conducted as a supplement to Census’ Current Population Survey in January 2009.

Designed to generate the first reliable national and regional estimates of the number of U.S. unbanked and underbanked households, their demographic characteristics, and factors hindering their use of banks.

Survey results expected to be released later this year.

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Bank Survey Administration

Mail-in survey questionnaires were sent in Spring 2008 to ~1,300 banks and thrifts (54% response rate). Participation was voluntary. 96 percent of top 25 banks (Tier 1) responded. 61 percent of mid-sized banks (Tier 2) responded. 51 percent of smaller banks (Tier 3) responded.

Case studies were also completed on 16 banks to highlight innovative efforts.

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Bank Survey Questions

Education and Outreach Perception of Market Opportunity Education and Outreach Efforts Perceived Effectiveness of Education and Outreach Efforts

Obstacles and Access Perceived challenges to serving unbanked/underbanked Efforts to modify bank branches to increase appeal Services for non-customers who may be unbanked Account opening policies and practices

Products and Services Entry-level checking accounts Entry-level savings accounts Services provided to unbanked/underbanked Funds Availability Entry-level credit products

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High-Level Survey Findings

Most banks are aware that significant unbanked and underbanked populations are in their market areas,

But relatively few banks have made it a priority to target these market segments.

Many banks offer basic financial education materials, But fewer participate in the types of outreach efforts that are viewed

by the industry as most effective to attract and maintain unbanked and underbanked individuals as long-term customers.

Most banks offer basic checking accounts to all customers, But few offer deposit, payment, credit, and electronically-based

products that address the unique needs of unbanked and underbanked customers.

Banks are concerned about the profitability of doing business with unbanked and underbanked individuals as well as perceived regulatory issues related to anti-money laundering laws and regulations

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Case Study Banks are Engaged in Innovative Efforts

Education and Outreach Amalgamated Bank, New York, NY Citibank, National Association, Las Vegas, NV The Commerce Bank of Washington, Seattle, WA Fort Morgan State Bank, Fort Morgan, CO International Bank of Commerce (IBC), Laredo, TX Mitchell Bank, Milwaukee, WI Monroe Bank & Trust, Monroe, MI

Obstacles and Access Bangor Savings Bank, Bangor, ME Citizens Union Bank of Shelbyville, Shelbyville, KY Ridgewood Savings Bank, Ridgewood, NY Second Federal Savings of Chicago, Chicago, IL

Products and Services Artisans’ Bank, Wilmington, DE BancorpSouth, Tupelo, MS Carver State Bank, Savannah, GA Central Bank of Kansas City, Kansas City, MO KeyBank, Cleveland, OH

Additional details on each case study bank are contained in the FDIC Executive Summary and the detailed report by Dove Consulting

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Survey Findings

1111

Perception of Market Opportunity

71%

90%

100%

73% 17% 11%

11%

7%

18%

3%

0% 20% 40% 60% 80% 100%

Tier 3

Tier 2

Tier 1

WeightedAverage

Yes

Don't Know

No

The majority of banks (73%) are aware that there are unbanked and/or underbanked individuals in their market areas

Q: Does your bank perceive that there are any unbanked or underbanked populations in your market area?

Yet less than 18% of banks have identified expanding services to these groups as a priority in their business strategy

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Most Effective Outreach Methods Banks identified “Providing financial education sessions,”

“Participating in other organizations,” and “Outreach visits” as the three most effective forms of education and outreach.

Q: What are the three most effective types of financial education and marketing programs that your bank has used to help establish account relationships with unbanked and/or underbanked individuals?

Ranking Programs

1 Providing Financial Education Sessions

2 Participation in Other Organizations

3 Outreach Visits

4 Financial Education Materials

5 Targeted Marketing

6 Other

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Provision of Education and Outreach Most banks (63%) provide financial education materials but fewer

provide the forms of education and outreach viewed as most effective by the industry.

Q:. Does your bank provide financial education materials aimed at the unbanked and/or underbanked?

Yes, 63%

No, 37%

Yes, at the bank and off-

premise14%

Yes, off-premise

35%

Yes, at the bank4%

No47%

Does your bank teach financial literacy and education sessions?

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Perceived Challenges to Serving Unbanked/Underbanked When asked to rank order challenges serving unbanked and/or

underbanked individuals, banks identified “profitability” first, followed by “Regulatory barriers”, and “Fraud concerns.”

Ranking Challenges

1 Profitability Issues

2 Regulatory Barriers

3 Fraud Concerns

4 High Cost of Customer Acquisition

5 Competition from Alternative Service Providers

6 Unfamiliarity with this Regulation

7 Internal Challenges

8 Other Challenges

Regulatory issues were perceived by 40% of

banks as impeding their ability to serve this

market.

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Efforts to Modify Bank Branches to Increase Appeal Most banks (64%) report that they have modified their retail

branches to make them more welcoming and/or convenient to unbanked and/or underbanked.

13%

17%

20%

43%

44%

47%

73%

0% 20% 40% 60% 80% 100%

Non-Traditional Locations

Innovative Branch Design

New Branch in LMI Area

Off-Premise ATMs

Extended Banking Hours

External ATMs

Internet or Mobile Banking

Most banks (73%) report that have done this by

offering Internet or mobile banking – fewer

have added non-traditional locations or branches in LMI areas.

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Services for Non-Customers Who May be Unbanked Services provided are typically limited to cashing checks drawn on

the bank itself.

37% of banks offer bank checks or money orders.

6% of banks offer international remittances.

Identification can be a challenge: most banks will accept a drivers license (92%) or state-issued photo ID (86%); 20% of banks accept Matricular Consular cards and 38% accept ITINs.

Many banks indicated regulatory concerns about providing payment services to non-customers.

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Account Opening Policies and Practices Account opening requirements can present significant obstacles to

the development of banking relationships with unbanked individuals.

Unbanked and/or underbanked individuals with blemished credit histories likely face challenges to account opening since most banks (87%) require a third-party credit check or new account risk management screen such as ChexSystems.

Most banks require either a driver’s license (99%) or passport (92%) to open an account and Matricula Consular cards are accepted by less than one-third (27%).

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Entry-Level Checking Accounts

Most banks offer basic deposit accounts that do not require a minimum balance (62%) and free check writing in their most basic transaction account (90%).

No Minimum Balance Required

w ith Direct Deposit, 8%

No Minimum Balance Required,

62%

Minimum Balance Required, 30%

But 38% of banks require a minimum balance on

their most basic deposit/checking

account and 99% charge a per-item overdraft fee

on their most basic transaction account.

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Entry-Level Savings Accounts

Most banks offer basic savings accounts and money market accounts, but few offer savings products designed to help unbanked and/or underbanked individuals.

Less than 10% of banks offer IDAs, Workplace-based

savings accounts, and/or VITA programs and only 25%

of banks offer “second-chance” accounts. 3%

7%

8%

50%

70%

97%

0% 20% 40% 60% 80% 100%

IRS VITA

Workplace-based Programs

Individual Development Account

Specialized Savings Clubs

Money Market Account

Basic Savings Account

2020

Services Provided to Unbanked/Underbanked About half of banks offer check cashing; fewer offer money orders,

bill payment, prepaid cards, check cashing kiosks.

49%

41%

18%

12%

1%0%

10%

20%

30%

40%

50%

60%

CheckCashing

Money Orders Bill Payment Prepaid Cards Kiosks forCheck

Cashing

Q: Indicate efforts your bank makes as part of its branch strategy to serve un/underbanked in your market areas.

2121

Funds Availability

Funds availability for checks, while in compliance with federal regulations, is slow relative to non-bank check cashing services.

24%

27%

28%

32%

50%

63%

64%

35%

47%

48%

50%

48%

36%

36%

8%

21%

21%

17%

1%

1%

1%

33%

5%

3%

2%

1%

0% 20% 40% 60% 80% 100%

Double Endorsed Check

Personal Check Not Drawn on the Bank

Business Check Not Drawn on the Bank

Payroll Check

Government Check

Business Check Drawn on the Bank

Personal Check Drawn on the Bank

Current Day Next Day Second Day Three or More Days

Many banks (36%) require at least a one

day wait for an established customer to

access funds from a personal or business check drawn on the

same bank and a longer wait for government or

payroll checks and checks drawn on

another bank.

Q: How soon are funds ordinarily available for an established customer who presents the following items?

2222

Entry-Level Credit Products

Banks offer few advance or credit products tailored to LMI and/or unbanked and underbanked individuals.

Less than 6% of banks provide an advance on funds due to arrive by direct deposit or check.

Over two-thirds (69%) offer closed-end unsecured personal loans for amounts up to $5,000, but bank loan eligibility requirements (credit history, proof of income, and credit score) may hinder unbanked and/or underbanked customer access to these and other alternatives to costly payday loans.

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FDIC Recommendations Consider defining a national shared government-industry goal to

lower the number of unbanked and/or underbanked individuals and households in the U.S.

This could include creating a national task force to provide oversight and guidance for the achievement of the shared goal.

Goal would best be based on reliable and regularly reported statistics on the number of unbanked and/or underbanked households in the U.S.

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Discussion