REAL Solutions for Low-Wealth Households

REAL Solutions for REAL Solutions for Low-Wealth Low-Wealth HouseholdsHouseholds

Colorado Credit UnionsColorado Credit Unions

Introductory ConferenceIntroductory Conference

REAL SolutionsREAL Solutions

REAL Solutions

Relevant

Effective

Asset-Building

Loyalty-Producing

Today’s Discussion

R.E.A.L. People! Defining Low-Wealth

R.E.A.L Facts! The Alternative Financial Sector

R.E.A.L. Stories! REAL Solutions in 26 States

R.E.A.L. Solutions in Colorado

State of the Movement

Stalled Growth

Membership and savings growth are just above population growth; 1.0% in 2007

60% of CUs have no growth at all

Declining numbers of CUs

Median CU membership age is 47; US population is 39

History of collaboration

R.E.A.L. People – Families with Modest Income

Households with modest incomeMedian US Household Income – $44,334Colorado Median Household Income $50,105Texas Median Family (4) Income $70,300

A good estimate of modest and low income - ModestModest income households earn 120% of the median income whileLowLow income households earn 50 to 80% of the median income.

They are largely underserved or unbankedThey are largely underserved or unbanked

2004 Census Data

Area Median Household Income - 2000

Area MHI $47,203 CO $41,994 US

Denver $39,500 .84 .94

Colorado Springs

$45,081 .96 1.07

Boulder $44,748 .95 1.07

Grand Junction

$33,152 .70 .79

Fort Collins $44,459 .94 1.06

Vail $56,680 1.20 1.35

U.S. Wealth Distribution - 2001

Defining Low Wealth

0%

20%40%

60%80%

100%

U.S. WealthDistribution

33% Net Worth

26% Net Worth

12% Net Worth

13% Net Worth

16% Net Worth

Defining Low Wealth

Income Quintile Median Wealth

Lowest Quintile $ 6,650

2nd Quintile $ 24,575

3rd Quintile $ 36,988

4th Quintile $ 61,366

Highest Quintile $142,937

Profile of Low Wealth Market

Low or Modest Income. . .Unbanked. . . . . . . . . . . . .No Credit/Credit Impaired.Immigrants. . . . . . . . . . . . .Minorities. . . . . . . . . . . . . . Young Adults. . . . . . . . . . .Unemployed. . . . . . . . . . . .Larger Families. . . . . . . . . .Higher Cost Services. . . . .

Low Wealth as Untapped

Low or Modest Income. . . High Income Density

Unbanked. . . . . . . . . . . . . Loyalties not Developed

No Credit/Credit Impaired. First or Second Chance

Immigrants. . . . . . . . . . . . . Remittances

Minorities. . . . . . . . . . . . . . Chance to Represent

Young Adults. . . . . . . . . . . Life Events

Unemployed. . . . . . . . . . . .Staffing Opportunities

Larger Families. . . . . . . . . .Multiple Relationships

Higher Cost Services. . . . . Difficult to Disappoint

Emerging Markets

What is the world’s most exciting, fastest-growth new market?

It’s where you’d least expect it: at the bottom of the pyramid.Collectively, low income people have immense entrepreneurial capabilities and buying power.The Fortune at the Bottom of the Pyramid by C.K. Prahalad

The Unbanked

Consumers without checking or savings

Estimated at 20 million HHs

Use check cashing stores and pay bills by money order or cash

Among U.S. born – 14% non-Hispanic Whites 34% Hispanics 46% African Americans

Among Mexican immigrants – 53%

The Cost of Being Unbanked - Opportunity

Check cashers

Charge $8 Billion annually

Payday loans

Charge $4.3 Billion in fees at APR’s of 400%+

Tax refund anticipation loans

Cost consumers $1 Billion in fees and interest

Remittances

Fees consumed 10-20% of the $20 Billion sent to family members

Check Cashers

$8 Billion

Payday Loans

$4.3 Billion

RAL’s

$1 Billion

Remittances

$3 Billion

$16 Billio

n A

nn

ual F

ees

No Credit/Credit Impaired

Economic struggles often the cause to overlook medical bills or to be late with a monthly payment

Some banks (CUs?) pre-qualify people for opening an account through ChexSystem or credit report

Are we forcing people to use AFS sector?

Why can’t we give them a first or second chance?

Minorities in Colorado - 2006

Race Percent U.S. %

White – not Hispanic

71.7 66.4

Asian 2.6 4.4

African American

4.1 12.8

Native American

1.1 1.0

Hispanic or Latino

19.7 14.8

Hispanic Median Age in Colorado is 26.7

Opportunity for 1st Time Homebuyers

Young Adults: Gen Y

Young Adults

18 – 24 year olds represent only 5% of credit union membership; 15% of US pop.

Generation Yers perceive no differences between banks and credit unionsLikely to use the internet to research financial products --But often rely on family and friends for advice and recommendations

Think life events (and needs)

TransactionsFirst jobFirst carMove away from homeCollegeFirst credit needStart careerRent an apartmentMarriage? Kids?Buy first homeInvesting

REAL Solutions Tested Business Models

Families with Modest IncomesPayday Lending ProductsCheck Cashing

Immigrants/New AmericansSafe AccountsRemittances

Young AdultsFirst Time MortgagesYouth Credit Union Branches

Unbanked and UnderbankedFree Tax PreparationStarter Accounts

A National View

Serving low-wealth households is an increasing opportunity that credit unions should not miss!

REACH OUT TO Serve LOW-WEALTH HOUSEHOLDS

A Credit Union Opportunity... Really?

R.E.A.L. Facts: Who is Serving This Market?

Check Cashers

Pawnbrokers

Payday Lenders

Title Lenders

Rent-to-Own

Finance Companies

Buy Here Pay Here Auto Dealers

Convenience Stores

Grocery Stores

Tax Preparation Offices

Banks (very limited)

Credit Unions (very limited)

Check Cashing Industry

2000 – 6,000 check cashing outlets

2005 – 13,000 outlets

180 million checks worth more than $55 billion are processed annually by industry

Avg. check value is $500 to $600

0

2000

4000

6000

8000

10000

12000

14000

2000 2005

Fees to Cash Checks

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1987 1997 2006

Govt Chk

Pay Chk

Auto Title Loans

Median charge of 25%/mo or 300% APR + $25/loan

LTV about 50% of car’s value

Usually due in 30 days

Rent-to-Own

Weekly or monthly payment

Typically no down payment or credit check

Can return merchandise at any time without obligation

Or purchase usually over 12 to 24 months

R.E.A.L. Actions – For R.E.A.L. People

Strategy for Financial Success

LOW WEALTH FAMILIESLOW WEALTH FAMILIES

EDUCATION CREDITTRANSACTION

SERVICESSAVINGS

PRODUCT AWARENESS

COUNSELINGSTAFF TRAINING

PAYDAY ALTERNATIVESMALL LOANS

USED CAR LOANS LOAN POLICIES

STAFF AWARENESS

LOW MEMBERSHIP FEESAVINGS AWARENESS

SAFE ACCOUNTSLONG TERM SAVINGS

CHECK CASHINGFEE FREE CHECKING

MONEY ORDERSREMITTANCES

TAX PREPARATION

Filene Research InstituteState Leagues

Credit Union National Association

CREDIT UNIONCREDIT UNION

HOME OWNERSHIP

HLPR LOANCOUNSELING

STAFF TRAININGCREDIT SCORE

Day-to-Day Day-to-Day LivingLiving

Bills

Overdrafts

Overdue

TRANSACTOR

Living paycheck to paycheck

Short financial time horizon

No savings – no assets

Informal Economy

Unbanked

Non-Depository Service Providers

Safe Harbor Products

Liquidity/Payment Services

Check Cashing

Bill Payment

Money Orders

Remittances

Stored Value Cards

Step Up Services

Fresh Start Accounts

Safe Accounts

Alternative to Payday Lending

Seeing the Vision

SAVER

Decision to Engage

Goal OrientationPay yourself first

Build assets

Expand financial horizon

Know that you can progress

ProductsSavings accounts, CDs, IRA

Financial educationStrong correlation between having a formal banking relationship and the accumulation of assets

Beginning Savings Products

Regular SavingsMember Advantage SavingsStep Up CD/Goal CDIndividual Development AccountsNo Excuses SavingsThe Savings ChallengeFresh Start CheckingSafe AccountPrize-based SavingsAuto SavingsEnvelope Savings

Double-Edged Sword

BORROWER

Build your credit score without borrowing your future

Productive CreditBuilds a platform for future borrowing

Increases income

Evens income inflows

Non Productive CreditState of financial crisis

Chronic borrower

Unpaid bills or debt

Payday Loan Products

Small Loans

Payday Alternative LoanShare Secured LoanCitizenship LoanQuincianeraFirst & Last RentRefinance Credit CardCredit Re-builderScore Builder2nd Chance VisaEmergency Loan

Low Score Used Car LoansRisk-Based LendingAlternative Credit ReportNon-Score Based LendingAlternative Student LoanYouth VISASmall Business Lending

Home Ownership

Investments

OWNER

Build Equity

Home Ownership

Business Ownership

Stock Ownership

Diversify Income Stream

Financial Education

Personal Investing

Estate Planning

Innovative Mortgages

HLPR Mortgage

Rescue Refi

Timely Payment Reward

No PMI Mortgage

Low Downpayment

ITIN Mortgage

First Time Homebuyer

Education K

eeps

the P

rocess

Moving

Financial Education

Product awareness

Staff Training

Counseling

Incentives for participation

Education without the right product menu Education without the right product menu has little chance of successhas little chance of success

R.E.A.L. Relationships! Low Wealth Households = Good CU Members

Lots of them!

Concentrate their business with their credit union

Have fewer good choices in the financial world

Loyal

Are borrowers and future borrowers

Good risks and manageable risks

Contact Information

Nancy Pierce

REAL Solutions Field Coach - NCUF

Tipton Research Group

piercen@kcnet.com

816-532-4865