Independent Banker - May 2020 - 48

A COMMUNITY BANKER, you know it
doesn't make sense to pay a check
cashing fee if you can get your money
using direct deposit for free.
Perhaps they've taken a financial hit
thanks to fees they didn't understand, or they were turned
down for credit. Maybe their parents never used a bank,
so they don't understand the system, or they came from
a country where the banking system wasn't reliable. Or
maybe they're living paycheck to paycheck and can't afford
the minimum deposit.
These people-known as the unbanked and
underbanked-have a rationale for their choice, says
Darrin Williams, CEO of $1.5 billion-asset Southern
Bancorp in Little Rock, Ark. Understanding those reasons
is critical to helping them.
Consider an unbanked 20-something who Williams
met in a coffee shop. The young man kept his money in
a cigarette box at home. He'd had a bank account in the
past but closed it because he didn't understand why the
bank had taken $75 from his account and not returned it.
The young man had probably signed up for an overdraft
program he didn't understand, Williams says, and $75 is
a lot of money to someone living paycheck to paycheck. At
least with a check cashing service, the man knows exactly
what the transaction will cost him.
" We as bankers have done a disservice with how
unnecessarily complicated the banking system is, " Williams
says. " He made a rational decision not to trust a bank. "
Unbanked by the numbers
An estimated 6% of adults, about 15 million people, in
the U.S. are unbanked. This is defined as not having a
checking, savings or money market account, according
to the Federal Reserve. Of that population, about 40%
use high-cost alternative financial services-money
orders, check cashing and remittances-and high-cost
loan alternatives, such as auto title loans, payday loans
or paycheck advances. Another 16% of U.S. adults are
underbanked, meaning they have a traditional banking
account but still use alternative financial services.
Williams is one of many community bankers working
to earn the trust of unbanked and underbanked people. In
2019, he helped found the Bank On Arkansas+ initiative,
a statewide program where participating financial
institutions offer checking accounts with a $0-$25
minimum initial deposit, no minimum monthly balance
requirements, free mobile banking and no overdraft fees.
While the product is important, the referral is more
important, Williams says. Under the initiative, community
Lead Bank is taking on the payday industry
s it possible to disrupt the
payday lending industry
from within? Lead Bank is
giving itself one year to find out.
The community bank in Kansas
City, Mo., is in the midst of a pilot
program to see if it can find a
way to safely and profitably offer
reasonably priced, unsecured
consumer loans. The goal is
to provide an alternative for
Americans who spend extra money
on payday loan fees every year.
" The key question in consumer
lending is if a bank can make a
profit at the 36% rate that some
states have imposed, " says Josh
Rowland, CEO of Lead Bank. " We're
trying to see if we can figure out
a set of underwriting that's fair
and open to all and that enables
people to find a gateway into
mainstream banking. "
The community bank has
partnered with two local companies
using different algorithms and
product configurations to try to
find a solution. Each of the fintechs
uses Lead Bank's underwriting
criteria to make loans via their
48 Q ICBA Independent Banker Q May 2020
online engines.
So far, the pilot has originated
more than $26 million in credit,
though the rates are still higher
than a traditional community bank
consumer loan.
" It's very early days, and I
wouldn't want to create the
impression we've figured out how
to reduce these rates, but it's
promising, " Rowland says. " I believe
there is really an opportunity to
find lower-risk customers out of
this pool that's been neglected by
banks for years. "
Independent Banker - May 2020

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