Micro Branches: Helping Low-Income Americans Enter the Financial Mainstream
Ever thought of your basic checking account as a luxury? Believe it or not, that happens to be the case for more than 9 million Americans who are unbanked. Millions of US families do not have access to a checking or a savings account, and without these fundamental financial tools, they pay significantly higher fees for routine services like cashing a check, making payments, and accessing credit. Even worse, without a formal relationship to a mainstream financial institution, unbanked consumers have fewer opportunities to save their money, build a credit history, and create lasting assets.
So, what do you do if you are unbanked, don’t have a rainy day fund, and face a financial emergency? There’s a whole segment of the financial services industry offering products and services to meet the needs of families living paycheck-to-paycheck. It consists primarily of payday lenders, who offer small, short-term loans that can often cost an arm and a leg.
The Center for Responsible Lending, a national consumer advocate group, cites that a two-week, $300 loan from a payday lender costs around $50. Unfortunately, because low-income individuals don’t have many financial resources to begin with, a majority of borrowers taking out this type of loan are unable to repay it within the agreed time frame. They find themselves trapped in a vicious cycle of debt, with annual interest rates frequently climbing to 400% or higher.
Just how common are these payday lending outlets? Since the 1990s, payday lenders have increased rapidly; experts claim that there are more payday lenders than McDonald’s restaurants in the United States. But with limited success, consumer advocates have begun fighting to reform and even eliminate abusive industry practices in the state and national policy arenas.
Self-Help Federal Credit Union has pioneered a new way to meet the needs of families living paycheck-to-paycheck while helping them enter the financial mainstream. This new and highly promising financial innovation, called a Micro Branch, offers consumers a convenient and efficient delivery model of basic financial products that families need in order to achieve financial stability. Specifically, the Micro Branch proudly offers affordable transaction products and services, deposit-based checking and savings accounts, and, soon, access to capital.
Since the Micro Branch credit union model officially launched in January of 2010 in San Jose, California, much remains unknown about how successful it will be at meeting the needs of working families. But soon, Micro Branch leaders will share what works and what doesn’t in order to help other credit unions, banks, and non-profits develop their own versions of the Micro Branch concepts and expand responsible financial services to underserved communities nationwide.
Check out this short video in which I interview Paul Leonard, a leading consumer advocate, about the policy landscape and Micro Branch innovation.
Until next week,
Sunaena Chhatry, Senior Policy Associate
