MADISON, Wis.–Following an 18-month test of five different types of financial products aimed specifically at meeting the needs of minority households over the past 18 months, the Filene Research Institute has released a new report on its “Reaching Minority Households Incubator.”
Effective today, the report will be accessible to all (including non-Filene members) via this webpage.
Filene said the fundamental underpinning of the initiative was the question, “Could traditional financial institutions find financially sustainable ways to make a difference for financially vulnerable minority households?”
Through this incubator, more than 58,000 loans have been issued to more than 18,559 underbanked households by 40 credit unions across the U.S. and Canada, Filene reported. The project was underwritten with grant support from Visa and the Ford Foundation.
According to Filene, the “Reaching Minority Households Incubator” resulted in $84.8 million in total loans issued and the research provides tactical implications for financial institutions seeking to serve a traditionally underserved population, Filene said.
“The most successful program in our incubator testing was ITIN Lending, in which credit unions were able to offer loans and credit to non-citizen members using an individual taxpayer identification number instead of traditional forms of identification,” Filene said.
One Person’s Story
Accompanying the report is one credit union member’s personal story of how she started her own business with support from Point West Credit Union in Portland, Ore. Sara Rodriguez, a non-US citizen, now has a thriving business all because of a $500 business loan issued to her by her credit union in spite of the fact that she didn’t have a social security number.
A “…lack of banking relationships isn’t the only indicator of many minority households’ financially precarious state,” the report states. “They are twice as likely as white households to live in asset poverty which means they wouldn’t be able to access funds to support three months of living expenses. Although minorities make up 30% of all U.S. households, they hold just 10% of net household wealth."
Not Mutually Exclusive
George Hofheimer, chief knowledge officer at Filene and the author of the report, said that meeting the needs of financially vulnerable populations and pursuing financial stability do not have to be mutually exclusive pursuits.
“Financial institutions are at the front lines of changing the disparity in access to basic financial services for African-American and Hispanic households,” said Hofheimer. “Providing products like those tested in the incubator program can be a win-win-win for the customer, financial institution and community.”
Filene said 40 credit union testers were involved in the effort to test the five programs. The Incubator is a process designed by Filene to test, package, and deliver viable financial products with an established track record of results. Filene forms testing partnerships with financial institutions that are able to offer these products to their consumers.
What Was Analyzied
The Incubator launched in August 2015 with marketplace research that leveraged insights from an earlier Filene report, Reaching Minority Households: Learning from Minority Credit Unions, the organization noted. Filene followed this with the Lab phase, which included formal product recruitment and credit union testing and ended in December 2017.
During the Lab period, Filene said it analyzed the following products:
- Individual Taxpayer Identification Number (ITIN) Lending: Loans for noncitizen members.
- Data Mined Auto Loans: Data mining techniques used to identify households that could benefit from an auto-loan refinance.
- QCash Small-Dollar Loans: Small-dollar loans based on relationship factors other than credit score that relied on rapid underwriting and disbursement via a mobile application.
- Community Microfinance Small-Business Lending: Small-business microloans to entrepreneurs.
- Payday Payoff Installment Loans: Loans to consolidate high-rate payday loans or other debt into one affordable payment by leveraging alternative data for underwriting.
Key Learnings
The report details the key learnings from the study, but among the key takeaways, according to Filene, are these:
-
Traditional financial institutions,
including credit unions, community
banks, and large banks, can reach minority households. - Programs serving financially vulnerable populations create meaningful impact for minority households.
- Serving minority households is not a one-size-fits-all endeavor.
- These programs should not stand alone.
- It is necessary to look beyond traditional measures of creditworthiness.
- Financial institutions should give themselves permission to offer products with higher rates and fees compared to other products in their portfolio
Three Conclusions
Filene also offered these additional conclusions:
-
Unless you can offer these products in a financially sustainable way,
you won’t be around to meet these consumers’ needs - Your rates will likely be substantially better than those offered by alternative financial service institutions
- The long-term goal is to get the consumer into a better financial position so that they can take advantage of lower-cost products in the future. These products can be a short- and long-term win for all, but you can’t compromise your financial stability in order to offer them.