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March 1, 2012
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Reaching Kentucky’s Unbanked

With education, 600,000-plus households could avoid fees and be ready when U.S. agencies go to direct deposit in 2013

By Gary Wollenhaupt

For about one in three Kentuckians, walking into a bank is a rare experience. There’s a push on, though, to change that before the federal government phases out paper benefits checks in 2013.

Kentucky ranks fourth in the nation in its rate of unbanked and underbanked populations, with 11.9 percent unbanked and another 23.7 percent underbanked, according to a 2009 study by the Federal Deposit Insurance Corp. (FDIC). The situation is often more critical in rural areas that have fewer resources and fewer financial institutions than urban areas.

People considered “unbanked” do not have an account at a federally insured institution. “Underbanked” people may have an account but also use alternative financial services such as non-bank money orders or check cashing, payday loans, rent-to-own agreements and pawnshops.

Lack of a traditional banking relationship will be more of problem for many low-income people beginning May 1, 2013, when Medicare, Medicaid, Social Security and other federal benefits must be directly deposited into a bank or delivered on a pre-paid stored value card, similar to a debit card. The end of printed checks that must be enveloped and mailed will be a big cost savings for Washginton.

In advance of that change, efforts across the state have begun to improve access to traditional financial services for Kentucky’s 208,000 unbanked households and 415,000 underbanked households.

“It will force folks to have to set up direct deposit, and they will have to be in a position to be able to do that,” said Ian Mooers, director of the Center for Economic Development, Entrepreneurship and Technology Center at Eastern Kentucky University.

For residents receiving state benefits, the Cabinet for Health and Family Services delivers benefits through an Electronic Benefits Transfer (EBT) card and direct deposit as well as paper checks.

“Unbanked clients generally get checks and likely pay a check cashing fee at banks or other check cashing entities,” said Jill Midkiff, a spokesperson for the Cabinet.

Without access to the traditional banking system, in which checks and debit cards are used to pay bills and make purchases, people gravitate toward payday lenders and check-cashing stores. They pay fees for money orders to pay bills and exorbitant interest rates to borrow money to make it to the next paycheck. Over a lifetime of working, a person may pay up to $40,000 in money order and check cashing fees alone, according to the National League of Cities.

The problem can be generational, EKU’s Mooers noted, as families pass on their bad financial habits. Also, the checkcashing operations can be aggressive in their marketing.

“They’ll pull up a trailer to a coal mine or factory on payday and get people to cash their checks as they come out the door,” Mooers said.

Bank On programs
To address the problems of predatory financial services and prepare people for the change in benefits delivery, some cities in Kentucky are launching Bank On programs. Bank On is a national program that started in San Francisco in 2004 to help give people access to the traditional banking system by providing financial literacy education. There are Bank On programs in Henderson, Louisville, Madisonville and Owensboro, with another preparing to launch in Ashland.

People who attend the training receive a Second Chance Certificate, which the participating financial institutions have agreed to accept as proof of education. The institutions allow program participants to open up basic checking and savings accounts.

Ashland program
In Ashland, April Perry, CEO of Kentucky Farmers Bank, and her husband, Don, a senior vice president with the bank, are spearheading the effort to establish the first Bank On program in the Appalachian region. It’s also the first initiative in a rural area, and the first started by the local banking community rather than a government entity.

The United Way of Northeast Kentucky has signed to help administer the program that will cover Boyd, Carter, Elliott, Greenup and Lawrence counties. So far, 20 financial institutions and a number of other non-profit agencies, businesses and local governments have signed on to support the program.

The launch is scheduled for July 1, when the financial education programs will be available to the public and the Bank On accounts will be offered at participating institutions. The initiative will use the “Money Matter$” financial literacy curriculum developed by the Kentucky Community and Technical College System.

The key to success so far has been the involvement of the United Way, April Perry said.

“You have to have the social service agencies involved and the United Way touches all those groups,” she said.

Perry recruited 16 banks and four credit unions in the area to participate in the Bank On program. The second-chance program makes the program palatable to the financial institutions that are taking risks in offering accounts to individuals that often have a poor track record in managing their money.

“This education will hopefully get these people back on track and more knowledgeable about how to manage their finances,” Don Perry said.

The Perrys acknowledged that the traditional banking system has not reached out to the unbanked population in the past. “People are intimidated by banks, and they worry about fees and having access to their money,” April Perry said. “In addition, they may be barred from opening an account if they have had financial problems in the past.” The BankOn program makes banking simple and the Money Matter$ education gives people a second chance.”

The goal, April Perry said, is to “get these people back into the banking system to where their money starts working for them rather than against them.”

Louisville program
In July 2010 the city of Louisville launched a Bank On program designed to deliver financial education and improve access for the unbanked population of about 50,000 people in the area. In the first year, the organization helped residents open nearly 6,000 bank accounts with 11 participating financial institutions, according to Tina Lentz, executive administrator of community service and revitalization with Louisville Metro Human Services.

Those accounts had an average monthly balance of $842, translating to $5 million in deposits. More than 90 percent of those new accounts were still open at the end of the program’s first year. Overall about 100 financial institutions, non-profit agencies, government entities and businesses partner with the effort.

“We bring employers and larger businesses into the group by educating them that a financially stressed employee is a non-productive employee,” Lentz said.

For 2012, the group has exceeded its goal of 500 financial education participants, and plans to open 7,500 new bank accounts. Increasing the number of people with bank accounts also helps with economic development efforts. The records of savings and expenditures can then be used in market research for locating businesses.

“Without the paper trail of payment card usage and bank transactions, it’s hard to convince a business to move into an area even though you know that neighborhood spends a lot of money on goods and services,” she said.

Adam Hall, assistant vice president with Fifth Third Bank in Louisville, said what makes the Bank On program appealing to the financial institutions is the education aspect. “We know a client that may have had challenges managing their personal finances in the past has gone through a comprehensive overview so we’re not setting them up to make the same mistakes again,” he said.

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