Opportunities for Financial Institutions to Deliver Credit Access
Whether through existing alternatives or leveraging fintechs, partnerships & other opportunities, FIs of all kinds are well positioned to increase consumer & SMB access credit.
As I’ve discussed in previous issues, people and SMBs lack access to both banking services, especially credit. Bank deserts exist in both rural and urban areas. Proponents of post office banking often cite these problems as a reason to bring banking to branches.
This issue explores the following:
Existing alternatives to retail banks that offer credit and other financial services to both consumers and SMBs.
Opportunities for financial institutions to approach the underbanked and credit access challenges in new ways
There are many existing financial institutions and FI-adjacent organizations already set up to provide low cost financial services and access to credit to people and SMBs who live in areas underserved or abandoned by traditional financial institutions.
Ironically, some of the banks that have abandoned certain markets, geographies or regions or states in the US also participate in these alternative financial organizations and institutions that support underserved consumers and SMBs with access to credit. There are (at least) 3 types of existing alternatives to retail banks:
Community Development Financial Institutions (CDFIs)
Community banks and credit unions
There is plenty of information about all of these types of organizations. My goal here isn’t to reinvent the wheel. My goal is to identify the existing alternatives to retail banks that provide access to credit to people and SMBs.
Community Development Financial Institutions
CDFIs can take a lot of forms, include a lot of different players - from community organizations to retail banks:
CDFIs can be banks, credit unions, loan funds, microloan funds, or venture capital providers. CDFIs are helping families finance their first homes, supporting community residents starting businesses, and investing in local health centers, schools, or community centers. CDFIs strive to foster economic opportunity and revitalize neighborhoods. Source: Community Development Financial Institutions Fund
CDFIs exist all over the US and they are particularly active in giving SMBs and individuals access to credit. Your FI may be a participant in one or more CDFI. They have been especially active since the pandemic. For example, in 2022, Greater Philadelphia Financial Services Leadership Coalition has launched a fund to support Community Development Financial Institutions (CDFIs) to money to Black and brown business owners in Philadelphia. This coalition is comprised of 30 financial institutions. FI include Bank of America, Truist, JP Morgan Chase, Vanguard, TD Bank and Santander Bank as well as local community banks and other FIs.
Community Banks and Credit Unions
In addition to participating in CDFIs, credit unions and community banks often serve urban or rural communities where larger retail banks haven’t or don’t want to open branches. Credit unions in particular are organized around membership requirements that can be geographic (such as all residents of Philadelphia) or employment (employee of state government) or member of an organization (to join Clean Energy Credit Union one must be a member of a partner organizations – I wrote about this CU in a previous newsletter).
Land banks are not exactly financial institutions, but they have a long history in the US going back to the pre-Revolutionary America . These banks used land assessments:
The Federal Land Banks (FLBs) were notable in the history of American finance for several reasons. They represented the first time the federal government subsidized mortgages—in this case, agricultural mortgages—and they also inaugurated a mass market for long-term, amortizing mortgages through the use of mortgage-backed bonds. Source: Business History Review , Volume 90 , Issue 4 , Winter 2016 , pp. 623 - 645
In fact, Samuel Adams’ father was involved in a land bank scandal. His father lost a lot of money & impoverished the family.
Today land banks have evolved into 2 types, with ties to either a state or the Federal government.
State Land banks
This type of land banks is geared towards urban areas and the acquisition of “vacant, abandoned and tax-delinquent properties” with the goal of reviving them to become productive assets or to sell them to new owners:
Land banks are public entities with unique governmental powers, created pursuant to state-enabling legislation, that are solely focused on converting problem properties into productive use according to local community goals.
Vacant, abandoned, and tax-delinquent properties are often grouped together as “problem properties” because they destabilize neighborhoods, create fire and safety hazards, drive down property values, and drain local tax dollars. In some sense, these are properties the private market has altogether rejected.
Land banks acquire these properties with the intention of either immediately returning these properties to productive use, or temporarily holding and maintaining them for the purpose of stabilizing distressed markets or fulfilling long-term land use goals.
Land banks, in essence, are a direct response to the growing trend of vacancy and abandonment, created to strategically acquire problem properties and convert these liabilities into assets. In short, land banks are intended to acquire title to these problem properties, eliminate the liabilities, and transfer the properties to new, responsible owners in a transparent manner that results in outcomes consistent with community-based plans.
Most land banks have special powers (see below) that enable them to undertake these activities far more effectively and efficiently than other public or nonprofit entities. When thoughtfully executed, land banks can resolve some of the toughest barriers to returning land to productive use, helping to unlock the value of problem properties and converting them into assets for community revitalization. (Source Center for Community Progress)
The goal of these land banks is to to revive neighborhoods with distressed property markets. This in turn will attract residents, small businesses and financial institutions to renew investment in the neighborhood. That is, reverse the effects of a bank desert.
Federal land banks
Federal land banks have a very different structure and tend to focus on rural communities and agribusiness. Federal land banks were created by legislation in 1916. Its cooperative structure is designed to promote access to credit throughout the network.
Today, the federal land bank (FLB) is a network of regional cooperative banks that provide long-term loans to farmers and ranchers. Founded in 1916, the federal land bank system is now regulated by the Farm Credit Administration (FCA).
Like more urban-oriented land banks, the federal land bank system works to provide credit access to people and small businesses.
New Approaches to Increase Access to Financial Services
The US post office as bank branch is an old approach that will no longer work in 2023 and beyond to support access to those financial services that banked, under- and unbanked, rural and urban, people need.
Through this and the previous newsletters, my analysis shows that at the very least, post office banking cannot work by itself. Instead of creating a new bank that operates in post office branches, why not take a new approach to support people and SMBs who are underbanked, unbanked or live in bank deserts?
Access to credit cannot be fixed by the USPS offering digital person-to-person payments at post office branches or even on an app. It can’t even be fixed just by offering low or no cost banking services to under or unbanked people and their families. And credit access certainly can’t be achieved with tips on how to improve one’s credit score, save money or reduce expenses.
Take Cues from the Microcredit World
There’s evidence from the microcredit world that financial services alone can’t solve the many problems tied up with poverty and working poor.
SEWA, based in Ahmedabad, India, has done significant work in providing financial services for poor women in their region of India that helps them end the cycle of poverty. But SEWA didn’t start with financial services. Financial services is just one of the SEWA’s Four Pillars. Similarly, Grameen Bank was built using its 18 Decisions methodology to poverty:
These decisions encourage the borrower members to make necessary changes in their lives personally, economically, and socially, which on the one hand, disrupts traditional values and thinking, but on the other hand, prevents the poor from being deeply indebted to the middlemen. Source: https://grameenbank.org/methodology/18-decision
I’m not suggesting that either the SEWA or Grameen Bank’s mission and structure can be or should be lifted wholesale and planted in the US. In fact, the Grameen Bank USA does not use the framework in the same way for addressing poverty and access to financial services.
What can be lifted from the microcredit approach or methodologies is that to truly help under and unbanked people, financial institutions must address underlying structures and causes of being underbanked. The FI must take an approach that goes beyond a marketing or sales pitch.
What does a new approach to credit access mean for FIs?
I have many ideas for ways FIs can increase credit access - if they are willing to do some things differently.
Recognize this is a long-term investment in people, businesses in your community
Financial services alone don’t help people. It doesn’t focus on the type of financial inclusion work & services that helps people get out of debt and poverty over time. The Post Office bank is disconnected from a comprehensive national or state policy around financial inclusion and poverty.
Focus on the services that people and businesses need. The Post Office bank idea tends to focus on basic bank services, services that are commodities, available everywhere, even at check cashing stores. It doesn’t focus on the real needs that include very small business loans and mortgages (harder now, of course), cross-border money transfers. These very small business loans might be very different than the SMB loans you have well-understood processes and credit risk tools for. You may need new processes and credit risk tools. I wrote about this in 2020.
Simply opening a new brick-and-mortar branch won’t fix the soft information problem. That will take time – time for branch staff to get to know customers and businesses, to spend their own money in the neighborhood, to network and create all the relationships for the bank. These activities will not only to increase lending access but also help the FI – perhaps the branch staff - create some innovative products and services for the people and small businesses in that neighborhood. The traditional ROI benchmarks for product and service success may not apply. FIs that are not prepared for this reality are not prepared to enter these markets.
Build Presence Through Collaboration & Partnerships
If financial services alone cannot solve the problems of under and unbanked people, then financial institutions can’t undertake
Be visible in local communities. You cannot expect banked consumers much less under and unbanked consumers to seek out your financial institution. Your FI must be visible, reaching out to people and small businesses where they are. To reach under or unbanked people, your FI must seek out new, local partners. Want to compete with payday lenders and check cashing stores? Figure out what they know that you don’t. For one thing, these lenders are often located next to retailers, like small grocery stores. How far away is your bank or credit union from these retailers? Go where they are.
Talk to local grocery stores or other retailers about how to work together to help their customers – who may or may not be your customers. What needs do their customers have that they can’t meet? What needs do they (the retailer) have that their current FI can’t meet?
Revitalize or start community investing accounts and relationships with CDFIs to improve investment in your targeted communities.
Promote CDFIs (and yes, your relationship with them) in local communities where residents will see or hear the information,
Collaborate with other FIs to develop technology people and businesses can use. Here’s an idea: create an app that enables both non-customers and customers alike to cash paychecks or to pay bills. There’s no reason why this app couldn’t be a collaboration among a group credit unions or community banks.
Partner with fintechs. Theodora Lau points out that fintechs can, and are, playing a role in providing access to credit.
Deliver discrete banking and payment services with local partners. There are plenty of credit unions and community banks. One way to attract new under or unbanked members or customers might be to provide discrete services like account opening, cash withdrawal and check-cashing, in local stores or even a post office branch.
Invest in Mobile Banking – The Other Kind
Increase your physical presence in neighborhoods where there are underbanked and unbanked adults – and teenagers & children. This does not necessarily mean an FI should make a huge financial and staffing investment in traditional branches. This is an opportunity to think outside of that, literal, box.
Mobile Banking - the Automotive Kind
No, not the app. The van – or small truck. Why invest in building expensive physical branches when mobile branches can also do the job? This is not a new idea, of course.
Retail banks have used trucks and vans to provide service for customers in times of emergencies. Most recently US Bank, have started to do this to support customers in times of disasters. In March, 2021, US Bank announced their fleet of mobile branches and a Mobile Financial Center:
For example, we’ve deployed our mobile unit in the wake of flooding in Cedar Rapids, Iowa, and Fargo, North Dakota; a tornado in Joplin, Missouri; and wildfires in Paradise, California; as well as following civil unrest in Minneapolis, where the mobile unit rotated between two locations.
“We are committed to being a part of relief and recovery efforts by ensuring that our customers have access to banking services,” said Jodi Richard, vice chair and chief risk officer for U.S. Bank. “A mobile banking unit is one of the many ways we can demonstrate that commitment.”
This month we rolled out a new U.S. Bank Mobile Financial Center.
And this sums up why the mobile financial center is important to US Bank:
When deployed, the U.S. Bank Mobile Financial Center is staffed by local bankers – those who have the closest connection with the impacted communities.
Mobile branches are not a new idea and many banks have deployed them before and still do. Mobile Facilities LLC and Mobile Banking Systems both claim on their websites that they have been designing mobile branches and ATMs since 1994.
Use Mobile Branches to Deliver Credit and to Acquire Customers
FIs could use mobile branches to target new members and customers in new ways, with new digital tools. FIs could use mobile branches to target hidden tribes of potential or existing customers who need a SMB loan or help with a mortgage. Mobile branches can also help an FI acquire new customers who may not be initially profitable and present different credit risks than their typical customers or members.
Bank on Buffalo, a division of Pennsylvania-based CNB Bank, sees the mobile branch as a way to reach more residents of places where banking services are lacking. Source Buffalo News
Expand or Create New CUs and Community Banks
If retail banks, credit unions and community banks can’t or are not willing to expand into areas where underbanked people live and work, start a new credit union or community bank. Finbold reports that 73 challenger banks were started in North America in 2022 alone.
This is also for all the digital banking vendors & VC people out there too: I’ve heard and read many times how fast, easy and less expensive it is to create a new FI from scratch. Is that just hype?
Hope for the Post Office?
I recently went to the post office to return too-small UGG slippers that I bought my daughter. During the return process at the UGG website, I created a QR code that was sent to my email address. The instructions on the website told me to package up the slippers, not to address the package and take the box to the post office along with the QR code.
My expectations for USPS service capabilities for this return were low. I felt quite confident that I would end up taking the package home and sending it back to UGG via a third-party delivery service.
Instead, when I got to the post office counter, the postal clerk scanned my QR code and printed out a label, put it on the package and said “you’re all good!”
“Really,” I replied, “This actually works?”
“I understand your skepticism,” she said, “but it does.”
Less than 24 hours later, UGG sent me an email that my package had been shipped and then within 48 hours that the package was received and replacement slippers shipped.
Had it not been for the partnership with retailers, I am confident that the USPS could have made this process, like the passport appointment process, inconvenient, time-consuming and unbearable.
Should FIs partner with the US postal system?
When I started these pieces, I planned to mentioned the partnership between TD Bank and the Canadian Post to improve credit access to people living in rural areas. The partnership was announced in July, 2021 and by November, 2022, the partnership had run into problems that forced a “pause.”
Toronto-Dominion Bank said “irregular” activities involving “bad actors” led the bank and partner Canada Post to the pause a new service offering loans to remote communities.
The idea was to combine TD’s lending infrastructure and Canada Post’s physical locations in rural, remote and Indigenous communities.
Loans for $1,000 to $30,000 were to be offered, with fixed and variable interest rates ranging from around 10 to 20 per cent, according to Canada Post’s website — much higher than TD’s prime rate of 5.95 per cent, but lower than the typical interest on credit card balances. Source: Financial Post
I am not implying that postal systems should not offer banking and payments capabilities or that FI/Postal partnerships are bound to go bad. Just as in any partnership, FIs must vet their partner or seek alternatives to solve the challenges they want to address.
You can find more ideas in these issues of my newsletter:
There is no one cure-all for these challenges. There is no single app, fintech or solution that will meet the needs of all people who need more access to financial services.
1. Remember that under-banked and unbanked people are not a huge monolithic demographic. There sub-groups, hidden tribes, that share some common characteristics. Identifying those hidden tribes and their needs are critical to create partnerships, apps, products and services that actually support them.
2. Start from the customer -perspective. Your first innovation or partnership may have nothing to do with banking or payments. The QR code for return packages starts with the return at the retailer’s website – not the post office. The QR code made it easier to return slippers to UGG. The USPS is only a step in that process.
3. Drive product and service development from the job-to-be-done. People who need to cash a paper paycheck or receive cash need a physical place to do that. People who need to receive a government payment or move money among family members probably need an app. People who need credit need face-to-face relationships. Whether through new brick-and-mortar branches, partnerships with local retailers, USPS branches, or mobile bank branches or some new idea I haven’t mentioned,
4. Repeat as necessary.
5. Repeat this process for your FI’s larger digital banking transformation strategy. This analysis also works for FIs seeking ways to realize digital transformation of their FI, products and services.
Digital banking providers
1. Evaluate your solution’s ability to enable partnerships – all kinds of partnerships including but not only those that require an API ecosystem.
2. Partner with organizations and financial institutions to identify jobs-to-be-done by those people who lack access to credit. These partners may take you out of your usual partnership network.
3. Identify capabilities your solution has that can support some features of microcredit that a financial institution can use to support access to credit those people who have been denied.
Want more help, advice, analysis or consultation? Contact me.
I moderated a great panel of folks for a conversation on innovation. We cut through the hype and share practical advice for making your digital transformation efforts pay off. We definitely talked about the importance of small innovations.
How can banks be truly low friction? They must address friction everywhere. Otherwise innovation & digital transformation will elude them. In this report I identified the characteristic of a low friction bank and why legacy core banking and architectures don’t support it.
What can the Kardashians teach your financial institution about partnerships and innovation? How can working with empathic fintechs help you identify niche groups (aka hidden tribes) and innovate. All this and more in this this ebook that you can download at Praxent or Nymbus.
Adopt an Agile Digital Banking Platform: How bankers must have an agile digital banking platform to support both global and local trends and requirements to help them identify new niche markets that will drive innovation, create new value and increase profitability. In this report I identified a set of capabilities that a digital banking platform must have that will help take banks into a competitive future and urges banks to select a digital banking partner who shares their innovation, vision and support for new value creation.
How Your Financial Institution Can Leverage Niche Markets for Next-Level Growth: New thinking on old models brings new ways for banks and credit unions to deliver new products and services to new niche customer markets. I moderated a vibrant discussion about this & more with Jeffery Kendall, Chairman and CEO, Nymbus and Tim Hamilton, CEO of Praxent.
Yes, I worked with clients on these ebooks and webinars. They may ask you for information before you can download or watch them.
How can I help you?
I’m also available for inquiry and strategy sessions via Third Eye Advisory.
Who writes PivotAssets?
I’m an independent analyst, strategic advisor & consultant (& a former Gartner analyst). I’ve worked in and covered the banking industry for over 2 decades. I write about
digital banking in this newsletter - not to confirm what you know (and you are plenty smart!) but to give you a fresh perspective & analysis on the transformation that is —and isn’t happening - in the industry.