Homeless not bankless: homeless people are getting help managing their money from nonprofit banks and credit unions. (2024)

The smell of wet wool and the sound of rumbling coughs filled the bank lobby as customers lined up just after opening time on a chilly Seattle morning.

They were not the usual bank clients. Most slept at homeless shelters or outside the night before. They wore scarves and third-hand coats. None had more than a few hundred dollars on deposit.

But the Compass Center bank, in a brick store front in Seattle's historic Pioneer Square, is far from a traditional bank. Its tellers are social workers. It offers free mailboxes. Its rules are simple. No fees. No rowdiness. No judgments.

The small nonprofit bank is part of a growing effort across the country to use banking as a weapon against poverty. Among families earning less than $25,000 a year, nearly a quarter--or 8.4 million families--do not have bank accounts. In credit unions and nonprofits from Florida to Michigan to California, check-cashing, direct deposit, money wiring and "second-chance" saving accounts are being offered to bring consumers into the financial mainstream.

The efforts target those who've rejected--or been rejected by--mainstream financial institutions, a group known among policymakers as "the unbanked." The federal Survey of Consumer Finances estimates that one in 10 households nationwide does not have a basic checking account.

Those households most often turn to the "fringe" financial industry of payday loans and check-cashing storefronts, a booming sector that handles nearly 300 million transactions a year. Studies by the Ford Foundation and other institutions suggest the industry's fees are so high they contribute to poor families' financial instability.

Waiting in line at the Compass bank, Ryan O'Shaughnessy, a 49-year-old dishwasher, shifted his weight, anxious to make a withdrawal and get to work. He used to have a checking account at a bank just up the street, he said, but piled up too many overdraft fees.

"I can be irresponsible with money if I have checks," said O'Shaughnessy. "I get myself in trouble. I am protecting myself this way."

BANKING THE UNBANKED

In 1999, the Social Security Administration began requiring direct deposit for payments, in large part to save money. But that posed a new problem: What if recipients did not have a bank account?

The Federal Reserve has conducted a series of studies in response, finding what many experts already suspected: The unbanked disliked banks, which they felt gouged customers for making mistakes.

Michael Barr, a former U.S. Treasury official, said the question posed by the Social Security Administration led to good steps, such as a small Treasury grant program to cultivate alternatives for people without banking accounts. But Congress could do more, in particular by allowing transmission of the Earned Income Tax Credit--an anti-poverty program larger in size than the federal cash welfare grants--via direct deposit, he said. That could open bank doors to thousands more.

State legislators could take a similar approach by using direct deposit for government payroll checks, helping lower-income employees gain access to cheaper banking services, Barr said. New York went further, he said, investing $100 million in banks that agreed to open branches in low-income neighborhoods.

Barr, now a senior fellow at the Brookings Institution, described those solutions as a matter of government self-interest. "If low-income people use their bank accounts to save funds, it can be a cushion in hard times, and they would be less likely to fall back on government programs or, in the worst case, fall into bankruptcy," he said.

"People with banks are also likely to get low-cost credit, which is a cushion. These are important strategies for helping people on the edge enter the economic mainstream."

One state-level response to the unbanked is more aggressive regulation of the payday loan industry. It grew from $2.2 billion in revenues in 2001 to nearly $4 billion in 2005, according to the Fannie Mae Foundation. On average, check-cashing outlets charge $500 for services that would cost $60 at mainstream banks.

Washington Representative Sharon Tomiko Santos, who represents one of the most ethnically diverse districts in Seattle, said she was motivated by the proliferation of check-cashing outlets in her district to help create a public-private foundation providing financial literacy in public schools.

"I think that proliferation is a direct result of the failure of banks to reach out to a certain customer base," she said. "It suggests to me that there is a market not being sufficiently served."

NEEDS LIKE OTHER CUSTOMERS

Another response to the unbanked has come from savvy credit unions and nonprofits. The Fannie Mae Foundation recently profiled 10 innovative programs, including the Compass Bank in Seattle.

Directo, in Atlanta, issues working customers debit cards through their employers and offers low-cost wire transfers to up to 10 family members anywhere in the world. That is a particularly valuable service for immigrants who, in total, wire an estimated $10 billion from the United States each year, incurring $1.5 billion in fees.

The Northeast Community Federal Credit Union's branch in San Francisco offers a payday loan alternative called a "grace loan." A partnership between a bank and a nonprofit in Chicago offers free tax preparation services.

Jim Carr, the Fannie Mae Foundation's vice president for research, said people without bank accounts--contrary to public perception--can be proficient money managers. They just have fewer options to access their money, he said.

"The point of these case studies is that there are ways to reach out to those outside traditional commercial banking," he said. "These customers have checking and saving needs like other consumers, and more and more institutions are seeing it as part of their mission to reach out to more people."

FROM SHOEBOX TO BANK BRANCH

The Compass Center, an 86-year-old homeless-services agency founded by a Lutheran minister, started its bank out of a shoebox almost two decades ago as a guard against street crime. The bank has since grown to serve more than just the center's clients. Today, about 2,000 people have open accounts.

Kim Sather, shelter manager for the center, said her bank's clients feel unwelcome elsewhere. "It's plain when people don't feel welcome in the lobby of a mainstream bank," she said. "Here, we notice when they don't show up to get their mail or if they look a little disheveled at the counter. It's a normal, daily contact that is a little less scary than a mainstream bank may be."

The Compass Center bank has been getting help from one of those mainstream banks for the last six years. A team from the Commerce Bank of Washington was doing volunteer painting at the center when someone noticed the homeless bank, which was then run out of a cash register.

A series of meetings ensued, and the Commerce Bank got a special waiver from the federal comptroller of the currency to treat the Compass Center as a branch. The partnership gave the Compass bank all the tools of a mainstream bank, including sophisticated banking software, a safe and its own routing number for direct deposits.

A large earthquake in 2001 temporarily shut down the center's building and shut down the bank. But it was already a beloved institution and the bank reopened with an expanded operation.

On a recent morning, dozens of customers dropped in, shaking off the damp wind blowing in from nearby Elliott Bay. James Burks, a homeless man with a history of mental illness, cashed a $40 check from his sister to buy a bus ticket to his parents' home.

He said he grew to distrust banks after piling up more than $200 in bounced check fees and relied on check-cashing outlets before recently opening an account at the Compass bank.

"I've been really wary of getting checks because I'm bad with money," he said. Pointing toward the teller window, he added, "These people treat you with respect. I'm just like you. I just don't have any money."

BRINGING BANKING TO WHERE IT'S NEEDED

The success of the Compass Center Bank is due in part to its location--it came to the homeless clients it serves. Access to more mainstream financial institutions can play a role in meeting the needs of people without checking or savings accounts and their communities.

New York created Banking Development Districts to encourage banks to open branches in communities in need of banking services. Banks that participate may get access to below-market deposits from the state, as well access to municipal deposits. In addition, the branches may qualify for property tax exemptions and other local tax exemptions.

"This brings not only banking services to a community, but access to capital, which drives economic development and neighborhood reinvestment," says State Banking Superintendent Diana L. Taylor.

A recent survey in the state found that more than 11,000 new accounts had been opened at Banking Development District branches open a year or longer.

--Heather Morton, NCSL

TEACHING FINANCIAL LITERACY

Reaching out to students is another way to encourage people to become "banked." Financial institutions are opening student-run branches to help young people learn real-life financial skills, as employees and customers. They can learn how to be tellers, record transactions and prepare marketing plans for the branch, as well as learning about checking and savings accounts by using the services themselves. Credit unions also have been active participants in school-based facilities. At least 125 credit unions in 30 states operate student-run branches in 401 schools.

In addition, educators, community organizations, financial institutions and legislators are creating financial education programs for students from elementary school through college. In 2005, South Carolina enacted the Financial Literacy Instruction Act of 2004 to provide for the development of a financial literacy curriculum. Texas requires instruction in personal financial literacy in one or more courses that are required for high school graduation. Virginia requires instruction in both economics education and financial literacy in public middle and high schools, and allows public schools to establish on-site banking programs for students.

--Heather Morton, NCSL