Is a Bank Account Required to Build Financial Security?

Banks and Check Cashers

Is a Bank Account Required to Build Financial Security? (Tweet This!)

Dr. Lisa Servon’s recent Op-Ed in the New York Times asks whether a bank account is required to build financial security.  In considering this challenge, I was reminded of losing my wallet not too long ago.

Between the morning marathon of getting my three daughters out the door for school and the walk to the subway, my wallet disappeared into thin air.  Standing at the turnstile, my head swirled with questions and decisions:  How was I going to get to work without a debit card to pay for a new MetroCard?  How quickly could I get to a computer to cancel my ATM and credit cards?  Unsure if my husband helped himself to part of my last ATM withdrawal, how much cash did I actually lose?

First I scrambled, running back home to raid my 8-year-old’s piggy bank so I had enough quarters to get to work. Not only did I pay a $1.00 surcharge for a new MetroCard, but also spent $2.50 for the ride, where normally the cost is auto-paid monthly with pre-tax dollars, effectively bringing the cost per ride to closer to $2.00.  At work, I had to borrow a colleague’s Amex corporate card so I could make a business lunch happen.

Over the next few days, I carefully planned all my transactions three or four steps ahead until I replaced my wallet’s contents.   And I’m lucky of course:  If I had a prepaid debit card, or held on to a personal check as a form of savings, I might have suffered a much greater loss.

Tens of thousands of people probably lose their wallets everyday, but 17 million people manage their finances without a bank account.  For them, the same scramble, premium expense, borrowing and enhanced risk that I experienced when I lost my wallet is actually the norm.  And for most, access to low-cost and transparent banking is the solution.

Except when the options are neither low-cost, nor transparent.

Take Honey, a Clinic customer.  Honey is a 34 year-old Newark resident who met with one of the Clinic’s Financial Coaches for help with overwhelming credit card debt she incurred when dealing with a medical problem.  As the Coach assessed her income and expenses, a monthly $20.00 charge for consistent access to her credit report by her bank—a reputable, well-known, national financial intuition— was an easy target for trimming.  Honey was relieved to know the same information was freely available through annualcreditreport.com.

This appreciation for the true costs of banking underlies the Clinic’s reasoning for modifying our banking outcome.  As Dr. Lisa Servon mentioned in her recent New York Times Op-Ed, the Clinic used to measure success as “increased use of mainstream services and lowered use of fringe services.”

This was also a topic Dr. Servon and I discussed on a recent panel.  Shortly after the Clinic’s founding in 2005, we observed the increasing prevalence of products and services like overdraft protection or credit monitoring had mainstream banking services looking more predatory.  Working in impoverished communities we also were recognizing that many “fringe” services were, in fact, accessible and transparent.

Thus, as an organization whose mission is to build the financial security of working poor people, we decided to remove our value-laden categorizations and instead encourage customers to “do the math.”  Today we focus on the cost of banking products and services instead.

By helping our customers focus on being the best possible consumers, the Clinic believes we are in a better position to help them build their financial security. For Honey, this meant $240.00/year back in her pocket; not an insignificant sum for someone whose annual salary is in the mid-$20,000s.  For many other Clinic customers, this might mean having a savings account, but keeping day-to-day transactions in cash, or becoming a member of a community development credit union. For others, it means accessing check cashers because accurately anticipating costs is more valuable to them than a relationship with a mainstream bank.

There are so many different paths to greater financial security that we should not assume they all include a walk through a bank.

Quantifying Mission: The “Cash Value” of the Clinic’s Work

Among many accomplishments in the Clinic’s nearly 10-year history, we are particularly proud to have put over $28 million back in the pockets of our customers. Early on, the Clinic set out to establish a taxonomy of how we were accomplishing our mission. Once we had an outcome framework established, we turned to quantifying the value of delivering that mission. We started to think of this as the “cash value” of our mission. In other words, how do we gauge the total debt alleviated, predatory bank fees avoided, and new savings established?

The free tax preparation field had forged a whole set of parameters to quantify the impact of its work on working poor tax filers. Led by organizations such as the Center for Economic Progress, the field is able to communicate the value of its volunteer hours, the predatory products avoided, and the refunds secured. Meanwhile, philanthropic organizations such as Robin Hood Foundation were drilling down on “return on investments” by asking nonprofit providers to help assess the value of the poverty alleviation services they were delivering.

Against this backdrop, the Clinic set out to define the “cash value” of its financial education, coaching, and counseling services. It arrived at the following assumptions and definitions:

• Assets: Any savings—whether related to alleviating household budget stress through work supports or actual formal savings—attributable to our Financial Coaches’ work with customers.
• Banking: The value of any reduction in banking service or product cost that a Financial Coach garners for customers.
• Credit: The aggregate difference in a year’s worth of payments at an assumed debt amount, with credit scores tied to a range of interest rates.
• Debt: The face value of debt changed when a Financial Coach negotiates a lower interest rate, or when a Coach negotiates a lower interest rate.
• Taxes: The credits and refunds a customer receives due to the help or advocacy of a Clinic Attorney or Financial Coach.

George and Tiffany are an illustration of how the Clinic’s “cash value” grows. George and Tiffany are married and have been working with a Clinic Financial Coach for a few months. Once they established a financial goal of securing a nicer apartment, they focused primarily on household budgeting to pay off George’s federal student loan by the beginning of 2015. They also worked to improve George’s credit, while establishing Tiffany’s new credit history. With the Financial Coach’s support and tools, they negotiated and paid down their debt quicker than they anticipated, allowing their savings to accumulate faster, too. This summer, they met their goal of building $10,000 in emergency savings, and have now decided to focus their efforts on purchasing a home rather than renting another apartment.

George and Tiffany’s new savings caps a year when the cash value of the Clinic’s mission surpassed the $25 million mark: Which is now $28,843,492.87. Closing in on our 10-year anniversary, the Clinic is pleased to have reached such a significant milestone. We are certainly looking forward to an exponential goal for our 20th anniversary!

A History of the Clinic Through How It Defines Its Mission

Assisting financial clients through Change MachineA defining moment in the Clinic’s early history was our effort to quantify and qualify what we meant by our mission: To build the “financial security” of our working poor customers. It was one thing to define mission clearly in the business plan leading to the organization’s founding, but quite another when actually working with people, partners, and investors. What once seemed precise became murky when viewed through the lens of our customers’ lives, problems, and dreams for their future.

We asked ourselves a basic question: How will we know we are accomplishing our mission? How will we know our customers are “there”? It’s one thing to know what activities we want our customers to engage in, but quite another to feel comfortable in knowing that we’re having a positive influence and are actually facilitating their economic mobility. Plus, there is the personal side: Starting a nonprofit business is no joke. The entire team’s hard work, long hours, and devotion to our customers come from dedication to the mission. We needed to know—at any moment—where we were in relationship to that mission.

Quantifying and qualifying our mission started with a review of the first 100 or so customers. A small team of volunteers and a financial coach (actually, the only employee) and I set out to map all the work we were doing. We catalogued all the tax returns filed, bank accounts opened, and savings started. We categorized all of the presenting issues and problems and asked ourselves, “When these are resolved, are they creating financial security and, if so, how and when?” “What does a successful trajectory between poverty and prosperity look like?”

The resulting map was taxonomy of financial security:

  • Goals: Having specific and measurable financial goals are the cornerstone to all financial education and the driver to the entire financial counseling process.
    Targeted Outcome: Articulated goal and verifiable activities toward that goal with the Clinic’s Financial Action Plans..
  • Assets: The presence of a safety net to vastly improve working poor families’ ability to make ends meet and weather financial stressors.
    Targeted Outcome: Consistent savings.
  • Banking: Avoiding predatory and fringe financial services (from rent-to-own outlets to cash advance options) and being “banked” increases the resources families have to spend on necessities.
    Targeted Outcome: Increased use of mainstream banking services and lowered use of fringe services.
  • Debt: Limiting unhealthy debt not only alleviates budget constraints but also promotes economic security because it frees up resources for “good” debt like student loans or mortgages.
    Targeted Outcome: Improved debt to income ratio.
  • Credit: The increasing importance of credit reports to transactions outside of applying for major loans like applying for a job, opening a bank account, or obtaining housing makes it critical for working poor families to know the contents of their credit reports and understand their score.
    Targeted Outcome: Improved credit score.
  • Taxes: For good or bad, the U.S. Tax Code has become the nation’s primary conduit for alleviating poverty: the Earned Income Tax Credit dollars exceed that of all other work and income supports combined. Tax refunds are a critical resource to helping the working poor achieve economic mobility.
    Targeted Outcome: Portion of refund used for savings and financial goals.

These five outcomes were supported by dozens of milestones, that we eventually differentiated by activities or key performance indicators, and hundreds of inputs such as meeting time or financial education materials. Over time, we dropped the ratio from the debt outcome to only focus on debt alleviated, recognizing that our financial coaches had less influence on customers’ employment and career options.

We also changed the banking outcome substantially: the increasing prevalence of products and services like overdraft protection had mainstream services looking more predatory; meanwhile, “fringe” services were accessible and transparent. Thus, we decided to “do the math” and focus on the cost of banking products and services. Critically, we are continuously tinkering with the overarching definition of high-performance: Three out of five outcomes? One asset-related outcome coupled with one deficit-related outcome?

And we are still tinkering. We recently learned so much about our relationships with our customers and their financial security through a recent random controlled trial. The Clinic was one of two organizations nationally to conduct the study on its financial education and coaching program at the behest of Urban Institute and the Consumer Financial Protection Bureau. This research will provide evidence of the effectiveness of Financial Coaching as a strategy to help empower consumers and determine what aspects of coaching work for whom and under what conditions.

I credit that early focus on understanding how, when, and why our mission actually impacts the lives of our customers. That internal compass, and the Clinic’s ability to adapt to changing circumstances, continues to drive our success.

Founding The Financial Clinic

By Mae Watson Grote

I’m often asked about my motivation for founding the Financial Clinic and why I’m devoted to finding solutions to help the working poor become financially secure. There is no singular answer but it was certainly informed by my passion for how nonprofit organizations advance social justice and create systemic change. Then, there’s my personal story.

My family was like many others during the 1970s, an era when divorce was on the rise and more and more women were entering the workforce. After my parents divorced, both juggled multiple jobs to support two new households. The indelible memory though was that of my mother getting up at the crack of dawn to deliver newspapers. Then, she would get my sister and me ready for school and head to her 9 to 5 secretarial job. But it didn’t end there. After putting us to bed, she would leave for her evening job working as a cocktail waitress. We were only about 6 and 8 years old. Looking back, I recognize the hard choice she made to leave us so that she could bring in the extra income our family needed to survive. Those are the kinds of choices so many people are forced to make when they feel like they’re out of options.

Before law school, I worked at the Legal Aid Society as a paralegal and welfare advocate where I saw again how a lack of options could affect people struggling financially. While there, I learned to use a variety of strategies to find financial solutions for people in need. I also learned how all-absorbing finances can be for people who don’t have much money—and that those same people, who need it most, have the least access to the information and the institutions that could help them.

Later, working in the public interest policy arena during the 1990s, I saw that the communities I had come to care deeply about would be devastated by the radical changes to welfare policy. While welfare poverty plummeted, working poverty skyrocketed. An $8 an hour job was well short of what people needed to survive, much less feel financially secure. And where there had been advocates and lawyers for welfare recipients, I saw that the working poor didn’t have the same support system. I knew there was a need to help them access services and benefits, like the Earned Income Tax Credit, and empower them to manage and improve their personal finances in a lasting way.

A lifetime working in the nonprofit, poverty-alleviating sector has forged within me a personal passion for systems change because to truly “move the needle,” we must eradicate the systemic roadblocks that keep people in poverty, like access to banking and legal services, predatory lenders and tax preparers, and the hopelessness that grows in the absence of financial goals.

I founded the Financial Clinic in 2005 to serve community residents of Bushwick, Brooklyn. Today, the Clinic’s goal is national in scope: to leverage the one-on-one successes we’ve had with thousands of customers to produce the kind of large-scale change that will impact millions of working poor people across the nation; people who, along with everyone else, deserve the opportunity to be financially secure.

Change Machine: An Online Financial Support Program

Change Machine: An Online Financial Support Program

Change Machine: An Online Financial Support Program

The Financial Clinic’s Change-Machine.org is an online support platform that enables nonprofit organizations and public agencies to incorporate powerful financial coaching strategies into their programs.

We aim to have this “Swiss Army Knife” be on the desktops of thousands of practitioners and supporting the financial security of an estimated 9 million low-income Americans by 2030!