Financial inclusion: The paradox of the city

Illustration: Vince McIndoe

Come to the city, get a job and then get rich, they used to say. It might sound old-fashioned, but it’s still happening in the world’s biggest economy today. 

According to US census data, more than 82% of Americans now live in an urban area – up from 64% in 1950. It is a number that is growing. Research from the Grayline Group predicts that by 2030 there will be 53 cities with more than one million residents in the US, up from just 12 in 1950 and 41 today. 

But the opportunities that cities promise have proved to be unevenly distributed. Indeed, it is in cities that the US’s wealth gap is most stark. 

As New York City has continued to add to its population (another 400,000 since 2010), income inequality has also grown. By annual income, residents at the bottom of the spectrum take home median annual earnings of $19,144, compared with $282,125 for the top. It is worse at the edges. The upper 5% of Manhattan households earned more than $860,000 in 2014, yet one in five of the city’s residents live below the poverty line. And despite the supposed lure of employment, joblessness is higher in New York than the national average. 

There is another misconception about city living, and it is the ability to access financial services. Here, New York is perhaps the biggest paradox of all. In the city that is home to Wall Street, the financial centre of the US and much of the world, a staggering 780,000 individuals (typically from low-to-middle income and largely minority households) are underbanked. 

It is another figure that is growing. Some 360,000 don’t have a bank account, placing New York City as joint third with Los Angeles among the most unbanked metropolitan areas in the US. 

“Financial inclusion, or the lack of it, is an issue across the country from urban cities to rural communities,” says Caroline Ratcliffe, senior fellow and co-director of the Opportunity and Ownership initiative at the Urban Institute.  “It doesn’t happen in isolation; it’s linked to poverty and instability in people’s jobs and earnings.” 

She and her colleagues conducted a study three years ago into New York City’s unbanked and underbanked populations. 

While payday lending is banned in New York, one quarter of its banked population use alternative financial services such as cheque-cashing or pawn shops – five percentage points above the national average. 

What urban financial inclusion studies such as that of the Urban Institute reveal, is that unlike in rural areas, it is not a lack of banks that is the challenge when it comes to getting people banked – after all banks are everywhere in New York City. 

One challenge, says Ratcliffe, is that the services many banks offer do not meet the needs of lower income customers. 

“Traditional bank accounts are not the right product for some people,” she says. “Minimum balance requirements and overdraft and other account fees can make bank accounts hard to sustain and expensive for low-income families with volatile earnings and expenses. Our study shows that thousands of New Yorkers do not have a bank account.”

Credit unions and Community Development Financial Institutions (CDFIs) are among the few institutions geared to serve low-to-middle income households, but in urban areas the challenges are often more acute than in rural areas. Gentrification of the poorer neighbourhoods they typically serve should have led to more deposits, but instead it has led to greater competition for deposits as larger banks have moved in. 

Smaller banks have also found it harder to recover from the financial crisis than the larger banks – as have their customers. And with regulatory costs and rents increasing, small community development banks are under strain. Yet without the diversity that CDFI banks provide in a world of increasingly homogeneous banking services targeted at the affluent, the wealth gap is only going to get bigger. 

Michael Pugh, president and chief executive of Carver Federal Savings Bank in Harlem, proudly points to a blown-up photograph framed behind him. 

The photo shows the original founders of the bank signing Carver’s bank charter in 1948. Other photos adorn the walls of Carver’s modest board room depicting the directors and chief executives who have run Carver for the last 70 years. They are all African-American. 

If any bank knows the plight of the unbanked and underbanked, it is Carver, because in Harlem in the 1940s, African Americans could not get accounts. 

“Business leaders, church leaders – middle-class African Americans – had aspirations but no place to store their money and no means to save,” says Pugh. And when a group of Harlem residents came together to set up their own bank and applied to New York State for a charter, they were declined. 

Refusing to give up, they then applied for a Federal charter, and the first branch of Carver opened on January 5, 1949 on West 125th Street, taking its name from African-American agricultural researcher and scientist, George Washington Carver, who in addition to his many contributions to agriculture and science, worked for racial harmony. 

“That was and is our mission – to be a bank for everyone,” says Pugh. It is the largest African-American managed bank in the country, with $560.7 million in deposits and nine branches in Harlem, Brooklyn and Queens.

Times have changed in Harlem since Carver’s inception, however. The area’s African-American population peaked in the 1950s. After the civil rights movement, many black middle-class families moved to the suburbs, leaving lower-income black families behind. Racial demographics have also shifted. West and East Harlem today are predominantly Hispanic; African Americans account for less than 40% of the population across Harlem more broadly – although they are still a majority in central Harlem.  

In the last 15 years, the pace of change has quickened as people have migrated to New York City. In keeping with gentrification in other NYC neighbourhoods, Whole Foods, Starbucks and gastro restaurants have come to central Harlem – as have higher rents. In 2000, the average rental cost of a two-bedroom apartment in Harlem was $1,400 – now it is over $3,200. Yet the tide has not risen evenly for everyone. 

Some 29% of residents of central Harlem live below the federal poverty level, for example, making it the second poorest neighbourhood in Manhattan. The majority of those in poverty are African American. 

Some of the pricing out is caused by the fact that builders do not always adhere to promises of making 20% of new units affordable. This limits the spectrum of rent levels. Over half of central Harlem’s residents spend more than 30% of their income on rent – that is an average however. A study from Harvard University in 2016 revealed that 83% of low income families in the US spend more than 50% on housing. 

Lower-income communities have also struggled to get back on their feet since the global financial crisis. Those who did not rent were often at the cheaper end of the housing stock; what little wealth they had was tied up in their homes, so that when the crisis hit, it hit these communities hard. Nor have they enjoyed the rebound that higher-value homes have seen. 

Carver has also yet to fully recover from the crisis – last year it reported a net loss of $2.2 million – its profitability restricted by the regulator’s one-size-fits-all approach. But Carver is clearly in a better situation now than it was several years ago. 

In the early 2000s, staying true to its mission-based approach, the bank ended up making a lot of loans and, in particular, construction loans. And then the housing market collapsed and the financial crisis hit minority communities especially hard. At the lowest point, Carver had $100 million of non-performing loans. 

Under its former chief executive, Deborah Wright, the bank was able to avoid joining 25 other black-owned banks in the US that failed, however, and in 2011, the department of the Treasury and a handful of US financial institutions including Citi, Goldman Sachs, Morgan Stanley and Prudential Financial injected $55 million into Carver in exchange for a share of ownership. 

A little over three years into his current role, Pugh will speak only of the graciousness of those who bailed the bank out, but while necessary, the recapitalization was not and is not an ideal situation. The Treasury owns 62% of Carver. The large banks own almost all the rest. As an historic black institution that went public on Nasdaq in 1994, that shift in its shareholder base did not go unnoticed in the community and it caused some deposits to leave.

It is up to Pugh to turn Carver’s fortunes around. Recently, Carver entered into a sale-leaseback agreement for its West 125th Street location and relocated its back-office operations down the block. The transaction strengthened the bank’s capital position, while the proceeds from the sale will be used to continue supporting small business development. 

But Pugh is fighting something of an uphill battle. With gentrification in Harlem, the larger banks arrived or expanded. Within one block of Carver’s 125th Street branch you can find Citibank, Chase and Bank of America, for example. That leaves fewer deposits for Carver.  “It’s just not as easy to attract retail deposits as it once was,” says Pugh. “As a community bank we just don’t have the marketing budgets to get out there and share what we do.” 

Larger banks have louder voices it seems. Since the financial crisis, the largest three banks in the US (Wells Fargo, Chase and Bank of America) have added more than $2.4 trillion in domestic deposits – a 180% increase. In contrast, over the last few years Carver has seen its consumer deposits decline. 

It is unfortunate because, as Pugh points out, “there’s very little in banking services Carver cannot offer that the larger banks can.” 

He highlights online banking, mobile banking and Popmoney – its person-to-person money transfer capability. While it may not have the branch network of its larger peers, Carver is part of the Allpoint ATM network, giving its customers access to 55,000 cash machines nationwide. Pugh is also trying to improve Carver’s presence locally, bringing into people’s awareness the bank’s role as a community and historical institution. 

For young people moving into Harlem, there are good reasons to bank with Carver. Its story is an appealing one for the increasingly impact-driven philosophy that young ‘gentrifiers’ claim to embrace. Carver runs financial education programmes that have produced 15,000 graduates, for example. It provides cash-access loans to small business entrepreneurs that need working lines of capital but who lack or need to build their credit histories. 

Carver’s Community Cash programme offers discounts to the high fees charged by cheque-cashing agencies in neighbourhoods such as east Harlem, and it offers cheaper money orders to counterbalance the tendency for its community to use alternative financial services. The jewel in its impact crown is that Carver puts 83 cents of every dollar on deposit back into its neighbourhoods through loans – and back into the hands of people who are often declined by larger banks. Carver is a socially responsible bank. 

Pugh is shrewd. If he cannot compete at present for retail deposits, he can go where large banks do not – to small businesses. Indeed, Carver is well placed to act in that area. It understands the business models that work in its communities and will put in the time to bring its clients up to a point where they can be eligible for loans. 

The bank has developed a speciality in serving the needs of minority and women business entrepreneurs (MWBEs). To date, Carver has provided approximately $23 million in loans to MWBEs through public and private partnerships like the MTA Small Business Mentorship Program. The bank’s business deposits have seen some moderate growth and its success stories from supporting local businesses are slowly gaining attention. 

Success stories like that of Melba Wilson. 

Wilson was, in her words, "born, bred and buttered” in Harlem, and worked as a cashier at Sylvia’s, the borough’s celebrated soul food restaurant, known for its gospel brunch. Wilson kept her earnings under the mattress “just like my mother did” and dreamed of one day opening her own restaurant. 

That dream took 15 years, but now Melba’s, on the corner of Frederick Douglass Boulevard and 114th Street is as familiar a Harlem establishment as Sylvia’s. Award-winning and featured on several television shows, reservations for any of the 109 seats are difficult to come by. 

“We serve comfort food, and comfort is the experience we want you to have – we want this place to be an extension of your home,” says Wilson. Hugs are mandatory and memorable, as is the catfish dinner and the red velvet cake. 

Melba Wilson 'shows what’s possible when you find a bank partner'

For the star-watchers, there is always the chance of glimpsing celebrities such as Pharrell, Katy Perry, Robert De Niro, or Smokey Robinson among the regulars. Wilson is an important part of the community. She currently employs a staff of 32, of whom 28 are Harlem locals, and more hires are on the way as she expands into catering and delivery services, with further expansion planned for craft services in the film industry. She is also an example of why banks like Carver are essential, because without Carver there would be no Melba’s. 

Conservative with her money, Wilson had never needed to use a credit card or apply for a loan and so despite a large coffer of cash savings, references and a location in mind for a potential restaurant, she was turned down for a business loan by the Harlem branches of both Bank of America and Chase. Eventually she found a small community bank that was willing to finance her dreams, but the terms for the loan capital were unattractive. 

It was then that Wilson turned to Carver. 

“The first difference I noticed was that a banker from Carver came to my restaurant to speak with me about a getting a loan,” says Wilson. “They wanted to see my business first hand. Then they guided me through the entire loan application process, including how to build credit. It was a large sum and I was nervous, but the bank was there with me the whole way through. 

“We have quarterly check-ins to see how I am doing and I have never missed a payment or been late.” 

Wilson is now a cheerleader for Carver, appearing in their in-branch marketing campaigns. 

“The sad fact is it costs money to be a successful leader,” she says. “So I want to show other people in my community what’s possible when you find a bank that will partner with you.”  

Harlem needs Carver and, given the rising number of underbanked, New York needs more banks like Carver. 

“For those in the community with no credit history or lower down the wealth spectrum,” says Pugh, “there are limited institutions that will put in the time and resources to help that customer get to a point where they are eligible for a loan. 

“It may take several months, but as you can see with Melba, the results can be life-changing for many people and can counteract the downward pressure on the neighbourhood’s minority and low-income population that gentrification can bring. If we’re not here, who will serve them?”

The answer is unfortunately no one, or so-called alternative financial services firms. In East Flatbush, Brooklyn, where Carver has a branch, 41% of households use alternative financial services. In Jamaica Queens, where Carver also has a branch, that number is 34%. And being unbanked or underbanked costs money. Cheque cashing typically comes with a $1 to $5 charge, plus 1% of the total amount. Pawn shops typically charge 2% to 10% a month. 

According to a 2016 report on US financial inclusion by the Obama administration, with an annual salary of $22,000 – the average for unbanked households – these fees can total over $1,000 a year in extra costs. 

“We’ve tried to put ourselves where people most need us,” says Pugh. But rents are high – it’s New York City. And talent costs the same whether you are at Carver or Chase. Online banking helps, but there are plenty of competitors there also. That makes partnerships, like that with All Point, crucial, although Pugh points out that it is not easy to find a one that aligns with the bank’s social values.

And on top of it all there are regulatory costs. “When it comes to regulation and associated costs, there isn’t a line drawn between large and small institutions, and it obviously is harder for us smaller institutions to meet those costs,” says Pugh. On May 22, however, Congress passed amendments to the Dodd Frank bill that will exempt banks with under $250 billion of assets from many aspects of the regulation.”

With total assets of $695 million, Carver is the largest African-American operated bank in the country. 

Carver has its champions. Those who saw the recapitalization of Carver at Goldman Sachs and Citi have considerable praise for Wright and Pugh, and stress the importance of the role Carver plays. Its board members reflect that support. 

In April, Bob Mooney was appointed as a director on the board of Carver’s bank holding company. Mooney was formerly the national director for minority and community development banking for the FDIC and understands the challenges for banks like Carver. 

The transition taking place in the banking world requires a creative response, he believes, which may include large financial institutions taking steps to support smaller CDFI banks like Carver. He is calling on larger banks to continue to make deposits and other investments in Carver and other CDFIs to help them generate more loans. 

“What better, more efficient way for a large bank to reach into this minority community than through a partnership? For example, in addition to deposits, a direct equity investment in a bank like Carver can be leveraged into many times that amount in new loans that create jobs and affordable housing targeted toward lower-income neighbourhoods,” says Mooney. 

“Large banks can also make community development loans directly with Carver, matching their resources with Carver’s unique expertise in the community. These same institutions can also help minority CDFI banks with back-office operations, sharing the effort and reducing costs. We need to start looking at a full range of solutions that would help support the mission of community banks in local neighbourhoods.” 

He says large banks should see partnerships with smaller banks as positive. 

“As larger banks move into developing neighbourhoods to serve middle-to-upper income individuals, they also need to support underserved lower-income families in that community, but they may not know how to reach them.” 

Again Mooney says a partnership with a local community bank like Carver could be useful. 

Collaboration, not only between minority CDFI banks and other institutions but among minority CDFI banks, is another area to be explored, says Mooney. 

“Federal Reserve research shows a 60% decline in the number of small banks from 2000 to 2015; and minority banks as a subset have declined 45% in those years. 

“There are 22 African-American banks like Carver remaining in the country – spread mostly across the east coast. They have a related mission but do not compete with each other. They can collaborate to share the effort and reduce the costs for their unique activities. They can speak and act as a group to ask foundations, government and others for more support to ensure a vigorous minority and CDFI banking sector.”

Indeed, that is a strategy that Pugh is pursuing. 

“Let’s not forget the powerful role that corporate America can play,” argues Mooney. “Deposits, grants and other investments by them in CDFI banks like Carver would help to build stronger economies in lower-income neighbourhoods where they do business. It’s a win-win proposition for all.”

Indeed, if banks like Carver are to continue to serve in urban areas – particularly as more individuals flock to cities and lower-income communities feel the cost pressures of gentrification – then they will need as much support as possible: from banks, governments, foundations and the affluent individuals moving into the neighbourhood.

Down in lower Manhattan, another minority bank is also struggling – Abacus Federal Savings Bank. 

It was founded in 1984 by Thomas Sung, a Chinese immigrant who worked as a successful lawyer in New York City. When he was refused a loan for a real estate investment, Sung was inspired to establish Abacus to serve the Chinese-American community in New York’s Chinatown. At its peak it was originating over 1,500 loans a year. 

His daughter, Jill Sung, is now the chief executive. Like African Americans, Chinese immigrants were unwelcome banking clients at one point in history. The Chinese Exclusion Act that prevented further Chinese immigration did not fully end until 1965 and racial prejudice towards Chinese immigrants was rife – banking for Chinese Americans therefore was late in coming. 

Today, some 32.8% of Asian Americans are underbanked, according to the FDIC. While according to data from the New York City government, Asians are the poorest population in the city – 24% of Asians in New York live below the poverty line. 

“It’s been a challenge to find reliable banking services for the community here,” says Jill Sung, “Particularly banks that understand their specific financial needs and profile.” 

One nuance of Chinatown’s Chinese-American immigrant community is that it is largely cash based. Mostly small mom-and-pop businesses, the fees for accepting credit cards can make the difference between the owner surviving or not. Cash therefore is king, which means many residents of Chinatown do not have credit profiles – automatically ruling them out for small business loans or mortgages. 

“But we know the people in the neighbourhood in a way that can provide us with information regarding loan risk that is beyond a credit score that large banks focus on,” says Sung. “And we also are committed to put in the time and resources to help the community achieve their goals.” 

That relationship means default rates on residential loans are low: just 0.3%.

Don Lee has lived in New York’s Chinatown his whole life, as did his parents and grandparents. He has seen large banks come and go in his neighbourhood. 

“There’s been a real lack of understanding about the community that lives here,” he says. “It’s changed now, but tellers at the large banks didn’t speak Mandarin or Cantonese, and they opened only from 9am to 3pm and not on weekends. Immigrants don’t work 9-to-5 schedules.” 

Lee says this has changed thanks to the presence of community banks like Abacus. Larger banks have been encouraged to tailor their services more, but they are still not committed to seeing the neighbourhood thrive in the way Abacus is, he adds. 

He points to a loan Abacus made to keep an historic Chinese building operating. 

“There wasn’t one other bank that saw the importance of the building for the community and offered to make the loan.” 

“If there is no diversity in the banking system, then we are doomed,” says Sung. “We can’t just have lending and financial products going only to those middle-income earners and above. We need them for everyone in our society, and that means we need to ensure we have these neighbourhood-focused banks.” 

Sung said this became even clearer after the financial crisis. 

“Some larger banks just told customers here that they no longer fit their criteria and asked them to leave,” she says. “That lack of consistency of service is detrimental to a local economy. You need banks that are committed in those tough times.” 

The financial crisis brought unique challenges for Abacus too: in 2012, the bank became the only one in the country to be indicted for mortgage fraud. But Abacus fought the charges – and won. 

Shortly after the crisis, an irregularity in a financial real estate closing was noticed at Abacus and the bank fired a loan officer and began an internal investigation. The bank also reported the findings to regulators and law enforcement. Yet despite following regulatory and legal requirements, the Manhattan District Attorney announced a 184-count indictment against Abacus, arriving to handcuff and parade employees out of the building in front of the press corp. 

What followed for Abacus was five years of disruption, which ultimately resulted in the bank being acquitted – but it came at a cost. 

“During the prosecution, we lost all our major third-party relationships, such as Fannie Mae, Freddie Mac and so forth,” says Thomas Sung. “Instead of making money from normal business, we couldn’t make business. We were actually coasting along and losing business and money. On top of that we had legal expenses.” 

He estimates the total loss to be around $25 million, including $10 million in legal fees. 

The bank has never fully recovered. Last year, it originated 276 loans and, like its smaller peers, it is struggling to attract deposits. 

“We’re up against the larger banks and now also online banking,” Thomas Sung says. “It’s popular for the younger generations who travel internationally to choose online banks. I don’t think anyone’s really thought about what this means for those who won’t be served by those institutions."