NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, January 14, 2016

New Filene research, Reaching Minority Households: Learning from Minority Credit Unions, shows minorities comprise 30% of all U.S. households but account for fractions of total U.S. household income (23%) and total household wealth (10%). The research also finds minority households are significant customers for nonminority-owned financial providers and offers ways financial institutions can help close the gap.

• Diverse Assets. Minorities represent a huge opportunity in financial services: deposits ($259B), nondeposit investments in retirement accounts ($874B), nondeposit investments outside retirement accounts ($428B), and home mortgages ($1,781B)
• Greater Challenges. Black and Hispanic households are far more likely to face large financial gaps than white and Asian households.
• Small Account Barriers. Oftentimes banks, insurers, and investment managers do not find smaller accounts attractive and thus impose higher per-unit costs, which dissuades low-wealth households from participating in conventional financial markets
• Power of Affinity. When minorities face financial gaps and traditional banks are not focused on serving their needs, they often turn to Minority Credit Unions (MCUs) which make up 13% of all credit unions and hold $53B in assets
• Growing Segment. Despite charging higher interest rates to offset elevated delinquency levels, small MCUs have returns on assets similar to other institutions and grow faster than all small credit unions
• Emotional Connection. Minorities report joining and utilizing minority financial institutions for emotional or affinity reasons independent of the interest rates charged and paid, terms offered, and their loan approval rates
• Effective Approaches. Credit unions report the following as most effective: creating targeted products, offering attractive pricing for higher-risk households, and financial counseling and education

“This research is the first output in the larger Incubator project to understand the scope and size of the underserved market within minority households,” said Andrew Downin, director of Innovation at Filene. “The next step is to take meaningful action to solve this problem by making promising programs available to more consumers.”

An Advisory Panel made up of representatives from academia, public policy and the credit union community are currently working to identify five products to be tested in-market through Filene’s proven Incubator process. The products will focus on serving African American and Hispanic populations in areas such as; small dollar loans, non-citizen lending, and micro-enterprise (or micro-finance).

Robert Meloche, Sr. Director of Financial Inclusion at Visa Inc. and Advisory Panel member, says “The Incubator should provide compelling examples for non-minority credit unions and other financial institutions looking to launch programs that address financial gaps among minority households. Products under consideration were submitted by credit unions and other organizations in the financial sector.”

Those interested in learning more about testing the selected products are encouraged to attend one of several free webinars scheduled in February. Registration information is available at filene.org

Formal recruitment for program pilot testing will also begin in February.