A Comprehensive Guide to Banking for Returning Citizens
What you need to know about mainstream banking services and fintechs, and why you should ultimately consider joining a Credit Union.
Formerly incarcerated individuals face significant challenges when it comes to accessing mainstream banking services. Limited access can have a huge impact on economic wellbeing and the ability to achieve sustainable financial independence.
More than 600,000 people, the majority of whom are people of color and women, are released from our prison systems every year and attempt to rebuild their lives.
While there is increasing support from government and community-based organizations for housing and employment, when it comes to affordable financial services, many people hit a roadblock. Formerly incarcerated individuals frequently encounter a financial system that doesn’t welcome them back into the mainstream, often forcing them to use check cashers, payday lenders and other high-cost, non-bank options. They have difficulty opening a checking account, have often had their identity stolen and find it nearly impossible to get a loan.
But the news isn't all bad. There are several options for justice-involved individuals in today's market. Being an educated consumer with a better understanding of each of these providers -- and their advantages and disadvantages -- can help you decide which option may be best for you.
Financial Services for Justice-Involved Individuals
Second Chance Banking Programs. Second chance checking may be an option if you've been denied for an account due to a negative banking history. Consumers can access these programs through financial institutions located in all 50 states. However, because of the higher risk, the terms and conditions may be less attractive than accounts available to general consumers. Many financial institutions impose service charges or have minimum balance requirements and other account restrictions.
On a brighter note, a number of credit unions and banks have started offering more affordable products aimed at helping unbanked communities. The Cities for Financial Empowerment Fund's national Bank On platform supports financial institution efforts to connect these consumers to safe, affordable bank accounts. As a great example of one of these initiatives, several large credit unions have recently come together to offer Dora Everyday Checking, a Bankon certified, all digital experience, with fee-free checking, early payday, direct deposit, mobile deposit, and access to a network of 30,000 surcharge-free ATMs.
Fintech Banking. It wasn't that long ago when few consumers even knew what a fintech, aka financial technology company, was -- now some think they're all the rage. These “challenger or neo banks,” typically have great tech platforms, and are easy to use and convenient. Some do not use credit reporting agencies, like ChexSystems, as part of their account opening process. This means that it may be easier for people with prior banking or other issues to open a new account than at some mainstream banks.
Fintechs do have their limitations, however. While the technology is awesome, products available on these platforms are usually limited to basic checking accounts and debit cards. There may be a few other bells and whistles thrown in, but essentially that's it.
Many of these for-profit providers earn the bulk of their revenue from interchange fees, which are fees paid by merchants to card providers based on a percentage of the transaction amount (averaging around 2%).
The more often you use your card and the larger the purchase, the more money the card providers (and their investors) make. Not exactly consistent with promoting good money management habits or encouraging saving. Overdraft and out-of-network ATM fees can be another substantial source of revenue for fintechs. So be sure to read the fine print, especially when a fintech claims it has "no hidden bank fees."
In all fairness, traditional financial institutions also earn income from card products, overdrafts and out-of-network ATM fees, however this represents a much smaller portion of total earnings, as lending activity is the primary source of income for most banks and credit unions.
Fintechs are intentionally transactional rather than relationship-oriented.
Revenue streams, growth, and ultimately, the company's valuation, largely depend on continuously increasing the number of accounts (i.e., users) and card transactions. For maximum efficiency, high tech generally equals low touch, which means that most of these companies do not offer the financial guidance that banks and credit unions typically provide to their customers.
The primary objective for most fintechs is to scale as quickly and efficiently as possible -- financial counseling and relationship building are inconsistent with this objective.
It's also important to be aware that some fintechs engage in predatory pricing practices. An example of this type of consumer abuse was recently discovered at JPay, a dominant for-profit provider of financial services to prisons and jails nationwide, which is owned by a private equity firm. JPay was fined $6 million in consumer redress and penalties by the Consumer Financial Protection Bureau (CFPB) for charging excessive fees on prepaid debit cards that formerly incarcerated individuals were forced to use to access their gate money and other funds owed to them upon their release. While many fintechs do not take part in these egregious practices, consumers are encouraged to read each company's terms and conditions carefully prior to opening an account.
Before a consumer opens an account with a financial services provider, they should know what to expect and whether the products, pricing and customer service is consistent with their needs and financial goals.
Individuals just starting or re-starting their financial journey should consider the value of a developing a long-term relationship with a traditional financial institution. Many of these organizations provide consumers with important financial guidance from knowledgeable professionals who can help them improve their financial health, build credit and create wealth. Community-based credit unions are particularly committed to helping individuals and families experiencing financial challenges.
To be sure, technology platforms certainly have value and can save people time and sometimes even money, but they may be better suited to individuals who do not require additional support services, such as mentoring and credit counseling, or access to a broad range of loan, savings and retirement planning products.
The Credit Union Difference
In the United States, there are nearly 6,000 credit unions providing services to more than 100 million members. Like banks, credit unions accept deposits and make loans. But when someone joins a credit union, they become a member-owner, not just a customer.
Credit unions are not-for-profit financial institutions that exist to serve their members, and provide a safe place to save and borrow at reasonable rates, rather than concentrating on profit margins, as do most banks.
Banks and fintechs are for-profit entities that are generally owned by individuals and/or companies (i.e., shareholders). When banks or fintechs show a profit, they return most if not all of the money to these investors. Credit unions, on the other hand, are owned by their members who are people in the community that have accounts and loans with the credit union. Unlike their for-profit counterparts, credit unions return profits to their members in the form of higher savings dividends, lower loan rates, and other perks like ATM Fee reimbursements. In addition, savings and checking accounts have lower fees and minimum deposit requirements than at most banks. A credit union manages the collective resources of their members, so every business decision they make is with their members’ best interests in mind. A credit union may also be more willing to work with someone who has poor credit or difficulty qualifying for a loan.
Aside from access to broad financial products and the pricing benefits credit unions offer, members also receive exceptional customer service.
When you open an account at a credit union, you’re more than just an account number --you’re a member of a community. Credit unions also offer a wide variety of financial education resources to help members improve their knowledge and meet their financial goals. As “financial cooperatives,” credit unions work with each other in ways that for-profit banks cannot. The national network of credit union service centers known as the Co-Op Shared Branch Network, allows credit unions members to visit Shared Branch locations in the US for basic banking transactions -- no matter where you're located, you’re probably not far from a partner credit union or ATM network.
Credit unions create lifelong relationships with their members.
How many times have you heard someone say they got their first car loan from a credit union and are still with the same credit union to this day? That’s because credit unions are all about building relationships with their members and helping people create a healthy, secure financial future.
First Step Alliance, a 501(c)(3) non-profit organization formed by a team of financial services professionals and formerly incarcerated community leaders, works with credit unions, like US Alliance Financial and Element Federal Credit Union, to help justice-involved individuals create a path to long-term financial independence. First Step Alliance is also hoping to start a credit union dedicated to returning citizens and their families in the near future.