We have seen countless innovative and impactful programs rise up from the local level, whether it’s working to reduce health disparities or to improve food access. That’s often where the most meaningful work happens. Just take a look at the mobile food market program by the Chattanooga-Hamilton County Health Department who drive their truck around to underserved communities or a grant services coordinator at a community college trying to improve access to mental health services for students. For them, it’s about creating equity where they see it’s needed.
With growing economic disparities, in rural and urban areas alike, state and local governments are exploring ways to revitalize their communities. Poverty and unemployment are still high in many communities, with some never rebounding from the economic downturn in 2009.
Since poverty is associated with limited access to basics like healthy food, health care, and jobs, it’s perhaps not too surprising to see that they also lack access to mainstream financial services. That means they are either geographically isolated from mainstream financial institutions, or they simply do not qualify for any type of home, auto, or small business loan. The lack of accessibility, both geographically and economically, makes it that much harder to invest in the residents and the community as a whole.
Nearly 5,000 bank branches have closed since the economic downturn. That’s roughly a 5 percent decrease in the total number of branches. It might not seem like a startling statistic, but the impact is disproportionately felt in low income communities. The absence of these branches creates a “banking desert” or a census tract area that has no branches within 10 miles. Even this small distance can reduce the amount of mortgages and small business credits in an area.
As families try to balance low-wage jobs and rising costs of living, life in a banking desert makes it more difficult to seize those opportunities that help families build their “American Dream.” The engine that once helped fuel small businesses and job opportunities in communities has all but come to a halt.
Since the recession, loans to small businesses have decreased by 20 percent, while loans to larger businesses have grown by 4 percent. This impacts small business owners, families, and their communities. But it does not have to stay that way. With new, innovative ideas, state and local governments are finding ways to fill the growing financial services gap in their communities.
Banking and Credit Union Development Districts
Texas is one of the most “unbanked” states in the US, and Dallas the most unbanked city in the US. More than 35 percent of households either have no bank account or just rely on check cashers. To improve access to mainstream financial services State Representative Eric Johnson, who saw the lack of financial services offered in the communities he represents, helped pass legislation to improve access in unbanked and underbanked areas.
The idea is to allow local and state governments to “seed” banking and credit union development districts. The newly opened branches would receive deposits from the city treasury to help get them up and ready to do business. In turn, the branches would be eligible for tax breaks and other incentives. A similar model ran in New York in 1997 and was met with success. More than 60,000 bank accounts were opened and loans totaling $538.8 million were extended to residents for mortgages and businesses.
Prize-Linked Savings and Lotteries
Prize-linked savings go hand in hand with banking and credit union development districts. To incentivize locals to open bank accounts, apply for loans, and use other financial services, bank branches offer chances to win a lottery. For example, every time a customer deposits $25 in their account, they are entered for a chance to win $10,000. Since 2009 these efforts have resulted in 50,000 new savings accounts and more than $94 million in total savings.
Community-Driven Financial Institutions (CDFIs)
CDFIs are banks, credit unions, loan funds, or venture capital providers that expand opportunity in low-income communities. They’ve been a great response to the growth of banking deserts, but even more, have provided economic opportunity in all types of communities across the US.
Unlike traditional lenders who work for shareholders, CDFIs look beyond the bottom line to opportunities that help revitalize communities, whether through financing homes for first-time buyers, investing in needed schools and health centers, or lending to residents who want to open their own businesses. CDFIs are funded through federal, state, and local governments, religious institutions, individuals, and public donations.
In 2011, Starbucks launched its Create Jobs for USA Fund which has donated more than $7 million to CDFIs. The money is used to help business owners gain access to capital they otherwise wouldn’t have access to in low-income areas. However, it doesn’t stop there. CDFIs also provide business education opportunities to small business owners on topics like business marketing strategies, cash-flow management, accounting, and employee training. There are countless success stories of how CDFIs helped small businesses grow and revitalize their communities.
While CDFI interest rates tend to be higher, and they are limited in how much they can lend, they continue to provide capital (and opportunity) for hardworking individuals and businesses that simply need a hand up during tough times.