The announcement earlier this month that the federal government approved a plan to establish a low-income credit union called Stepping Stones in the City of Wilmington was met with a lot of fanfare.
Many saw it as a ray of hope for the city’s poorer residents, many of whom don’t have access to traditional banks, because they would now have more options and potentially a better financial life.
An editorial in The News Journal on Oct. 4 even described the move as “a possible avenue to seeking constructive peace with criminals and gaining some foothold in reducing crime.”
Helping fight crime and combating poverty are realistic goals, and Stepping Stones, with its strong community support, especially from the banking sector, and a solid business plan, has a good chance for success.
But the road to building a successful low-income credit union is paved with many challenges, and a past attempt to establish such an organization in Wilmington failed.
“No one has ever successfully served this particular market we’re talking about,” said William Myers, director of the Office of Small Credit Union Initiatives at the National Credit Union Administration, the government agency that approved Delaware Community Reinvestment Action Council’s (DCRAC) plan to create Stepping Stones Federal Credit Union.
But, he continued, after several years of working with DCRAC, helping them build a business plan, and making sure the Council’s members were aware of the dynamics and threats that exist in the financial world, “they convinced us.”
“It’s a creative endeavor,” he added.
Low-income credit unions, also known as community development credit unions (CDCUs), are different from traditional credit unions because they’re designated to serve underprivileged communities and have mainly poor members.
They’ve become an alternative to the payday lenders and loan sharks that often prey on this community. And they provide a banking option for individuals who are shut out of big banks because they may not have enough money or assets to get loans; make accounts cost effective; or for those who just don’t trust or feel comfortable with large financial institutions.
Low-income credit unions are playing a critical role during tough economic times, said Cliff Rosenthal, president and CEO, National Federation of Community Development Credit Unions.
“Financial literacy and education is an important part of what most low income credit unions do,” he said.
Such institutions can even impact crime rates and property values.
Kulwant Rai, research director of the Tayloe Murphy Center at the University of Virginia, studied several low-income communities in North Carolina and Virginia before and after credit unions targeting that population opened and found crime had indeed dropped as a result.
“Providing banking services to unbanked communities can reduce crime,” Rai explained. He found that crime had decreased an average of 4.2 percent in those communities, and in one community he found armed robbery plummeted more than 22 percent.
The reason, he said, is thieves target low-income folks who they know typically don’t have bank accounts and tend to cash their paychecks, making them easy targets. “If you have banking services for those individuals then they don’t have as much cash on them or in their homes,” he noted.
The other positive outcome of the credit unions, Rai discovered was that the property values in those communities went up, about 4 percent over the last decade. “I was very excited to see those numbers,” he added.
Indeed, such evidence would get any struggling community to stand up and take notice of low-income credit unions, and the City of Wilmington, with its high crime rate and faltering real estate market, is no exception.
It’s a boon for the DCRAC, and for the state of Delaware, that the National Credit Union Administration approved the creation of the institution, given that the federal government agency has not approved any other credit unions, low income or otherwise, so far this year. But the hard part lies ahead.
13 credit unions failed this year alone, according to the Administration’s Myers, and that’s about average for recent years. Brookings said in a recent report that low-income credit unions had a 50 percent failure rate in the 1990s.
The Brookings report founds that:
“Unlike conventional lenders, these failures were not due to excessive risk-taking. The main reasons for failure were: under-qualified management and boards; inadequate capital, liquidity, bookkeeping, and staffing; limited range of services; inadequate economies of scale; absence of collaboration with community partners; and inadequate use of existing programs and financial institutions to support their efforts.”
In 2005, Wilmington lost its low-income credit union, called United Communities, and also referred to as Peoples credit union, even though the organization had over 2,000 members at the time. United was forced to merge with a larger credit union, DPL, which later became Community Powered Federal Credit Union.
“They didn’t have sufficient support, or administrative levels to provide the necessary planning and things needed,” said Anthony Hinds, CEO of Community Powered, adding that his understanding was that United failed to meet certain federal regulatory requirements. “They may have had highly qualified persons on their board, however there were compliance requirements from the regulator that United Communities found challenging to comply with.”
Sometimes, getting enough members can also be a big hurdle.
The East River Development Alliance, a community group in Long Island City, NY, opened up a credit union, named ERDA Federal Credit Union, in April of 2010 right near one of the largest public housing projects in the country, and the institution has a strong volunteer base, advisory board and board of directors. But the group isn’t happy with only having signed up 750 members to date.
“I think it could be better,” said Ana Rosenblum, manager of ERDA Federal Credit Union about membership. She said the organization is working on improving enrollment by adding more services, including checking and possibly ATM access.
According to the business plan for Stepping Stones, they are looking to have 1,360 members and $1.4 million in assets by the end of the third year of operations. The credit union is currently accepting members and plans to be up and running shortly after Thanksgiving. It will operate three days a week – Monday and Friday from 3pm to 7pm and Saturday from 11am to 2pm.
“I think our first major challenge once we open the doors will be managing growth smartly and strategically,” said Rashmi Rangan, executive director of the Delaware Community Reinvestment Action Council, which many in the community point to as one of the reasons Stepping Stones will ultimately be successful.
“Rashmi and the Delaware Community Action Council have been embedded in that community for 15 years,” said Terri Hasson, regional director for Citibank’s community development group and chairwoman of the new credit union. Under Rangan’s direction, she stressed, they be able to “smooth out the rough edges.”
Initially, she added, the credit union can only do two products – basic savings and low-dollar short-term signature loans. Down the line the group may move into auto loans and checking.
The first few years are always difficult for a low-income credit union to turn a profit, especially in this economic environment, said Rosenthal with the Federation of Community Development Credit Unions. But Stepping Stones has a lot going for it right now, he maintained, including support from the banking community in Delaware, and the recent consumer outrage nationally against big banks and escalating fees.
Nov. 5 is so-called “Bank Transfer Day”, a movement that was sparked on Facebook and has gotten many consumers considering changing to smaller banks and credit unions, he said.
But in the end, Stepping Stones’ success won’t hinge on the ups and downs of the banking industry or the economy but on how it serves the community for the long haul.
“We began the plan to charter a credit union for its long-term viability,” Rangan stressed.
“For me, personally, nothing in life is about choices but living at intersection among our various constituencies and using the inherent tensions among them to drive progress,” she explained. “If we responsibly confront these tensions and never shy away from them, allow our core values to define our processes, push the envelope on risk taking, be strategic about hiring, serving, developing talents, creating products and services, we are ready to manage challenges that we know will confront us.”