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By ANN CARRNS, The Wall Street Journal Thursday, April
5, 2007 found at sddt.com
CLEVELAND -- On a recent pay day, nurse's aide Danikca James bypassed
the grocery store in a low-income neighborhood where she once cashed her
checks and walked into a branch of KeyBank.
The 27-year-old single mother, who barely makes ends meet, was just the sort
of customer the big Midwestern bank used to avoid.
That Friday afternoon, James pressed her thumb on a fingerprint scanner and
gave an I.D. to a KeyBank teller. It took minutes to pocket roughly $400 in
cash -- the total of her check minus a 1.5 percent fee of about $6.
KeyBank, the consumer and
small-business unit of
KeyCorp (NYSE: KEY),
the 15th largest bank in the U.S. by stock-market value, is seeking to learn
much more about the financial habits of clients like James. Competition for
deposits from middle-class and wealthy customers has intensified in a
saturated banking market. Instead of simply trying to lure clients from
rivals, many banks are aggressively courting overlooked customers -- those
with limited or no experience with traditional checking accounts.
An estimated 14 percent of U.S. income earners, or 28 million people, lack
bank accounts; many are recent immigrants or have very low incomes. Another 22
percent, or 45 million people, including those with poor credit histories, use
banks only intermittently. The so-called unbanked and underbanked nonetheless
spend an estimated $11 billion in fees for 324 million "alternative"
financial transactions annually at check-cashing outlets, money-wire companies
or other operations, according to the Chicago-based Center for Financial
Services Innovation.
Banks want in on the action. Bank of America Corp. (NYSE: BAC) is
marketing wire transfers to immigrants sending money abroad. The North
Carolina State Employees' Credit Union is competing with payday lenders, who
offer cash advances on future paychecks. Last year, J.P. Morgan Chase &
Co. (NYSE: JPM) introduced a service allowing low-income tax filers to
receive tax refunds on a debit card.
Check cashing is another way banks are generating new fees, with a goal of
selling clients on checking accounts later. UnionBanCal Corp.'s (NYSE:
UB) Union Bank of California has offered check cashing for a decade, and says
25 percent to 30 percent of those clients migrate to more traditional bank
products. U.S. Bancorp in Minneapolis has started a check-cashing pilot in
Colorado Springs, Colo. Wells Fargo & Co. (NYSE: WFC) is testing a
way to cash paychecks issued by the bank at its automated-teller machines.
For KeyBank, the idea is to make the most of the 230 branches -- a quarter of
its total -- that sit in low- to moderate-income neighborhoods, primarily in
slow-growing Northeastern and Midwestern cities. Its parent, KeyCorp, is the
product of a 1994 merger of KeyCorp of Albany, N.Y., and Cleveland's Society
Corp., which served blue-collar workers along with the affluent. Cleveland,
the company's headquarters, was named the country's poorest big city by the
U.S. Census Bureau last year.
KeyBank charges 1.5 percent, up to a maximum of $22.50, to cash payroll and
government checks. That's below the 2.44 percent average that check-cashing
outlets charge, for example, for Social Security checks, says the Consumer
Federation of America. So far, KeyBank's three-year experiment has brought in
a nearly negligible sum, and future projections still put it at a fraction of
1 percent of the $2.64 billion in annual revenue from the KeyCorp unit that
includes branch-banking. Many working poor still show allegiance to storefront
chains because of their longer hours and willingness to cash more types of
checks.
But Bruce Murphy, KeyBank's president of community development, who oversees
business in urban areas, calls the push inevitable. In neighborhoods with
homeowner rates as low as 20 percent, selling home-equity loans, for example,
"just doesn't work."
Jeanne Morton, who manages a training center for a Cleveland nonprofit housing
group, said she was initially concerned KeyCorp might use check cashing to
pitch clients on costly accounts. But she says she's encouraged to see KeyBank
providing services at lower costs than many check-cashing chains.
Murphy, a native of Youngstown, Ohio, came to know Cleveland as a child when
he visited his grandmother. Now 54, he says that one of his
"formative" experiences as a young African-American was witnessing
celebrations in 1967, when Cleveland elected Carl B. Stokes the first black
mayor of a major U.S. city.
Much later, overseeing KeyBank's retail operations in Cleveland from 1999 to
2001, he heard the frustrations of employees who felt they had little to offer
the mostly African-American residents living near inner-city branches.
The bank subsequently tapped him for the urban-development job. One day in
mid-2002, KeyCorp's chairman and chief executive, Henry Meyer III, sat down at
Murphy's table in the corporate cafeteria. Murphy told him he'd been mulling
how to capture fee income from low-income customers. "Henry, we think
there's an emerging market in the unbanked," he recalls saying.
The CEO was receptive. "I'm always looking for new things that aren't way
out there on the risk spectrum," Meyer says he told him. "You've got
something here. Go back and think some more about it."
But the CEO says any effort had to make economic sense. "Bruce doesn't
work for the KeyBank Foundation," Meyer said, referring to the bank's
charitable arm.
KeyBank began offering checking accounts with no minimum-balance requirements
in September of 2002, but that initial attempt to reach less-affluent
customers fizzled. Other banks had already started doing the same. Also, even
with the balance flexibility, many people didn't qualify because they had a
record with ChexSystems Inc., a network that tracks customers with a
history of bouncing checks.
The high bar turned prospects off, said Judy Lucas, who oversaw an area that
included 20 urban branches. It seemed to reinforce the view of attendees at a
bank focus group who had said they didn't trust or respect banks.
Murphy's team then homed in on a simple idea -- to offer the service those
residents regularly used, check cashing.
It was tough swaying some mid-level managers. In meetings in early 2003, he
recalls one employee saying, "Are you crazy? These are the very people
we're trying to keep out of the bank!"
Security staff also warned that offering check cashing could make branches
less safe. It suggested putting tellers behind bullet-proof glass, recalls
Michael Griffin, a former housing-development advocate who directs strategy
for KeyBank Plus, as the bank calls its check-cashing service.
"The general sentiment was that we were opening the bank vault and taking
cash out of it," said Griffin.
Diane Bujdos, a KeyBank vice president overseeing sales and operations at the
branches, noted that branch employees' pay was tied to their office's
performance; why should they embrace a program that might attract bad checks
and increase losses? If word got out that the bank was doing this, "we
could become a target" of customers trying to cash fraudulent checks, she
recalls saying.
The complaints convinced Murphy that some "myth-busting" was in
order. In April 2003, his team flew with marketing and risk-management
executives to Los Angeles to visit Union Bank of California, which started its
check-cashing service in 1993 and now offers it at 15 of its 321 branches. The
group boarded a small bus and toured freestanding branches and one inside a
grocery store. Union Bank branches offered check cashing at clearly marked
locations. People in the check-cashing line were pretty much indistinguishable
from other clients. Managers said losses were within expectations.
As the group gathered that evening over dinner, Griffin, Murphy's lieutenant,
sensed they'd turned a corner. "There was a lot of excitement" that
the program could be viable, he says.
Murphy's team launched a test of KeyBank Plus at five branches in run-down
areas of Cleveland. To reduce risk, they limited the service to payroll and
government checks; personal and third-party checks weren't accepted.
Bullet-resistant glass went up at the St. Clair branch, which had been
previously robbed.
The bank redesigned the pilot branches, painting walls in warm mustard hues,
and hired a nonprofit organization to teach free financial-literacy classes at
an adjoining education center. Murphy also ordered up a special marketing
campaign. One was a collage of photographs, mostly depicting
African-Americans, with a focus on a young man dressed hip-hop style in tank
top, silver chain and cap.
The program hit some early glitches. To verify enrollees' employment and home
addresses, tellers called the customers' bosses and landlords. Bujdos, the
former teller-turned-executive, cringed. "It was intrusive. To me, that
says, 'You think I'm lying,'" she says. She also suspected the cumbersome
process was discouraging enrollment.
To overcome those problems, the bank in 2005 invested in new technology from Valid
Systems Inc. that electronically verifies a customer's identity using a
check of multiple databases. Upon enrollment -- required to cash even one
check -- clients present identification, such as a driver's license, and a
thumbprint for imaging for future identification.
Clients said they didn't mind giving a print. "It feels safer that
way," said Pameletta Jones, 48 years old, who cashes her monthly
disability check at KeyBank.
By the end of 2006, KeyBank Plus had signed up more than 5,500 Cleveland
check-cashing clients. The bank now has check cashing in 26 branches in
Cleveland. In mid-January it expanded the service to Albany, N.Y, where it has
enrolled about 1,000 customers at 20 branches. Denver and Portland, Ore., are
on the list for later this year.
When a branch in working-class Cleveland recently hung a banner inviting
customers to cash their tax-refund checks, the manager of an ACE Cash
Express Inc. store across the parking lot complained to the property
owner. But Eric Norrington, a spokesman for Irving, Texas-based ACE, a chain
with more than 1,500 stores nationwide, said his company isn't worried about
the competition. He says ACE offers extended hours and more flexibility than
banks, which "don't understand the market."
Child-care worker Erika Jones, 28, cashes checks at KeyBank, but says she
still must head to a convenience store to pay her utility bill for a 75-cent
fee.
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“There’s so much inventory out there that the buyer can pick and choose,” said Susan Sirles Fidler, a Realtor at Re/Max 10, Oak Lawn. But she cautioned, “The stuff that’s almost free is almost free because it’s going to cost you an arm and a leg to put it back together. It’s not buyer beware as much as buyer be smart.”
