In the parts of Dallas known as South Dallas and West Dallas, west of the Trinity River, many neighborhoods could rightly be called “banking deserts.”
“You see a handful of bank branches, a Chase drive-through or an ATM kiosk in a strip mall,” says Texas State Rep. Eric Johnson, whose district includes these areas. “You don’;t see any – or very few – of the smaller community banks or credit unions.”
But what these neighborhoods do have in abundance, says Johnson, are what he calls “lower-tier” financial services providers: payday lenders, title lenders, pawn shops, and check cashers.
Dallas is, in fact, among the most “unbanked” cities in America, and Texas is among the most “unbanked” states. According to the Federal Deposit Insurance Corporation (FDIC), more than one-third of Dallas-area households – about 36 percent – either have no bank account at all or rely mostly on check cashers and other non-bank providers for financial services. These households are what the FDIC calls “unbanked” and “underbanked.” Statewide, nearly 4 in 10 Texas households – or about 38 percent – fall into one of these categories, compared to about 27 percent nationwide.
But Texas might now be on the path to reversing these trends. In May, Johnson successfully led the passage of legislation that could put Texas at the forefront of improving access to mainstream financial services. Better access to banks, Johnson hopes, would also mean better access to mainstream financial products such as home mortgages, small business loans and lower-cost consumer credit – all of which are in short supply in many parts of Dallas and Texas.
The principal effort sponsored by Johnson would allow local governments and the state to “seed” new bank branches in underserved areas – those designated as “banking and credit union development districts” – with deposits from the city treasury.
“Overnight, those banks would have significant deposits in their vaults,” said Johnson. “I don’t expect that all of [a city’s] general funds would be deposited in these bank branches, but it would be enough to get a branch up and going and solvent from day one.”
Banks that choose to invest in a banking development district would get other perks as well – the ability to pay below-market rates on a city’s deposits and eligibility for tax breaks and other incentives.”They’re doing a service to the city by opening that branch,” Johnson said.
This map of Dallas shows where banks are – and where they’re not.
The Texas initiative is modeled after a similar effort that New York State launched in 1997. According to a report from New York’s state consumer services agency, the initiative led to the creation of 38 banking development districts by 2010, the majority of them in New York City. Between 2005 and early 2010, the new branches opened 61,750 bank accounts and extended loans (including mortgages, small business loans and auto loans) totaling $538.8 million to residents in underserved neighborhoods. Based on surveys, the report concluded the program to be a benefit to the state’s unbanked, “providing communities with access to financial products and services and providing growth opportunities for local businesses.”
The Texas legislation, however, includes refinements to the New York model that could expand its potential for success. For one thing, unlike New York, the Texas legislation would allow credit unions as well as banks to establish themselves in banking development districts.
More significantly, Texas passed companion legislation, also led by Johnson, allowing banks and credit unions to offer “savings lotteries” – an increasingly popular innovation to bring new customers into mainstream banking and encourage savings.
Long championed by the pioneering non-profit Doorways to Dreams Fund (D2D Fund), savings lotteries and other “prize-linked savings” initiatives offer cash rewards to consumers who open savings accounts.
For example, at the Case Credit Union in Lansing, Michigan – one of the first to offer “Save to Win,” as these initiatives are broadly known – every $25 deposit includes a chance to win a $10,000 jackpot at the end of the year.
For Johnson, savings lotteries will not only attract the customers necessary to keep a banking development district branch viable, they have the potential to help replace more destructive habits. Says Johnson: “If you’re going to buy $200 worth of lottery tickets in a year, why wouldn’t you want to open up an account and deposit $5 or $10 a month to be entered into a lottery your bank is offering where your money is not a risk at all?”
According to the D2D Fund, Save to Win efforts in four states have led to more than 50,000 new savings accounts since 2009, with total savings of more than $94 million. In December 2014, Congress passed new bipartisan federal legislation, the American Savings Promotion Act, to encourage more states to embrace prize-linked savings strategies.
Johnson says he hopes to see new bank branches in his district within the next two to three years. But he also says his legislation is part of a broader strategy to tap the economic potential latent in districts like his, which he described as largely working class and overwhelming African-American and Latino.
“Step one is to get the banks in these communities, and step two is to get people using the banks,” said Johnson. “But step three, once we’ve stabilized some of these individuals and families, is to grow the people who want to be entrepreneurs and become business owners in our community.”
What he would like, Johnson said, is robust access to small business lending where capital is now hard to come by. “Mainstream financial institutions are not necessarily the fastest to embrace change,” he said. “But what I’d love to see out of them is to recognize that there is a way for them to profit and for the community to benefit that addresses the desire of folks in economically distressed communities to be entrepreneurial.”
If Texas can realize the full potential of Johnson’s legislation, that day could come sooner than later.