Financial inclusion: American tragic
The plight of the unbanked in the US’s poorest regions is a modern-day scandal in the world’s richest nation. Southern Bancorp is one bank seeking to address the problem. Euromoney goes to the heart of the battle to beat financial exclusion in rural America.
Illustration: Jon Berkeley. Photos: Nathan Pittman
It was once a thriving small city with a rich history that played a part in the civil rights movement and was the home of the blues. Today the population of Clarksdale, Mississippi, is just two-thirds of what it was in the 1970s. Some 40% live below the poverty line.
Twenty minutes-drive away across the state line stands Helena, Arkansas. In the 1940s, the small town was the terminus for the railroad and its 15,000 population made Main Street thrive. Now that number is down to 6,300 – 41% of whom, again, live below the poverty line.
This is the Yazoo-Mississippi Delta, one of the poorest regions of the US. While the national poverty rate is about 15%, in most Delta counties it hovers between 35% and 40% – as it has for decades.
Its residents have been disadvantaged many times over: from a history of racial injustice, the steady mechanization of farming that lasted until the late 1980s, the closure of the railroads and the exodus of several key employers. Businesses were shuttered, homes became vacant and, exacerbating it all, many of the region’s banks went under, were sold off or stopped lending.
The national average of unbanked in the US is 7%. In Arkansas, it is 9.7%; in Mississippi, it is a staggering 12.6%. The national average of underbanked is 19.9%, in Arkansas it is 22.6% and in Mississippi 25.5%. These are statistics unheard of in developed countries – let alone in one of the wealthiest countries in the world.
Near the famed crossroads leading in and out of Clarksdale, where blues guitar legend Robert Johnson is said to have traded his soul to the devil for musical genius, multiple payday lenders wait expectantly. But 61-year-old Bubba O’Keefe is not giving up on his city.
Born and raised in Clarksdale’s limits, O’Keefe takes a sip of his coffee in the Yazoo Pass Café downtown that he recently bought, refurbished and sold to new owners, and points out of the window.
“I feel like maybe downtown will come back. This is more traffic than I’ve seen in a long time,” he says.
There are five cars parked along an otherwise empty street. But the storefronts, while mostly empty, are clean and freshly painted. There’s even a man sitting on a bench, something O’Keefe says he has not seen in decades because of daytime crime.
Clarksdale banks on its blues history for regeneration
O’Keefe is right, there is a frisson of optimism in Clarksdale. If Clarksdale recaptures any of its former glory, it will be in no small part due to one bank – Southern Bancorp.
In a region that has become a financial desert, where banks have left or refuse to lend to the community because of rigid credit policies from headquarters many states away, Southern Bancorp has booked 186 commercial loans in Clarksdale alone over the last three years with a total origination of around $21 million (excluding agricultural loans).
This may sound like a small figure, but it isn’t to towns like Clarksdale that are hanging on a thread. Southern Bancorp has breathed life into the community.
Among the patrons of Yazoo Pass, conversation moves from fishing and politics to touch on the charter school that is being built nearby, the new owners of the Five and Dime Lofts (also bought and sold by O’Keefe), an artists’ studio above the old country store that is being refurbished and the American Society for the Prevention of Cruelty to Animals dog shelter that has been taken over and will be refitted.
All were funded by Southern Bancorp and many of them were propelled by O’Keefe, who has become something of a civic champion in Clarksdale, pushing for new jobs and trying to attract visitors to his town in the hope they will see beyond its challenges and stay.
The freshly painted storefronts in Clarksdale’s downtown should help. Several of those were paid for not by the local government but by Southern Bancorp matching owners’ own investments. As Darrin Williams, chief executive of the bank, recognizes: the more welcoming Clarksdale is for residents, tourists and prospective investors, the better the chances for the city and his customers.
The investment works financially and philanthropically. Several new businesses and non-profits that filled a handful of the many empty storefronts look like they are not only staying but, crucially, hiring. Several out-of-towners have recently bought homes there. A news channel is even in town covering the success of a local non-profit that is providing staff training at its coffee-grinding operations and café.
The Delta’s music history draws tourists, but how can it make them stay?
“These towns are never going to fully come back, but we can help them stabilize and begin to rebuild,” says Williams.
Southern Bancorp is a lifeline in Arkansas and Mississippi. It is in 46 locations, and in 50% of those it is either the only bank or one of two.
Southern (as it is called by those who work there) is a certified Community Development Finance Institution (CDFI) and a community development bank – of which there more than 100 in the US. These CDFI banks are mission-driven rather than profit-maximizing.
To obtain certification as a CDFI, banks are required to provide financial services primarily in low-income communities and to people who lack access to financing. In contrast to their larger counterparts, CDFI banks offer affordable lending and finance community businesses, including small businesses, microenterprises, non-profit organizations, commercial real estate and affordable housing companies.
Essentially they do the job that all US banks used to do – supporting the local community in its entirety at a small profit. No customer is too small, and nearly every person who walks in to a branch can be put immediately on a path to building credit and a financial future.
Certification allows CDFI banks access to apply for financial assistance awards from the government. And in the case of Southern it employs a bank holding company structure under which sit the regulated bank and an unregulated CDFI non-profit loan fund that holds the money raised from foundations and corporate donors – perhaps financing for financial literacy programmes or specialty loans, as well as grants, such as those that helped towards Clarksdale’s fresh coat of paint, for example.
“The loan fund can supplement the work of the bank, so we can ensure we can serve the community here,” says Williams. The challenges are, of course, that government programmes change with every presidency and donor money is not always consistent.
Darrin Williams, chief executive of Southern Bancorp
CDFIs were introduced under president Bill Clinton’s administration during the 1990s in an attempt to fill the gap left by the consolidation of the nation’s banks, that of providing financial services to underserved populations such as minority and rural communities.
Indeed, Clinton’s own experience with Southern in large part informed his decision to pursue a treasury designation for CDFIs. As governor of Arkansas, he wanted to emulate the work that ShoreBank was doing in Chicago to meet the financing needs of low-income African American communities responsibly and profitably.
Clinton called ShoreBank’s founders to the state to ask their advice, and in 1986 Southern was established with $10 million in assets. In its earliest days, Hillary Clinton and Rob Walton (son of Walmart founder Sam Walton) were on the board. Grameen’s Muhammad Yunus was also involved in the founding process.
Today Southern has $1.2 billion in assets, with more than 60,000 customers and Williams knows that it has to expand in order to be sustainable. There are only so many loans that can be made in the short term in his current markets.
This mission of bringing finance and hope to communities in the Delta is Williams’ passion. Before joining Southern, Williams was a partner of a law firm working as a plaintiff attorney, sometimes representing consumers harmed by financial institutions. He also served as Arkansas House Speaker pro tem and as a champion for consumers and small businesses.
He is a familiar name in Clarksdale, despite his office being three hours away in Little Rock, Arkansas. Williams is in Clarksdale often, seeking out loans to make and checking to see the community is still engaging in the long-term future of the city.
“It’s a very long game investing in these towns and the momentum has to be kept up,” he says.
Economic development is the key.
“It’s about jobs. If we want to stabilize communities, we need to be more creative about how we retain and bring in jobs,” says Williams, who understands that it is banks and not just governments that can make that happen.
|Bubba O’Keefe in Clarksdale’s derelict theatre –
another building he hopes to revive with Southern’s help
In Clarksdale, O’Keefe, an ally in Williams’ mission, understands well that creativity is needed. These towns do not have the skills to attract large corporations with jobs. Williams and O’Keefe are also aware that relying on a sole employer is not great policy.
“It’s going to take lots of people with small businesses, creative businesses – things like ecotourism or opening a micro-brewery or like the coffee-grinding operation that is doing great,” says O’Keefe.
“We also have to build on what we have already – blues music and history and tourism. It’s not a quick fix, and larger banks don’t get that. They won’t take a chance on us. We need someone who is there in the trenches with us, which is why we have to support Southern.”
Over the border in Helena, the community is also working with the bank. The small town benefits from sitting on a river and just off a big highway. In 2015, the railroad reopened for limited commercial traffic to the west coast, thanks in no small part to key leaders in that community. That makes it easier to attract businesses and industries.
Southern recently donated funds to support an environmental technology firm that makes biodegradable products, for example. That opened in 2015 and is now expanding and hiring. Biodiesel company Solfuels USA also opened last June.
John Edwards is the economic development director for the deep water port, Helena Harbor, and is on the board of directors for Southern. A former head of the USDA’s rural development agency during the Clinton presidency, Edwards says Helena has been on his radar for some time. He began working on the reopening of Helena Harbor in 2001 in a bid to bring new non-farming jobs.
He believes the future of Helena depends largely on small business: “How do we make Helena thrive? By embracing small businesses with 50 to 100 employees. But you need someone here to finance that. Otherwise ideas just stay ideas.”
Again Southern has been helping to support the harbour.
Southern also works with local consultant Cathy Cunningham of the Helena Advertising and Promotion Commission. Like O’Keefe in Clarksdale, she has a vision for improving the quality of life for residents and attracting new income streams.
“It’s simple things like investing in key locations and corners that can be seen from intersections to make Helena feel more welcoming,” says Cunningham. “Or providing supplemental funding to the local prosecuting attorney so we can make the town safer. Or investing in promoting the incredible civil war history we have here.”
During the American Civil War, Helena was Union-controlled in a Confederate state and became a place of refuge for slaves seeking freedom. Cunningham works to bring donor money from philanthropic organizations, like the Walton Foundation, to Helena and to improve tourism; and Southern has provided grants for projects such as the creation of Freedom Park.
Williams says relationships with civic-minded residents and business owners are essential, especially if he wants to hit his “big, hairy audacious goals”.
In 2016, Southern’s board created 10-year goals, one of which is to create or retain 100,000 jobs. Retention is just as important as new jobs in these rural communities, he points out. “Once a business goes, it won’t be coming back.”
Helena’s downtown awaits new businesses
In Helena, for example, one of the county’s largest private employers, Hoffinger Industries, was going to close, putting 137 jobs at risk. Southern worked to facilitate an employee buyout.
Small businesses are key to the sustainability and growth of local economies. According to the Small Business Association, since 1995 small businesses have been responsible for creating two out of every three net new jobs in the US. They also produce around 45% of private non-farm GDP.
Yet the majority of small businesses have fewer than 20 employees and are likely to require loans too small for large banks. It is no coincidence that the number of new small businesses is decreasing. In 2014, there were 150,000 fewer new businesses created than in 2006, before the financial crisis.
“We will do about 6,000 loans this year, half of them will be for under $10,000 and about 1,200 loans under $1,000,” says Williams. “If you went to a large bank and asked for those kind of size loans, they would give you a credit card application that would carry a much larger interest rate than a small business bank loan, likely putting you into more debt. But these small loans that we make can be the difference between a small business failing or succeeding.”
The argument from larger banks is that these loans are unprofitable, but Williams says while the margins are thin, “it’s a myth that you cannot lend to these communities and be sustainable.”
Southern made $11 million in profit in 2017, for example.
“But what we do is not formulaic or volume-based,” Williams says, “and so you just have to be prepared to put in the time. There’s always a story behind a financial story when you sit down with a customer, and that is where we can find an opening for a business solution or a personal finance solution – and therefore an opportunity to serve them.”
These kinds of relationships require bank employees that are highly personable as well as proficient in banking, and Williams is quick to credit Southern’s mission-minded workforce with the company’s success.
“Our team members grew up in and are committed to the communities we serve; they went to school with our customers; they attend church together and their children play sports,” he says.
It is these relationships that keep default rates low. At the end of 2017, non-performing assets were less than 1.9% of the bank’s assets – in line with CDFI banks across the nation.
“Taking the time to know our customers and understand their needs and challenges in a rural environment is key,” says Williams. “It’s what sets us apart. Most banks aren’t going to take that time to find a unique solution to the unique challenges of a rural borrower.”
Small loans also help keep payday lenders at bay; and there are plenty of them in the Delta. Arkansas successfully banned storefront payday lenders by enforcing its constitutional usury interest rate cap of 16.9%. However, one can simply cross state lines to pick up a $450 loan with a typical 390% to 780% annual percentage rate.
According to the Mississippi Center for Justice, the state has the highest concentration of payday lenders per capita in the nation: about 1,000, mostly concentrated in low-income areas and typically in communities of colour. Williams points out there are more storefront payday lenders in Mississippi than there are McDonald's, Burger King and Starbucks combined.
Women account for the majority of payday lenders’ business – single heads of households like Jennifer Williams, a teacher in Clarksdale earning less than $30,000 a year, who took a $400 loan to help her until payday and ended up three years later driving 30 miles between nine payday lenders every four weeks.
|Teacher Jennifer Williams shares financial
literacy with her students
That was until she saw an advert for financial help from Southern. The bank was offering a five-week evening class that covered the importance of good credit and how to improve it, as well as budgeting, saving, how to talk to collection agencies and how to write letters to creditors and credit agencies to correct errors. Those who attended at least four of the five sessions would qualify for a loan of up to $1,500 to go toward paying off their debt.
It was a life-changing experience for Williams.
“I used to see teaching colleagues in line at the payday lenders and we’d all just keep our heads down,” she says. “Even with friends, we didn’t talk about it. Now I’ve come out about my situation, I realize how so many of us are caught in this trap of payday lenders without realizing we can get out with the help of banks like Southern.”
Williams says it never occurred to her that a bank would help her.
“I racked up credit card debt at college and had to declare bankruptcy. My experience of banks was not that they wanted to help you thrive. But now I finally feel hopeful. I managed to get my credit score up so I could qualify for an auto loan, and now I’m working towards getting a house.”
Improving financial literacy in low-to-moderate income areas is crucial. Studies show that those who take courses in financial literacy will be more responsible with their money. One study from financial services firm TIAA-CREF showed that those with high financial literacy plan for retirement and have double the wealth of people who do not plan for retirement.
In these small rural towns access to financial education is hard to come by. Williams says his challenge is not offering the courses but reaching people.
“If I could stand outside a payday lender with flyers, I would,” he says. “But I expect that might cause some trouble.”
In the bid to offer a permanent solution to payday lending cycles, Southern is piloting technology for its own employees. It has built a platform linked to payrolls that enables employees to draw on a $250 to $1,000 loan with repayments deducted directly from their paycheck spread out over a year with no penalties for early repayment
“We are constantly asked in response to payday lenders: ‘What are the alternatives?’ And as an industry we don’t have a good answer,” says Nathan Pittman, director of communications and marketing for Southern. “Given a small amount of our own employees sometimes need to draw on money before payday, we decided to build and trial this as a possible solution.”
That is hard to do as Southern also tries to dissuade its employees from getting into habits of drawing on credit. It also charges an interest rate of 16.9%, which although less than most credit cards, is still steep.
“So far, only a handful of employees use the programme, but we’re keeping tabs to see if it has the effect we hope for – to prevent people from turning to alternative credit,” says Pittman. Depending on those results, it could be offered to employers such as schools, police departments and hospitals.
“We can’t have our law enforcers, nurses and teachers getting into debt spirals,” says Williams.
The second of Williams’ audacious 10-year goals for Southern is empowering one million people to become savers. Accumulating assets is key to breaking generational poverty, he says. Assets such as short-term savings for life emergencies and homeownership are critical to a family’s economic security.
Research from Pew Charitable Trusts shows that 70% of those born into the bottom quintile of wealth will not move out of it in their lifetime and, therefore, their children can expect the same.
The majority of people in the bottom quintile are non-white. The 50th anniversary report by the Kerner Commission released in March, for example, shows how black communities in particular in the US find it hardest to move up the wealth ladder.
The key to getting out of the bottom quintile is higher home equity and savings, yet the report shows that black homeownership levels have not changed in 50 years. Indeed, the gap between white and black households has worsened. The black homeownership rate is 42.1%, compared with 72.7% for non-Hispanic whites.
The third of Southern's 10-year goals is to have 10,000 people supported in attaining and/or sustaining affordable housing. To get people from a place of bad or no credit to owning their own home is entirely possible, says Williams. Again, it just takes time and some creativity.
He shares the story of Vernetha Jackson, a customer who purchased her first property last year at the age of 63. When she came to Southern, it was because she had inherited a small piece of land but had no credit and had never had a bank account. She knew Southern only because they offer to help with tax returns for free at their branches.
Vernetha Jackson outside her first home
Southern then got Jackson enrolled in a homebuyer education class, working with her on budgeting and matching her savings from the non-profit loan fund so that she could sell her land and build a deposit for a $22,000 property.
Using philanthropic contributions, Southern also helped pay the closing costs. On such small mortgages, $2,000 in closing costs can be the difference between buying and not buying. That is a $2,000 cost to create an entirely different future for someone – one that can help them and their families break the cycle of poverty.
Since 1989, the wealth gap between the bottom 50% and top 10% has doubled in the US. At the same time, the number of banks in the US has declined from over 12,000 to under 6,000.
There is a growing awareness that the unchecked evolution of the US banking sector has resulted in low-income communities being marginalized and their plight aggravated. The push for financial inclusion by banks like Southern is being seen as a second civil rights movement; one that is about economic justice.
As people become more conscious of the social impact of the consumer goods they purchase, so too are they beginning to consider their bank and whether their deposits are doing harm or good. It is the next step in the impact revolution and it is not a leap to imagine that if Southern can find a way of both marketing itself to conscious consumers and providing a national online banking platform, it may be able to attract deposits from outside its immediate geographic market. That would enable the bank to expand into other underserved markets beyond the Delta.
Southern is rolling out the ability to open accounts online from anywhere in the US. The account is called the MyImpact account. Customers will receive reports on the work Southern is carrying out in Arkansas and Mississippi, so they can see how their deposits are being used.
“Do you know where your money spends the night?” asks Williams. “We’re hoping to spread the message that where you bank makes a difference and by banking with us you can support financial inclusion for all Americans.”
Southern’s MyImpact account is competitive with larger bank offerings: access to a national ATM network; integrated and automatic goal savings; and remote deposits via mobile banking.
Marketing will be the challenge, says Pittman: “We just don’t have the multi-million dollar marketing budgets that the large banks have, and getting our story out beyond the Delta requires a unique approach.”
In short films, he has been documenting customers who have had their lives changed by Southern – such as Jackson and Williams – to bring the bank’s story to a wider audience.
The bank has also been working with marketing technology firm Mighty, offering data analysis on the impact of the 5,000-plus banks in the US. The aim is to increase awareness about how deposits support community investments and to point consumers to banks that align with their values.
The result, of course, will be positive publicity for banks like Southern that have a measurable impact on the real economy.
As Jimbo Boyd, who leads Southern’s central region, which includes Helena, points out: “It’s kind of crazy really. Everyone wants to talk about CSR [corporate social responsibility] and impact these days, and the large banks are publishing CSR reports – but for us, all we do is CSR, and it’s all we have been doing since we started.”
The message will also help Southern attract young talent. Pittman says many of the people who apply to work for the bank do not only have an interest in economics or finance but also in social justice and advocacy work.
“We are the nexus of those two things,” he says.
If Williams can capture new deposits allowing the bank to expand in the region so it can make more loans, he says he will be able to rest easier at night: “Lending is how we make money, and although we are doing okay, our long-term future is not certain without expanding.”
Southern is in the process of raising finance to allow it to make acquisitions or grow organically, and hopes to go public with the details before the end of the second quarter.
“There are a lot of things that we’d love to see happen for us to know we can carry on doing what we’re doing indefinitely,” admits Williams. Not least is a change in regulation. The cost of doing business increased after Dodd-Frank was introduced.
“It was an over-reaction to a problem that was not created by community banks, and we suffer disproportionately because of compliance costs,” he says.
The cost of keeping small branches open becomes even more challenging.
“I’ve got a one-person branch in one area where Southern is the only bank for 15 miles,” says Williams. “The poverty levels there are higher than the regional average. I don’t want to leave those people, but I also keep my fingers crossed that the branch doesn’t need a new roof.”
Changes in policy would also help, says Williams. The allowance of payday lending in Mississippi makes Southern’s mission harder. The bank would also benefit from an update to the Community Reinvestment Act (CRA).
“The CRA is over 40 years old, without any significant modernization since its passage,” says Williams. “Updating the CRA to better align community needs and bank investments could lead to greater access to financial services in communities that lack them.”
In the meantime, however, there is plenty of work for Southern.
“We have these 10-year goals – I called them big, hairy and audacious for a reason,” says Williams. “They’re ambitious, but we’re committed. Hopefully nearly everyone who walks into a branch we can help create a future they dream of. That’s our role as a bank, so we have to do it.”