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The Poor Need Access To Digital Banking, Too



Community reinvestment. For years, that has been a hallowed goal of reform-minded bank regulators who think banks have neglected their responsibility to reinvest reasonable amounts in the neighborhoods, even low-income ones, that give them deposits. Recently, regulators have become increasingly optimistic that wrongs perpetrated for years will be righted. In a controversial case settled last August, the Justice Dept. required Maryland-based Chevy Chase Federal Savings Bank to open new branches in low-income areas.

The reenergized regulators have been missing a crucial trend, though. Even as they lean harder on banks to get more involved in low-income communities, often by opening branches or offices, banks are shunning brick-and-mortar banking and going electronic. And the new high-tech products and services are often almost entirely bypassing low-income neighborhoods and the customers there. Ironically, though, skipping low-income areas actually hurts the banks: Low-income customers can be surprisingly profitable. One reason is that they are inexpensive to serve--and serving them electronically is even cheaper than using branches.

SCARCE ATMS. The growth in electronic banking services has been breathtaking. There were 109,000 automated-teller machines in the U.S. in September, 1994, up from 80,000 in 1990, according to Bank Network News. Small wonder: Processing a teller transaction costs more than double what an ATM transaction costs. And now, banks are gearing up to offer even higher-tech banking services, from PC-based home banking to banking that uses telephones with CRT screens and keyboards attached.

You wouldn't know it from a trip to the South Bronx, though. A study by Mark J. Green, public advocate for the City of New York, found just 1 ATM per 117,676 residents there. But he found an ATM for every 8,294 residents in middle- and high-income parts of Manhattan--quite a difference, even allowing for banks' legitimate crime fears. "There's a low-income and slight racial bias that leads traditional bankers to think there is not as much money to be made in low-income neighborhoods," Green says. The disparity is even more acute for services such as PC banking. Home banking is still not widespread, but it is growing rapidly. Since low-income consumers are unlikely to own PCs, they are completely shut out of those services.

The gaps in electronic banking offerings wouldn't be so bad if ATMs and other services were mere supplements to bank branches. After all, banks are not required to offer every service they have to every one of their customers, and they can point to crime and vandalism statistics in many low-income areas that argue against installing ATMs there. Moreover, current federal rules emphasize lending over convenient cash access in low-income neighborhoods. But many banks are moving toward replacing branches with electronic systems that can provide all the services of a branch. Some ATMs now let customers open accounts and apply for loans. That means that in a community with relatively few branches, omitting ATMs seriously limits residents' access to a wide variety of bank services.

WORRIES. Leaving ATMs out is also shortsighted for banks. A study by First Manhattan Consulting Group Inc. showed that while low-income customers' accounts are less profitable than those of the wealthy, they are more profitable than accounts of suburban middle-income customers. Largely because of fewer transactions, low-income accounts cost an average of $250 per year to service, while middle-income accounts average $350.

Some productive ventures are already under way to increase access to bank services and address worries about crime. In a number of cities, drugstores and supermarkets house ATMs in moderate-income neighborhoods. These are only accessible when the stores are open, but they help. In Chicago, banks are installing a few ATMs in or near police stations in high-crime areas, and a few other cities have similar programs. These programs should be expanded across the country. Banking PCs could be installed in facilities such as public libraries and schools. Regulators, further, should make sure to take electronic services into account when they complete revisions to the community reinvestment regulations late this year or next.

By expanding their electronic reach, banks would be in the enviable position of doing well by doing good.Kelley Holland

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