A new MassINC report on promoting wealth-building in Gateway Cities shows that residents of these economically distressed communities disproportionately turn to high-cost financial services such as pawn shops and check cashing stores as an alternative to more traditional banking options. In the third of its “Going for Growth” series on Gateway City revitalization strategies, MassINC shows why helping residents in these communities tap into a growing movement to connect low-income families with wealth-building financial services should be at the top of a Gateway Cities growth agenda.

According to the report, Gateway City economies lose at least $72 million a year to providers of high-cost financial services such as check cashing and tax preparation. The report suggests that this large transfer of wealth has a significant impact on local economic growth.

“This study shows connecting residents with wealth-building financial services should be right up there with job generation as a key element in any Gateway City revitalization strategy,” said Greg Torres, president of MassINC and publisher of CommonWealth magazine. “Organizations around the country – some right here in Massachusetts – have been working to develop innovative new products that give working families the financial services they need at a much lower cost. Communities need to be aggressive in helping families connect to these new models.” 

MassINC estimates suggest Gateway City residents incur at least $38 million in check cashing fees annually. The proliferation of Refund Anticipation Loans (RALs), which give low-income taxpayers instant access to refunds rather than waiting for their check to arrive, also take a heavy toll. Research shows that the average taxpayer opting for a RAL forfeits 8 percent of their return in fees. For all 11 Gateway Cities in the 2006 tax year, nearly 73,000 residents (17 percent of all taxpayers) paid to receive their refunds more quickly in the form of a RAL. This led to an estimated $13 million in interest and service fees.

The report’s analysis on alternative financial services establishments provides evidence of the prevalence of the problem.

• Currently, 43 check cashers serve the 11 Gateway Cities. These businesses are particularly concentrated in Springfield (19), Worcester (8) and Holyoke (4). The average median family income of neighborhoods where check cashers locate is a third lower than the average Gateway City neighborhood’s median family income.
• The average Gateway City resident lives less than a mile from one of the 26 pawnshops operating in these 11 communities.
• Gateway Cities have 123 tax preparers. This high concentration places residents within half a mile of these costly services.

Researchers believe that resistance to traditional banking options is what is fueling the crisis.  While it is hard to know exactly how many Gateway City residents lack a bank account, estimates from other communities suggest approximately 30% of families in low-income urban neighborhoods do not have a checking or savings account.

“Low-income families rely on high-cost financial services for a variety of reasons. Often mainstream banking services can be less responsive to the needs of working families. In some communities, there is distrust for traditional financial institutions. It’s likely the foreclosure crisis has only intensified these feelings,” said MassINC Research Director Benjamin Forman.

Instead, low-income residents turn to pawn shops, rent-to-own stores, and auto title lenders with more costly interest rates; all the while, these commercial services are competing with locally-run community banks. One of the report’s recommendations is to encourage greater access and collaboration between banking institutions and low-income neighborhoods. As the report points out, a good amount of progress has been made in this area, though barriers still exist.   

Other recommendations of the report include:

• Developing a better understanding of Gateway City markets for financial services and metrics to evaluate progress toward asset building goals.
• Support community development financial institutions that provide Gateway City residents with access to low-cost personal financial services.
• Create new pathways toward asset building.
• Vigorously promote asset building among families receiving public assistance.

MassINC’s Going for Growth policy briefs describe smart, evidence-based approaches to help Gateway Cities realize their promise in the commonwealth’s 21st century economy.  Previous briefs include Going for Growth: Promoting Residential Reinvestment in Massachusetts Gateway Cities and Going for Growth:  Promoting Business Investment in Massachusetts Gateway Cities.

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About MassINC – The Massachusetts Institute for a New Commonwealth (MassINC) is a nonprofit, non-partisan think tank and civic organization focused on putting the American dream within the reach of everyone in Massachusetts. MassINC uses three distinct tools – research, journalism, and civic engagement – to fulfill its mission, each characterized by accurate data, careful analysis, and unbiased conclusions. MassINC sees its role not as an advocacy organization, but as a new kind of think tank, rigorously non-partisan, whose outcomes are measured by the influence of its products in helping to guide advocates and civic and policy leaders toward decisions consistent with MassINC’s mission, and in helping to engage citizens in understanding and seeking to influence policies that affect their lives.