Few Financial Services Available to Indianapolis Low-Income Areas
By Jessica Easto
Maintaining a checking account can be an expensive, vicious cycle for low-income Hoosiers who live paycheck to paycheck. According to Bradley Heck, a financial counselor at the Community Alliance of the Far Eastside, many of the clients he works with would be “harmed more by having a bank account,” and thus do not have one.
How? Thanks to increasing fees, checking accounts are more expensive than they used to be. For starters, it often costs money just to have a checking account. According to a survey last year, only 40 percent of non-interest-bearing checking accounts are considered free, down from 75 percent 10 years ago. Next, consider than many low-income areas simply do not have access to banks. In Indianapolis’s poorest zip code, there is only one FDIC-insured bank, a reminder that 25 percent of the city’s FDIC-insured bank branches have closed in the last 10 years. And unless customers can maintain a balance of at least $500 or have that much deposited directly each month, it costs $8 a month to hold a checking account there.
It can be difficult for many low-income residents to meet this criteria, and when they can’t, they are dinged with insufficient fund fees or overdraft fees, which average about $35 according to the Center for Responsible Lending. Many banks charge overdraft fees for each instance it occurs, which means costs can accumulate quickly.
For customers who have run into overdraft issues or who have had their accounts closed, it can be difficult to get another one. Many banks charge these customers monthly fees until they can “prove” they can maintain an account.
“It is so expensive to be poor,” said Prosperity Indiana policy director Kathleen Lara. “The barriers are multitudes. If we’re trying to address equity and building wealth for low-income individuals, we’ve got to reduce some of the barriers that drain wealth.”
Prosperity Indiana is a network of about 150 advocacy groups fighting on behalf of economically disadvantaged Hoosiers, of which there are many. Sixteen percent of Indianapolis residents are “underbanked,” which means they use a traditional bank as well as high-risk alternative financing, such as payday loans (aka cash advances). Another 6 percent of Indianapolis residents have no account at a federally insured bank, making them “unbanked.”
Unlike banks, Indiana payday lenders are common in low-income neighborhoods. Sixteen percent of the city’s population lives in its five poorest zip codes. Only 9 percent of the city’s banks are located there while 22 percent of its payday lenders are.
For the unbanked and underbanked, payday loans in Indianapolis can seem like the only option. The problem is their high interest rates and short repayment terms, which make it difficult to repay the loan. People often end up rolling the loans over or taking out additional loans, trapping them in a cycle of debt.
Some politicians are trying to make national structural changes to the country’s banking system while local advocacy groups work on the front lines in Indianapolis. One solution that is gaining traction in some communities, including Indianapolis, is postal banking, in which the local post office offers some financial services that would help bridge the gap between banks and payday lenders.
“They’re worth considering,” Prosperity Indiana’s Lara said. “We’re looking at all the options. What we would like to see is reform of the market that cuts down on predatory activity and [expands the type] of lending wherein mission-driven organizations are fulfilling community credit needs.”
Prosperity Indiana and other community groups are also working on community loan centers for Indianapolis that would act as alternatives to payday lenders. They would offer loans up to $1,000 with interest rates capped at 18 percent and repayment terms of one year, both big improvements over the standard terms of payday loans in Indiana. Such centers currently exist in 22 Indiana counties, but not Marion, the county that Indianapolis is located in.