Inner City Banking - The idea

The normal banking model is broken for poor inner city residents. I aim to tackle each of the hurdles that these residents face. The main themes of this idea are reducing costs, increasing access, and fostering responsible behavior.

Smart phones have become very cheap. Low end smartphones cost less than $100 off-contract.  This is why 62 to 80% of young adults with cell phone plans have smartphones, and this number is only going to continue to rise. The primary way that customers will access their accounts will be through their phones. Depositing a check will be as easy as taking a photo from your phone, which at least 9 banks already do. All balance inquiries, transfers, and initial loan requests can be made using a smartphone, tablet, or laptop.

Deposits and withdrawals will be made using local businesses. It works like this, you request how much you’d like to withdraw and find out if you can take it out of a local business, for example the corner store. If they have enough money, then you get the go-ahead to pick up the money. You go into the store and scan a QR code, and the business verifies the withdrawal with the bank with another smartphone*. Roughly the same thing happens with deposits.

Customers will be able to open (and close) accounts online and apply for loans, which means that there won’t be any reason to have physical bank branches for practically all activities. The only thing that will involve a physical bank location is credit counseling.

The bank would also have non-profit functions to facilitate financial education. There are two ways to make this work, either using a non-profit for-profit hybrid, or creating a low-profit limited liability company (L3C). The goals would be to run workshops on personal finance, one-on-one guidance on financial decisions, and setting up personal finance mentorships in which responsible members of the community help others develop healthy personal finance practices.

The bank would give lower rates to those who have been through one or several workshops and have a personal finance mentor. Another thing that could lower the interest rate is if other members of the community are willing to put up a small amount of collateral (1%-5%) as sponsors of the loan. This collateral would show that people who know the individual believe that he or she will pay back the loan and provide an incentive for community members to help that person to do so.  The bank could facilitate provision of collateral by providing two savings accounts: a normal savings account and an account in which money will be set aside to be used as collateral for a particular loan.

By reducing loan generation costs (by eliminating physical branches), increasing healthy personal finance (from the the non-profit), and increasing community responsibility (using community members’ collateral) it’s possible to give loans out at reasonable rates, say 8%-12% and still get a return of 5%. About 1.5% would be paid out as a high savings rate, which further encourages healthy finances.

*I heard about this general idea from an NPR story. The company was targeting developing countries though.