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The Business of Immigrant Markets: Providing Access to Financial Services

Why focus on this market segment?

• The Mexican immigrant population in the United States is growing quickly, yet it is a population that is largely unserved by financial institutions. Serving Mexican immigrants is a win-win scenario for both immigrant communities and financial institutions. Immigrants benefit from a safe place to keep their money, low-cost remittance options, and the potential to build credit for the future. Financial institutions benefit from serving an untapped market and establishing relationships with immigrant families as they become established and more integrated into the United States financial system.
• Offering an appropriate mix of products and services at reasonable rates and fees is the first step in serving this population. The next challenge is to engage unbanked individuals in using financial institution services.

A Demographic and Financial Service Overview of Mexican Immigrants

• Mexican immigrants make up over ten percent of the U.S. population and their population has more than doubled over the past ten years. They encompass a growing, untapped market for financial institutions because they are largely unbanked.
• Less than fifty percent of Latino immigrants have bank accounts.
• Because people migrate to the U.S. to work, immigrants tend to be employed and have a strong savings ethic. They also tend to have little experience with financial institutions and many are accustomed to functioning solely within a cash economy.

International Remittances

• According to the Bank of Mexico, in 2003, $13.3 billion was remitted to Mexico from the United States. This represents a 35% increase over 2002. For the first time, remittances surpassed the inflow of foreign investment into Mexico.
• Finding safe, accessible and inexpensive options for sending money to family members across the border is a significant concern for recent immigrants. Though international money wiring companies such as Western Union and MoneyGram still dominate the remittance market to Latin America, financial institutions are making headway. Currently, at least 15% of immigrants in the U.S. send money home using financial institutions and that market share appears to be increasing.

Transforming Remitters to Customers

• Institutions benefit from serving the immigrant market. They gain customer loyalty from a population that can be profitable in the short-term through individuals holding savings accounts and using international wire transfer services at the institution. In the long-term, immigrants bring profit to institutions by taking out consumer and home mortgage loans as well as using other financial products.
• There is also short-term profit potential from offering low-cost wire transfer services and check cashing to individuals who trust the institution but are not yet ready to open an account.
• Early experiences with the initial products offered to the newly banked are often the most important. For example, opening a new checking account without sufficient knowledge of how to use it may result in the eventual loss of a customer. Newly banked individuals who face significant NSF charges and overdraft fees at the beginning of a new bank relationship may have a disincentive to continue the relationship.

Immigrant Market Trends

• Generally speaking, expenditures on financially oriented products are not a “high ticket” item within Spanish-dominant U.S. Hispanic immigrant households. Top categories are much more focused on tangible goods. Much of this is clearly a holdover from this audience’s cultural roots.
• While in the United States, the general market population tends to see a bank account as a “requirement”; Hispanics may have grown up in environments of financial instability, i.e., constant currency fluctuations and uninsured financial products, within their countries of origin. This indicates the extreme importance of educational programs to convey the difference in international banking systems and the United States system as well as a willingness to take the time and effort to build relationships.

Alternative Identification Documents for Opening Accounts

• The long-standing requirement that an individual have a Social Security number and a U.S.-government issued identification in order to open an account had long been a barrier for financial institutions in serving immigrant populations.
• On 9/18/03, the U.S. Treasury Department affirmed earlier rules for implementing the USA Patriot Act. Under the new federal regulations, financial institutions have the discretion to accept foreign issued identification to open accounts as part of a Customer Identification Program.

Matrícula Consular

• Most major U.S. banks have agreed to accept "Matrículas Consulares" - photo ID cards issued by the Mexican government to its citizens who live and work in the U.S. - as proof of identification, allowing Mexican immigrants to open bank accounts.
• Mexican Consulates require that the applicant appear in person and present proof of nationality, identity and address. Significant background checks are performed.
• The card contains a number of security features to prevent fraud.
• Currently, 178 U.S. banks in 248 cities and 800 governmental entities nationwide accept the matrícula as official identification.
• Acceptance of the ID cards opens up a vast market to U.S. banks. According to a study issued by The Mexican Center of the Teresa Lozano Long Institute of Latin American Studies at the University of Texas at Austin, one bank that has been at the forefront of outreach efforts to Mexican immigrants in Texas opened 30,000 accounts using the matrícula consular in a six-month period with a total of $50 million in deposits. In the Midwest alone, approximately 50,000 accounts have been opened using the matrícula card over the past 18 months, collecting over $100 million in deposits, as per the Consulado General de Mexico’s 2003 “New Alliance Task Force Announces Preliminary Results”.
• In September, The U.S. House of Representatives approved the continued use of Mexican ID cards in the nation. The Mexico-issued matrícula consular will remain a valid form of identification for Mexican citizens seeking a bank account or other services in the United States.

Individual Tax Identification Number (ITIN)

• In conjunction with the matrícula card, financial institutions sometimes request an ITIN, for foreign nationals. It is important to note that ITINs are legally necessary only for accounts that have tax implications, such as interest-bearing accounts.
• The groundwork for the trend was laid in 1996, when the U.S. Treasury created Individual Tax Identification Numbers to collect taxes from workers in the United States who don't qualify for Social Security numbers.
• The ITIN is a nine-digit tax-processing number issued by the Internal Revenue Service (IRS) to foreign nationals and other individuals who are required to file a U.S. tax return but are otherwise ineligible to obtain a social security number. The ITIN is for federal tax reporting and the IRS does not intend it to serve any other purpose. No background check is required for issuance of an ITIN.
• Through the end of last year, the IRS had issued about 7 million numbers, all of which begin with 9. Undocumented residents have used the numbers to pay taxes and, in some states, as a means of identification to open a bank account, apply for health insurance or obtain a driver's license.
• As a service to their immigrant customers and a means of extending credit, many banks are accepting mortgage and loan applications using the ITIN and placing them in portfolio since they cannot be sold on the secondary market. It is expected that the number of these loans will continue to rise even though interest rates on such loans range from 4.65%, with a 30 percent down payment, to the far more common 7.5 percent to 9.5 percent, for smaller down payments. Officials, representing several regional and national banks and mortgage lenders, said several factors justify the higher rates on such loans.
  • The applicants, most of whom are undocumented, have uncertain immigration status and could leave the country unexpectedly. They also do not have credit histories, which means the risk to the bank is higher.
  • Currently, these consumers don't pay mortgage insurance, which further increases risk to the banks.
  • Lenders also cannot sell these mortgages on the secondary market, which is a common practice among mortgage lenders. Since they can't be sold, they remain a part of a bank's portfolio, said Banco Mortgage's Rincon. A tax ID mortgage is a relatively new product, "and it has to be proven whether it's going to work out or not."
  • So far, bankers interviewed say they are seeing a relatively low rate of foreclosure. Since February, one particular bank, Banco de Nuestra Comunidad --- which has nine branches in the Atlanta area --- has made 125 tax ID mortgage loans, valued at $16 million. Not one has foreclosed, according to the bank's president and chief operating officer. United Americas Bank is seeing the same rate of success. The bank has made 350 tax ID loans totaling $46 million to Hispanic customers since 1999. Only three have ended in foreclosure, a fact confirmed by the Georgia Superior Court Clerk's Cooperative Authority.
  • Most banks that offer these types of mortgages to their immigrant customers require loan applicants to provide two years of filed income tax records as well as their tax ID number. Applicants must have available at least a 5 percent down payment, in addition to one year of positive rent history. Officials verify all the documentation before granting the loan.

Service Guidelines

Accepting the matrícula consular card as identification to open an account is important in attracting the Mexican immigrant population that does not have access to a Social Security number.

It is important to note that accepting the matrícula card is only the first step in building a relationship. Financial institutions must also educate the front line of service providers about the procedures involved in opening an account with the matrícula or other foreign government identification cards. If a person who is unbanked takes the first step of entering a bank, the experience must be positive and consistent with any information provided in community outreach or advertising efforts.

Free checking accounts with low minimum balances are popular entry products. Most individuals who are accustomed to dealing in cash do not use checks right away but are typically interested in using debit and ATM cards. However, if new customers are not given sufficient guidelines on how to use accounts, the customer may become quickly discouraged when NSF fees start adding up. Limits on transactions, particularly teller transactions, can also discourage new customers. People new to the mainstream financial institution system generally require more personalized service and one-on-one interactions.

Product Considerations

When designing products to serve the immigrant community, it is important that financial institutions keep in mind those factors that may make accounts more appealing or accessible.

Many recent immigrants are reluctant to use checks because they do not have the confidence to write the payment information in English. In terms of savings products, accounts that reward small incremental savings are effective when serving lower-income individuals who do not possess significant personal savings. It is also beneficial to let people know that having an account is the first step in a relationship that could lead to access to credit, including consumer and home mortgage loans.

Research shows that penetration of bank services increases as remittance activity decreases – a clear indicator of acculturation and financial literacy.

Supplemental “Bridge” Services

There are three service areas that are particularly helpful for recent immigrants:

• International wire transfer services
• Offering low-cost money order
• Spanish language service and literature

Wire Transfer Services*

For many recent immigrants, sending money to Mexico is a key financial activity. It is a tool for economic development and an expression of an intimate family relationship. Banks face competition from a variety of stores and check-cashing locations within the community, who also provide these services. These sites are typically staffed by bilingual employees, thereby offering a certain level of comfort to the user, as well as evening and weekend hours, which may be considered more convenient.

Key features of a marketable wire transfer service are:

• Easy to use
• Convenient
• Fast
• Offer flexible options for family members abroad to pick up the money, accommodating individuals from rural areas and areas without convenient access to banks

*Remittance products can be eligible for CRA regulatory consideration

Money Orders

People who do not have checking accounts are accustomed to using cash and money orders to pay bills. Providing low cost money orders can help ease the transition process away from check-cashing companies and from being unbanked to full usage of banking services.

Spanish Language Service and Literature

Many recent immigrants are not comfortable conducting financial transactions in English. Having bilingual, bicultural customer service representatives available at all times at branches that typically serve the Mexican and Latin American immigrant population is important to ensure that people coming into the bank have a positive experience and feel comfortable. Spanish-language literature helps Spanish speakers understand their options and become more informed consumers of financial services.

“Language is a key driver, and a key barrier, to developing trust.”
Robert W. Byrne, Director, Diverse Growth Segments Group
Wells Fargo & Company

Analysis of Alternative Financial Services

Alternative financial services refer to those non-bank businesses that conduct, and facilitate, everyday financial services – check cashers, payday loans and pawn shops. These entities are important to immigrants because they offer what banks do not or cannot offer for many of these unbanked consumers. Unfortunately, use of these services are expensive and do not allow families to develop a credit history, thereby denying them access to more affordable credit options. Yet the advantage of fringe services is that all fees are set and charged up front. If consumers are charged too many unexpected fees by financial institutions, they may opt to end their bank relationship because of the perception that it is costing them more than using a check cashing entity. Such a move is neither in the interest of the consumer nor the financial institution.

According to research recently performed by The Urban Institute in Chicago, many immigrant households have actually performed a fairly rational analysis of their options and fully understand the costs associated with their use of alternative financial services. Lack of financial literacy, previous problems with a bank, cultural barriers, lack of documentation and community mistrust all contribute to their decision to remain “unbanked”.

In fact, the top reasons associated with not using a bank were the assumed costs of maintaining an account (to include perceived high balance requirements) and bad service, i.e., “my people aren’t welcome”.

Statistics and Facts

Top three states for international wire transfer volume:

• California
• New York
• Texas

Top four Mexican destinations for funds remitted from the U.S.:

• Michoacan
• Jalisco
• Guanajuato
• Mexico D.F.

Eighteen percent of the population in Mexico receives funds remitted from the U.S.:

• 63% women
• 37% men

Of these funds:

• 94% are used for food, clothing, housing and healthcare
• 6% are invested
• According to Bank of México, $16 billion have been remitted thus far, in 2004, into Mexico. This represents a 25% increase over 2003.
• $30 billion in total remittances to Latin America
  • Equal to total frozen food sales in the United States
  • Equal to total funds spent on all HeadStart programs in the U.S.
• Sixty-nine percent of the nation’s undocumented immigrants are from Mexico; 22% send money through a bank.
• Fifty percent of immigrants polled believed that a perfect credit history was a prerequisite for applying for a mortgage loan.

Source: Carlos Garcia de Alba, Consulado General de México

Resources

• Fair Isaac offers credit education information, as well as a new credit qualification product, in Spanish. For details, click on: http://www.myfico.com/Spanish/CreditCentral.asp
• FDIC offers a financial literacy program, entitled “Money Smart”. These materials are available in a variety of languages, including Spanish.

Conclusions

The U.S. Hispanic population lags well behind other ethnic groups in its use of conventional financial services. More troubling is how few Hispanics have taken traditional steps to secure their financial futures. Compared to other ethnicities, Hispanics are far less likely to have credit cards and savings accounts. These low figures are not always the result of cultural norms that make Hispanics wary of United States banks. Actually, a majority of Hispanics, particularly recent immigrants, reports that they want to learn how to save more, budget better and choose investments. A high percentage also expressed interest in learning about borrowing, credit cards and mortgages.

Given the current demographic trends and long-term forecasts, a big challenge faced by North American banks is how to provide linguistically appropriate and culturally sensitive financial services to the diverse populations that they serve. Building trust is key to successfully serving Hispanic immigrants who are often unfamiliar with the U.S. banking system and the protection it offers. Consider the following steps as a “blueprint” for approaching immigrant consumers:

Step #1

Focus on “people diversity” as a competitive advantage

• Align team members’ diversity and language skills with local communities
• Involve employees in local market volunteer programs and community outreach
• Support Supplier Diversity programs
• Highlight employees and customers (of color) in marketing messages targeting immigrants

Step #2

Broaden language capabilities

• Ensure adequate Spanish sales and service capabilities are in place
• Build additional language capabilities – phone, Internet
• Enhance online and ATM offerings
• Acknowledge the significance of in-language collateral

Step #3

Tailor branches to be more welcoming to the local community

• Offer bilingual collateral and signage
• Impart targeted branches with culturally relevant colors, designs, and art
• Add branches in diverse communities

Step #4

New products and services to appeal to immigrant customers

• Accept alternative forms of identification
• Expand remittance options
• Creation of entry-level banking products
• Outreach to small businesses

Step #5

Financial Literacy Outreach and Support

• Produce first-time homebuyer materials and educational seminars, in Spanish, designed to counter lack of familiarity with banks
• Credit education materials
• Community and nonprofit partnerships
• “Wealth building” seminars

With Mexican immigrants comprising an increasingly significant portion of the U.S. Hispanic population, financial institutions have a growing opportunity to move this community from the fringes of the financial services sector. By providing services and products that meet today’s needs and opening avenues for building credit for the future, financial institutions can both make a profit and aid the country’s immigrant communities.

About the Author

Laura Sonderup is the Director of Heinrich Hispanidad, a full service Hispanic advertising agency that is a division of Heinrich Relationship Marketing, Inc., a direct response agency headquartered in Denver, Colorado. Heinrich Hispanidad focuses on helping companies communicate to the domestic Latino market via impactful, culturally relevant, direct response marketing.

Laura has been a featured speaker on ethnic marketing at numerous local and national conferences. She serves on the Board of Trustees for the Museo de las Américas, as Public Relations Chairperson for the Rocky Mountain Direct Marketing Association and is an active member of the Denver Latino Chamber of Commerce and the Association of Latino Advertising Agencies.

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