THE SPEAKER was passionate. “You bankers need to understand our culture is not like your culture. In our community, we don’t expect bills to be paid on time. If you’re really interested in serving our community, you need to adjust your expectations and not be asking us to change our culture in order to qualify for your loans.”
Wow, did I get an education some years ago, when my bank attempted to reach out to the town’s minority community. We were prepared to discuss credit scores and the importance of a good track record of paying bills on time. Instead, we walked away thinking we may have done more damage than good. Clearly, the community’s view of our industry didn’t match our own view.
In our defense, our intention to serve every segment of our community, including low income areas, was honorable. But we ran into a wide cultural divide we were ill-equipped to handle.
But as a young community bank chief executive, I was idealistic and not easily discouraged. I was intent on finding a way to serve everyone. We had purchased a wealth management company to cater to our well-heeled customers. The bank itself was well-positioned to serve most of the financial needs of the middle class. But I wanted a way to reach the unbanked. That desire, however noble, set me up for an embarrassing failure.
Freedom Loans—not its real name—sat in the middle of our Midwestern town. The most remarkable feature was a big ugly green sign in front of the tiny store. The sign would come alive at night and blink its bright neon lights spelling out the word, “LOANS…LOANS…LOANS.” It wasn’t subtle marketing—and hardly the image a preeminent bank in town would want to project.
The owner of Freedom Loans—let’s call him Tex—wanted to sell the business. “Perfect,” I thought. We’ll buy Tex’s company and this will be our way to learn how to serve the unbanked in our community, plus I hoped to teach Freedom’s customers how to improve their credit standing and to encourage them to favor the lower-cost loans available from my community bank. And, boy, did I learn a lot. Here are the highlights:
1. The poor don’t pay on time and don’t care about late fees. One of my first conversations with Tex was on his need to bring down his “past due” ratios. My bank kept past dues below 1%, while Tex was around 20%. He just looked at me and shook his head, saying, “You don’t understand what we do at all, do you? We love past due loans. That’s how we build up our late fee income. And nobody ever complains.” As I found out, he was right.
2. The poor don’t care what interest rate they pay. Tex charged an average 28% interest on loans. Tex taught me the poor don’t care about the rate. Only the payment schedule mattered to them.
3. The poor will pay almost anything to maintain one reliable line of credit. Tex gave me an education into the mind of the unbanked. They don’t care about interest rates. They don’t care about late fees. They don’t care about any other debts they were running past due. But they did care about keeping Tex happy, because he was their emergency fund. Tex would always advance them a new loan when needed if they would continue to pay him something from time to time. You could say Tex was a friendly loan shark.
4. It’s hard to find ethical lenders who share Tex’s view of customers. After the sale of the business, Tex only wanted to stay on for a short transition period. We hired a young man to train under Tex, with the intention of making him the new president when Tex retired. This trainee, however, never bought into Tex’s exploitation philosophy. He quit and went to work for a church, where he found more compatible values.
5. The poor suffer from fear and shame. Freedom Loans had a hidden parking lot in the back, which allowed customers to enter without being seen. Tex explained to me that this private rear entrance was a key to business success. The poor will almost never enter a traditional bank lobby, because they don’t feel they belong there. But they also want to hide their poverty from others, which would be revealed if they were seen entering a high-interest loan shop.
The Freedom Loans experiment fairly quickly ended in failure. Our bank’s values were incompatible with the idea of charging exorbitant interest and fees, especially to the poorest among us. Freedom Loans never made any money. The lack of profitability was probably because no one in my company could buy into the Freedom Loans philosophy.
But the failure motivated me to look elsewhere for ideas on how to help the poor. Over time, I’ve found some answers that work much better than my poorly conceived idea to buy Freedom Loans.
Warren Buffett’s partner, Charlie Munger, has a saying: “Invert, always invert.” In other words, turn a problem upside down and look at it backwards. Here are two ideas that appear to be effective in raising the poor out of their mindset of poverty.
Investment clubs. Over time, I became friends with a number of pastors in the minority community. They had formed an investment club that regularly met to pool members’ money and make investment decisions. These wise pastors knew that one path out of poverty was to teach their members to think more like owners and less like debtors. I think the club was successful because the effort came from within the minority community.
Peer micro lending and savings groups. Similar to investment clubs, savings groups have proven successful in developing countries. These savings groups encourage capital formation, without the bureaucracy of bankers like me getting involved. Members can take loans from these savings groups, if approved by their peers, for purposes such as business expansion, home improvements, medical care or other needs—and without paying exorbitant interest rates.
There’s a reason for the biblical prohibition against moneylenders charging interest to the very poor, who are least able to pay it. As far as I know, Freedom Loans didn’t help anyone in my town escape poverty. It most likely kept them poor.
My confession in this article may not have the same impact as the 13 books St. Augustine wrote discussing his confessions. Still, this was an important lesson for this banker to learn. Not every market segment is a profitable niche, nor is it ethical to try to make a profit to the detriment of the poorest among us. But that doesn’t mean there are no alternative ways to bring human flourishing to those who struggle the most.
Joe Kesler is the author of Smart Money with Purpose and the founder of a website with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers. Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains.