A blueprint for broadening ex-inmates’ access to banking

In 2014, Old National Bancorp in Evansville, Indiana, launched a financial literacy program for a new audience: female inmates serving time for drug-related convictions.

The program — called “12 Steps to Financial Success” — consisted of weekly classes at the Henderson County Detention Center in Kentucky. The courses, which were taught by Old National employees, included financial psychology, savings and budgeting, credit and debt, investing and account management. The goal: to provide the women with basic financial education and access to mainstream banking services as they prepared to reenter society.

In its first six years, approximately 1,080 women participated in the program, one of several financial literacy initiatives that the $24 billion-asset Old National supports. Although classes have been suspended during the pandemic, Ben Joergens, the bank’s director of financial empowerment, hopes that instructors will resume visits, in person, early next year.

Ben Joergens, Old National Bank’s director of financial empowerment, teaches a course on banking basics to inmates at the Henderson County Detention Center in Kentucky.

“This is one thing we can do as a bank to help someone get back on their feet,” Joergens said. “We want to … empower them and give them tools to make decisions to change their futures.”

Individuals involved in the criminal justice system have long faced barriers to accessing financial services after they are released from prison. Oftentimes unbanked or underserved by the mainstream financial system even before incarceration, these people may struggle to open bank accounts and obtain loans, making it hard for them to get jobs, find housing and pay off their debts.

The lack of access to financial services is even greater among people of color, who are disproportionately represented in the criminal justice system. Black Americans are incarcerated in state prisons at nearly five times the rate of whites, and Latinos/Hispanics are incarcerated at 1.3 times the rate of whites, according to a recent report from The Sentencing Project, a nonprofit organization that tracks incarceration rates by race.

Banks can help, according to a new white paper from the American Bankers Association Foundation, which not only sheds light on key barriers to financial services for formerly incarcerated individuals, but also suggests ways for banks to develop more financial inclusion opportunities.

Standing in the way of access to banking are five critical factors, according to the paper. One is a misperception about whether so-called justice-involved individuals — a category that includes people who have been arrested, charged or convicted of a crime, as well as family members affected by the fees, fines or burdens of incarceration — can qualify for a bank account.

Other factors are more closely tied to specific individuals and their pasts: a lack of valid identification, a permanent address or both; past-due fees, fines or child support debt that has been turned over to collections; previous mismanagement of a bank account; and a general fear and mistrust of the banking system.

A frequent perception is that people are unbanked either by choice or because they made a mistake with a prior bank account, said J. Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin-Madison.

That perception is true in some cases, said Collins, who is also principal at PolicyLab Consulting Group, which helped the ABA Foundation develop the white paper. “But there are some people who really are excluded from the market based on rules that maybe don’t reflect the risk that’s in place,” he noted.

According to the white paper, banks can expand access to financial services by accepting alternative forms of identification, waiving consideration of past account mismanagement, allowing inmates to cash certain types of checks, providing low-fee accounts certified by the BankOn coalition, offering financial literacy services and leveraging community resources to help people find housing, get jobs and obtain legal help.

In addition to Old National, some banks are already working in this space — in part to help fulfill Community Reinvestment Act requirements but also, they say, out of a sense of duty to give back to the community.

Bank of Hawaii in Honolulu offers savings accounts for inmates participating in the Laumaka Work Furlough Program, a work-release program for people at the Oahu and Maui Community Correctional Center. Since 2013, the $23 billion-asset bank has opened nearly 1,000 accounts for inmates. At the end of 2019, Bank of Hawaii had 125 active accounts holding $700,000 in deposits.

Ally Bank, the Sandy, Utah-based banking arm of Ally Financial, is piloting a yearlong financial literacy course as part of a partnership with a Salt Lake City-based organization that provides residency and onsite work and education programs to formerly incarcerated people.

Ally rolled out the courses in November 2020; the first cohort graduated in November. The company also offers a matched savings program as an incentive to stick with the courses — part of an effort to reduce the likelihood that participants will return to prison.

“I would say, one year in, we feel like it’s been very successful,” said Diane Morais, Ally’s president of consumer and commercial banking.

In Mountlake Terrace, Washington, 1st Security Bank of Washington teaches quarterly financial literacy courses at the Washington Corrections Center for Women. The classes are part of a collaborative project involving law enforcement, currently and formerly incarcerated women and community organizations, which focuses on reducing incarceration and recidivism.

To date, approximately 200 women have participated in the courses, which include a one-on-one meeting with a 1st Security banker to review participants’ credit scores and address any errors.

In 2017, the $2.2 billion-asset bank launched its First Step Checking account specifically for participants in the program. To work around the hurdle of providing a valid form of identification, which may expire during a prison term and can be difficult to replace, the bank agreed to accept alternative forms of ID, including those issued by the correctional facility.

Knowing that some participants have committed fraud and other financial crimes, the bank puts restrictions on the accounts and monitors them on a regular basis.

“We all win if we can help these women land on their feet,” Erin Burr, 1st Security’s chief risk officer and Community Reinvestment Act officer, said in an email.

For former inmates, a lack of valid identification, previous mismanagement of a bank account and a general fear and mistrust of the banking system can all serve as barriers to entering the mainstream financial system, according to a white paper from the American Bankers Association Foundation.

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Still, banks can do more, said Carlos Fernando Avenancio-León, assistant professor of finance at the University of California-San Diego Rady School of Management. His research shows that former inmates are less likely to receive credit because they were in prison, and that the risk of recidivism increases because these individuals have lower access to credit.

It’s not that banks don’t want to build relationships with formerly incarcerated people, but rather that the current credit-scoring system works against ex-inmates, he said. Because people cannot pay their bills when they are incarcerated, their credit scores tend to decline.

“What we’re really talking about here is how former inmates can get access to credit at the level they would receive if they had not been incarcerated,” Avenancio-León said, adding that banks are in a better position to help than high-cost lenders.

“I think it’s important that banks are the ones providing the credit because they can do a better job of providing it to good borrowers, and many former inmates are good borrowers,” he said.

To help fill the credit gap, the Fountain Fund in Charlottesville, Virginia, makes microloans to former inmates. The nonprofit organization provides low-interest loans ranging from $250 to help cover legal fees to $15,000 to start a business. To date, it has provided 250 loans worth a combined $1 million.

Erika Viccellio, the Fountain Fund’s executive director, cited JPMorgan Chase as an example of a bank that is reaching out to formerly incarcerated individuals. The bank’s Second Chance Agenda calls for public-policy changes aimed at reducing employment barriers for people with criminal backgrounds. In 2020, JPMorgan Chase hired 2,100 people with criminal backgrounds.

While Viccellio said that banks have room to improve when it comes to banking former inmates, she is hopeful that a growing awareness of the barriers these people face will ultimately lead to more action.

“When bigger institutions say, ‘We need to change how we’ve been going about business,’ I hope that is further on the action end and not just on awareness,” she said.

At Old National, the goal is to expand the 12 Steps program “into as many markets” as possible, Joergens said. He hopes that more banks will start doing similar work.

“I think the more we do collectively as financial institutions, the bigger the impact we can make, and the fewer people that will go back to prisons,” Joergens said.