How to Make Economic Development More Inclusive
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Policy Social Impact Economics May 8, 2018

How to Make Eco­nom­ic Devel­op­ment More Inclusive

Two finance experts dis­cuss the need to tai­lor strate­gies to spe­cif­ic under­served communities.

People visit a bank

Yevgenia Nayberg

Based on insights from

Janice C. Eberly

Don Graves

In the Unit­ed States, access to eco­nom­ic oppor­tu­ni­ty remains a work in progress. Many pol­i­cy­mak­ers, lenders, and com­mu­ni­ty lead­ers are keen to bol­ster the oppor­tu­ni­ties avail­able to those who live in areas with high unem­ploy­ment or pover­ty. So what can be done to encour­age more inclu­sive eco­nom­ic development? 

Don Graves, the incom­ing head of cor­po­rate respon­si­bil­i­ty and com­mu­ni­ty rela­tions at Key­Bank — and for­mer deputy assis­tant to Pres­i­dent Oba­ma — sat down with Jan Eber­ly, a pro­fes­sor of finance at the Kel­logg School and for­mer Assis­tant Sec­re­tary of the Trea­sury, to dis­cuss what it takes to tai­lor devel­op­ment efforts to the spe­cif­ic needs and cir­cum­stances of a strug­gling community. 

This inter­view has been edit­ed for length and clar­i­ty.

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Jan Eber­ly: When it comes to under­served com­mu­ni­ties, what role do you see gov­ern­ment play­ing in encour­ag­ing eco­nom­ic development? 

Don Graves: I should stip­u­late first that the rea­son you need gov­ern­ment devel­op­ment pro­grams and strate­gies is that the mar­ket has imper­fec­tions: it just doesn’t work even­ly across all com­mu­ni­ties. At every lev­el, gov­ern­ments can address those mar­ket imper­fec­tions. They have the scope and resources to look across com­mu­ni­ties and pro­pose solu­tions that indi­vid­u­als or local mar­kets can’t come up with or imple­ment on their own. 

Jan Eber­ly: In many cas­es, it’s a start­up prob­lem. In com­mu­ni­ties that already have finan­cial insti­tu­tions, suc­cess­ful busi­ness­es, good schools, and thriv­ing social insti­tu­tions, it’s eas­i­er to pro­vide hous­ing finance, con­sumer finance, and oth­er ser­vices. It’s more dif­fi­cult in com­mu­ni­ties where those insti­tu­tions aren’t there, where the ecosys­tem isn’t there, where the infor­ma­tion isn’t there. That’s where pol­i­cy comes in. You still rely on pri­vate-sec­tor resources and ini­tia­tive, but gov­ern­ment can help coordinate. 

The Brook­ings Insti­tu­tion has a recent paper on place-based poli­cies. Rather than rec­om­mend­ing the cre­ation of a series of nation­wide pro­grams address­ing jobs or hous­ing, they looked at spe­cif­ic com­mu­ni­ties and what kind of jobs pro­gram or hous­ing pro­gram they might need. Tar­get­ing loca­tions that are par­tic­u­lar­ly dis­tressed, espe­cial­ly where job­less­ness is high, may pro­duce high­er social returns than a more dilut­ed approach. This log­ic could apply to finan­cial pro­grams as well. I think there’s now a recog­ni­tion that solv­ing one issue at a time doesn’t help a whole com­mu­ni­ty over the hump. 

Don Graves: I think it’s true that place-based devel­op­ment has real­ly come of age. Back in the Clin­ton admin­is­tra­tion, when I was at the Trea­sury Depart­ment, we had a sense that place-based devel­op­ment could work. But we were still devel­op­ing nation­al pro­grams with lit­tle flex­i­bil­i­ty to deal with the nuances of local com­mu­ni­ties. What we learned in the Oba­ma admin­is­tra­tion is that it might be bet­ter to give local and state gov­ern­men­tal enti­ties the abil­i­ty to use gov­ern­ment resources to meet the spe­cif­ic chal­lenges of a local com­mu­ni­ty with para­me­ters around the use of those resources in part­ner­ship with the pri­vate and phil­an­thropic sectors. 

There was recent­ly an analy­sis called the Detroit Future City Strate­gic Frame­work. It was a 50-year, high­ly detailed, long-term guide for deci­sion-mak­ing craft­ed by Detroit stake­hold­ers from elect­ed offi­cials to res­i­dents. The strate­gies it laid out were then imple­ment­ed with the tac­ti­cal sup­port of the fed­er­al gov­ern­ment and nation­al actors who had a wider purview, which allowed them to see beyond what the local actors could. 

So there was a strate­gic approach with spe­cif­ic action steps that was informed by the local assess­ment but giv­en the sup­port of and the resources of the fed­er­al government. 

There’s con­cern that some insti­tu­tions are tar­get­ing lucra­tive seg­ments of the mar­ket and not pro­vid­ing ser­vices to oth­ers, which means that low- and mod­er­ate-income com­mu­ni­ties may not be get­ting the most inno­v­a­tive prod­ucts to meet their needs.” — Don Graves 

Jan Eber­ly: It’s about find­ing a bal­ance between cus­tomiza­tion and scale. 

The oth­er con­sid­er­a­tion, of course, is account­abil­i­ty. If you’re bring­ing pub­lic resources to bear, you want to be able to report back to the pub­lic about the program’s suc­cess, and that means you have to think about out­comes and what qual­i­fies as suc­cess.”

Don Graves: I also think that by mea­sur­ing impact you give oth­ers a sense of the program’s val­ue. That could mean local gov­ern­ment, phil­an­thropic insti­tu­tions, non­prof­its, or for-prof­its. You get buy-in when peo­ple see the impact a pro­gram has on their communities. 

Jan Eber­ly: How do pri­vate-sec­tor actors — par­tic­u­lar­ly in the bank­ing sec­tor — best posi­tion them­selves to get involved in com­mu­ni­ty finance? 

Don Graves: I think there are a num­ber of ways for the pri­vate sec­tor to get involved. At Key­Bank, our pur­pose is to help our clients and com­mu­ni­ties thrive, so we tai­lor our prod­ucts to the spe­cif­ic needs of the com­mu­ni­ties we serve. 

Unfor­tu­nate­ly, not every insti­tu­tion takes that approach, although there have been pol­i­cy pre­scrip­tions that encour­age banks to do so. The Com­mu­ni­ty Rein­vest­ment Act, cre­at­ed in the 1970s, was designed to ensure that finan­cial insti­tu­tions were meet­ing the needs of all com­mu­ni­ties, not just those they felt would make them the most mon­ey. It’s not a per­fect mea­sure, but it is at least a way of push­ing banks to meet com­mu­ni­ty needs. 

Jan Eber­ly: It seems like a lot of Fin­tech inno­va­tion is aimed at cus­tomers who are pret­ty well served already. How can inno­va­tion sup­port under­served communities? 

Don Graves: For bet­ter and for worse, tech­nol­o­gy is chang­ing the finan­cial-ser­vices indus­try. I think there are huge oppor­tu­ni­ties for peo­ple to expand their rela­tion­ships with finan­cial insti­tu­tions using tech­nol­o­gy that we couldn’t have com­pre­hend­ed even a decade ago. 

Those who have access are able to take advan­tage of the lat­est inno­va­tions, but there’s con­cern that some insti­tu­tions are tar­get­ing lucra­tive seg­ments of the mar­ket and not pro­vid­ing ser­vices to oth­ers, which means that low- and mod­er­ate-income com­mu­ni­ties may not be get­ting the most inno­v­a­tive prod­ucts to meet their needs. 

It’s incum­bent upon banks across the coun­try to deter­mine cus­tomer needs and try to deliv­er prod­ucts so that every­one can use them. Banks should also make a greater effort to edu­cate their cus­tomers and help them become finan­cial­ly fit. 

Jan Eber­ly: That’s inter­est­ing. I’d say that stu­dent loans is one exam­ple of a mar­ket where some actors have gone after the lucra­tive mar­ket seg­ments with­out much con­cern for broad­er cus­tomer needs. 

You men­tion being finan­cial­ly fit. That’s a big chal­lenge in every com­mu­ni­ty: try­ing to inter­act with clients in ways that meet their needs. 

Don Graves: That’s right. It’s not easy to build that trust, let alone try to build it through a com­put­er or a phone. Part of what we’re try­ing to do — what every major bank in the coun­try is try­ing to do — is fig­ure out how peo­ple use tech­nol­o­gy, what their com­fort lev­el is, and then to pro­vide them with tools and resources that are eas­i­ly accessible. 

There’s a host of poten­tial cus­tomers out there. But if some­one doesn’t have a smart­phone or enough cash to deposit, how are they ever going to build a main­stream finan­cial rela­tion­ship? How are we ever going to get them out of the shad­ow-bank­ing sys­tem and into a sit­u­a­tion where they’re able to build wealth and pass that wealth along to their fam­i­ly? When you expand this view to entire com­mu­ni­ties, that’s where you begin to get at the core issues of income inequality. 

Jan Eber­ly: What are the ini­tia­tives you’ve seen that are look­ing to bridge that gap and bring peo­ple into the bank­ing sys­tem, if that serves their needs? 

Don Graves: There are sev­er­al. There’s the Bank On ini­tia­tive from the Cities for Finan­cial Empow­er­ment Fund, which is an effort on the part of banks and com­mu­ni­ties to help peo­ple estab­lish rela­tion­ships with main­stream finan­cial insti­tu­tions, instead of the shad­ow-bank­ing field. 

At Key­Bank, we know the first step is under­stand­ing how clients think about man­ag­ing mon­ey and what they want from their bank. We used this approach when eval­u­at­ing the spe­cif­ic needs of the unbanked and under­banked pop­u­la­tions. We deter­mined one way to begin to con­nect with them was to devel­op a check-cash­ing ser­vice that would intro­duce them to KeyBank. 

This ser­vice, Key­Bank Plus, was launched in 2004. It allows indi­vid­u­als to cash a pay­roll or gov­ern­ment check with­out a tra­di­tion­al bank account. The fee for this ser­vice is low — 1.5 per­cent — and every fifth check is free. We feel the true val­ue of the pro­gram is that it enables under­served pop­u­la­tions to estab­lish rela­tion­ships with a bank. As these clients’ needs have changed, we have intro­duced more rea­son­ably priced bank­ing prod­ucts with fea­tures that ensure respon­si­ble use. That includes our Has­sle-Free account, which elim­i­nates near­ly all typ­i­cal bank fees, includ­ing over­draft fees. 

There’s also Hel­loWal­let, which is a tech­nol­o­gy plat­form that helps deliv­er finan­cial edu­ca­tion and well­ness, includ­ing tools for bud­get­ing. Key­Bank pur­chased Hel­loWal­let last year because we saw that the plat­form could help our cus­tomers achieve finan­cial fitness. 

And there’s this group out of New York called Mobil­i­ty Cap­i­tal Finance, led by a for­mer Wall Street banker. They’ve been work­ing on build­ing cred­it scores through non­tra­di­tion­al mea­sures such as pay­ing bills on time using their MoCaFi app. 

There are a vari­ety of ways to go about it. I think the key, at least from a pub­lic pol­i­cy per­spec­tive, is to make sure these tools are built in a way that is holis­tic so that they get at the real chal­lenges peo­ple face when deal­ing with the finan­cial sys­tem and are done with con­sumers’ inter­ests at heart as opposed to being predatory. 

Jan Eber­ly: I agree, because people’s needs do vary. A new finan­cial prod­uct might be excit­ing from a tech­nol­o­gy per­spec­tive, but if the fees are too high, it won’t do much for the per­son with a small account. There’s got to be a clear sense of whom you’re try­ing to serve. 

We saw this in a dra­mat­ic way dur­ing the hous­ing cri­sis. The idea had always been that home own­er­ship is how you build wealth, but when lever­age became the tool, peo­ple were no longer build­ing wealth, and when home prices fell, they were dev­as­tat­ed. It seemed so promis­ing, but it end­ed up destroy­ing the wealth of entire communities. 

Don Graves: That’s why it’s so impor­tant to focus on edu­cat­ing con­sumers and pro­vid­ing them with infor­ma­tion they need to make good choic­es for them­selves and for their future. Too many peo­ple bet their future on what we now know were risky invest­ments, and they made those choic­es based on faulty or incom­plete information.

Featured Faculty

Janice C. Eberly

John L. and Helen D. Russell Professor of Finance and Faculty Director, Kellogg Public-Private Initiative

About the Writer

Drew Calvert is a freelance writer based in Los Angeles.

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