James R. and Helen D. Russell Professor of Finance; Senior Associate Dean for Strategy and Academics
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.
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.