FINANCIAL SERVICES

Limited access to traditional banking and financial services has long been a barrier to wealth creation in marginalized communities. This lack of access often translates to higher costs for basic financial transactions. Communities faced with a high presence of check cashing institutions, pay-day loans centers and other predatory financial services providers fall victim to higher transactional fees; a recent study found that “borrowers pay $4.2 billion every year in excessive payday lending fees." 

To demonstrate market anomalies regarding financial services, Social Compact’s DrillDown looks at access to traditional and non-traditional financial institutions in a variety of ways including:
•    calculating the average distance to financial services
•    ratio of financial services to residents 
•    quantifying the presence of underbanked populations
•    estimating the dollar value of income earned from informal economic activity

Average distance: this indicator represents the average miles from each census block group center to the nearest financial services establishment. The assessment includes establishments in the study area and up to two miles beyond the study area boundary. In the case that an establishment is located on or just beyond the neighborhood boundaries used in the DrillDown analysis, this indicator serves as a more accurate determinant of residents’ access to financial providers.

Underbanked populations: Social Compact has developed an underbanked proxy by quantifying the percentage of households that lack credit histories. The proxy takes into account all households that do not have an associated record with any of the three major credit bureaus (Axciom, Equifax and Experian).

Informal economy: Social Compact’s estimate of the proportion of neighborhood income attributed to informal economic activity. By weighting the following proxies, the DrillDown provides a monetary value of unregulated economic activity: households with income below $30,000; difference between household income and household expenditures; the percentage of households with no credit record; the percentage of utility payments made in cash; the number of nontraditional financial service providers per household and per acre; the difference between estimated housing costs and real home values; and the percent foreign born population. The DrillDown average household income estimate is adjusted to include the proportion of neighborhood income attributed to informal economic activity; median household income is not.

In 2007 Social Compact, in partnership with Emerging Markets Inc., conducted a survey on individuals’ financial practices. The report “Survey of Unbanked and Under-banked Residents in Los Angeles” summarizes the research results obtained through a six-week surveying of three low-income neighborhoods in Los Angeles during the summer of 2007. The survey contains information about resident’s use of a wide variety of products and services as well as the motivations behind individuals’ financial behavior. Please contact Social Compact to request a copy of the raw survey data-over 1,800 surveys, roughly 600 per neighborhood.

Social Compact continues to develop new ways to measure the use and presence of financial services.