Kyra Bowerman was trapped in a vicious banking cycle.

The Indianapolis teacher and single mom of two would open a bank account. An expensive day care bill would come due at the same time she needed to pay for rent, utilities and food. The bank would charge an overdraft fee. The account would close.

She’d open an account at a different bank. Another utility bill. Another rent payment. Another overdraft fee. Another closed account. On and on.

“Things would get out of control,” said Bowerman, 37. “They would all come due at the same time, different bills. I would pay day care, then one of my daughters would need something for school. It was always something.”

Bowerman has a checking account again—and she’s determined to make this one work, with the help of Kim Taylor, a financial counselor at the employment- and financial-assistance not-for-profit Center for Working Families who has helped her budget. But before Bowerman can access free checking, she has to pay $12 a month for her account until she proves she can keep it in the black.

“It’s frustrating,” she said. “It’s over $100 for the year just to own this account. I just need help to get over this hump.”

Bowerman’s struggle is not unique. At its root, advocates for the working poor say, is a structural problem: Banking is more expensive for the people who most need it to be affordable.

It’s a reality that experts say plays a significant role in preventing large swaths of struggling central Indiana residents from snapping the cycle of poverty.

“It is so expensive to be poor,” said Kathleen Lara, policy director at Prosperity Indiana, a network of about 150 community development groups, not-for-profits, and others fighting for economic opportunity for disadvantaged Hoosiers.

“The barriers are multitudes. If we’re trying to address equity and building wealth for low-income individuals, we’ve got to reduce some of the barriers that drain wealth.”

Consider the following realities about how low-income and working-class people in Indianapolis interact with the financial services industry:

◗ More than 16% of Indianapolis residents are underbanked, meaning they use traditional banks along with riskier, more costly alternatives, such as payday loans, to make ends meet, according to the Federal Deposit Insurance Corp. The typical payday loan borrower is in debt for five months and pays more than $500 in fees to repeatedly borrow $300, according to the Indiana Institute for Working Families, a research and public policy not-for-profit.

◗ Another 6% of Indianapolis residents are unbanked, meaning they have no account at a federally insured institution. More than half of the unbanked say the primary reason is they don’t have enough money to keep in their accounts.

An average family without a bank account earning $25,000 spends $2,400 a year on financial transactions, more than it spends on food, according to a white paper from the U.S. Postal Service’s Office of Inspector General. And payroll debit cards issued by some local employers to the unbanked carry steep maintenance fees.

◗ Indianapolis residents face wide disparities in having convenient access to physical bank branches. And while the digital revolution has made that access less important for some, advocates for low-income people say they still need the in-person help that bank tellers provide.

Meanwhile, payday loan stores are prevalent in poorer areas. The five poorest ZIP codes in Indianapolis make up 16% of the population yet have just 9% of the banks and 22% of the payday lenders.

Racking up fees

At the Community Alliance of the Far Eastside, financial counselor Bradley Heck said most of his clients don’t have a bank account. It’s simply too expensive. They could be “harmed more by having a bank account,” he said.

“A lot of the people I see are living paycheck to paycheck and they don’t have the balance to even keep a bank account active,” Heck said. “They’re running their account down to zero each week. You’re going to hit fees.”

Banking is more expensive than it used to be—especially for the cash-strapped. About 40% of non-interest-bearing checking accounts are now considered free, compared with about 75% a decade ago, according to a 2018 Bankrate survey.

Indianapolis’ poorest ZIP code, 46218, has just one FDIC-insured institution: PNC Bank. There, the most basic checking account costs $7 a month to maintain unless customers keep an average of at least $500 in their accounts or have at least $500 monthly in direct deposits.

PNC’s second-chance “foundation” checking account, for people who have previously run into trouble with banks, also carries a $7 monthly fee along with usage restrictions.

Pat Gamble-Moore, senior vice president of community development banking for PNC Bank, said charging “a very affordable fee is probably not unreasonable.”

She said the bank tries to convert second-chance checking account holders into standard bank accounts when it can. However, PNC Bank said it does not disclose its conversion rate.

“We are giving you the opportunity to start over,” Gamble-Moore said. “We want to get you to that traditional checking account as soon as possible where you do have the opportunity to be in a free account.”

Even people who qualify for a traditional bank account can suffer expensive consequences if they run out of money or accidentally overdraft. Banks normally charge about $35 for overdraft fees, according to the Center for Responsible Lending. And 80% of overdraft and insufficient-funds fees are paid by 8% of account holders, according to the Consumer Financial Protection Bureau.

Murdock Murdock

About One City Worlds Apart This is the latest story in an occasional series examining the growing gap between the affluent and poor in Indianapolis and ways to address the problem. Read the earlier stories here

“We’re providing banking services on the backs of the people who are struggling the most,” said Erin Macey, senior policy analyst for the Indiana Institute for Working Families. “We need a better solution for the people who are just getting slammed by all these fees and can’t access basic financial services.”

Overdraft fees can lead to bounced checks and unpaid bills, which lead to involuntarily closed accounts, haunting consumers for years when they wind up on commonly used credit-monitoring systems, such as ChexSystems, EWS or TeleCheck.

Advocates for the poor say those credit-monitoring systems act like a “blacklist” and shut people out of banks.

But banks say they’re simply managing risk. Gamble-Moore said PNC Bank, which uses EWS to check potential customers’ banking history, prefers to offer customers entrance to its second-chance accounts or use of its “SmartAccess” prepaid debit card in lieu of denying them access to the bank’s services entirely.

“I don’t think it’s ever the intent we’re trying to lock folks out of the system,” Gamble-Moore said. Sometimes a potential customer’s checkered financial history “was the culmination of a lot of events that spiraled out of control. We recognize that. That’s an opportunity for us to say, ‘Let’s start a new relationship and see how we can build from there.’”

Surviving on debit cards

Without a bank account, Indianapolis residents have few, if any, low-cost options to access money.

Center for Working Families counselors Heck and Taylor said the majority of their clients access their money on payroll debit cards issued by employers. The payroll cards look and feel like debit cards associated with a checking account, but they’re much different.

“That’s their spending and savings mechanism,” Taylor said.

One benefit for consumers is that they’re a way around credit reporting agencies. And for employers with a large volume of hourly or transitory workers, they are more convenient and less costly than cutting checks.

Walmart, for example, started issuing payroll debit cards in 2009 to its employees without direct deposit. Spokeswoman Kory Lundberg said its current payroll debit card “is a popular alternative for associates to receive their pay without the need to pick up or cash a paycheck.”

Lundberg said the card offers “no startup or monthly fees, no overdraft, bounced check or late fees, no interest charges and no minimum balance requirement.”

However, not all payroll debit cards are as generous. Some carry a litany of fees: fixed monthly fees, transaction fees each time you use the card, ATM withdrawal fees, balance-inquiry fees, reloading fees, decline fees, inactivity fees, fees for bill payment and more.

“It’s buying a dollar stick of gum and getting a fee on top of that,” Heck said. “A lot of the people that I’ve talked to that have those don’t even realize those fees are being taken out.”

That’s what happened to Andrean Barrett-Mumford, 40, a far-east-side resident and single mom of four. She opened her first bank account at age 16, but quickly ran into overdraft fees. The account eventually closed, and, “I didn’t want to deal with a bank after that,” she said.

Two years ago, when she got a job at an Amazon warehouse, she opted for the payroll debit card, thinking it would be less expensive than a bank. She was wrong.

“Any time you have a transaction, even though it’s your money, they had a transaction fee,” Barrett-Mumford said. “There was also a fee to put money on the card.”

‘A tale of two cities’

For those in lower-income neighborhoods, the lack of physical access to a bank branch is often an obvious barrier to financial services.

On the far-east side, where a shuttered Regions Bank sits in the same shopping center as the Community Alliance of the Fast Eastside, Center for Working Families Chief Operating Officer Robb Schrimshaw said he has a front-row seat to “a tale of two cities.”

“If you go up north around Fort Ben, you’ll find four or five banks right there at Post Road and 56th Street,” he said. “The nearest bank [to CAFE] was the Chase branch over on Shadeland, and that closed six months ago.”

In fact, the city’s poorest ZIP code, 46218, has just one FDIC-insured institution—PNC Bank—for its 26,757 residents.

In a lawsuit filed this month, the U.S. Department of Justice accused Muncie-based First Merchants Bank of redlining predominantly African American areas of Indianapolis.

The suit alleged First Merchants violated the Fair Housing Act and the Equal Credit Opportunity Act, which restricts financial institutions from race-based discrimination in lending.

According to the Justice Department, the bank never has opened or operated a bank in any of the 50 majority-black Indianapolis census tracts.

First Merchants settled the suit but denied doing anything wrong. In the settlement, it agreed to open a full-service branch in one of Marion County’s majority-black census tracts.

The bank told IBJ in a statement that it will work with community groups to “assist with successful strategies to reach low- and moderate-income residents and neighborhoods.”

Taylor Taylor

It’s not as though bank branches have left only poor areas—in fact, less-impoverished areas have lost roughly the same percentage of branches, a symptom of the digital revolution. Since 2008, Marion County has lost 25% of its bank branches.

Advocates for the poor say access to physical branches—and the knowledge of the tellers inside—remains important.

“Having an online banking app is beneficial for some,” Heck said, “but if someone doesn’t know how to use it or [doesn’t have] the technology to use it, there’s a hurdle.”

The lack of access to a branch has stymied Shawn Eldridge, an east-side resident who on weekdays sells chili cheese dogs, sausages and hot dogs from a stand in the Martindale-Brightwood neighborhood.

When Eldridge launched Dog on Right LLC last year, he knew he would need a bank account, so he opened one at the Chase branch at East 12th Street and Arlington Avenue.

“I wanted to be legit when I started this business,” Eldridge said. He’d spent years, as he described it, being “young and dumb” with money.

Less than a year later, Eldridge will have to figure out a new place to deposit cash. The Chase branch will close in August, the latest sign of what residents in poorer neighborhoods see as a lack of commitment by banks to serving less-moneyed areas.

“It seems like it may be inequality—who knows?” Eldridge said.

But Chase spokeswoman Carlene Lule told IBJ that Chase remains committed to Indianapolis, with 66 branches and 169 ATMs in the area, including six near the branch that’s closing.

“Like any good retailer, we constantly evaluate our branch network to ensure we’re in the right locations as our customers’ needs change,” Lule told IBJ. “Sometimes we consolidate a branch when another is nearby or traffic is low.”

‘Banking swamps’

Meanwhile, the payday loan and alternative financial services industry has flourished in low-income areas, offering a potentially dangerous, yet some say necessary, option for people strapped for funds.

Though derided by some as akin to legal loan sharking, alternative financial services have this going for them: They’re plentiful in the city’s poorest areas and offer a means to capital and face-to-face service.

Felicia Cox, manager of Financial Health Federal Credit Union’s Arlington Woods branch, assists member Allie Harris. (IBJ photo/ Daniel Axler) Felicia Cox, manager of Financial Health Federal Credit Union’s Arlington Woods branch, assists member Allie Harris. (IBJ photo/ Daniel Axler)

The half of Indianapolis ZIP codes with the lowest poverty rates have a combined 15 payday loan shops, according to an IBJ analysis of Indiana Department of Financial Institutions data. The half with the highest poverty rates have a combined 39 payday loan shops.

The four poorest ZIP codes—46218, 46222, 46201 and 46224—contain 12 of those shops. Meanwhile, the four ZIP codes with the lowest poverty rates—46259, 46278, 46234 and 46236—have just two.

Anthony Murdock, pastor at Eastern Star Church, described the city’s low-income areas, brimming with payday loan shops and liquor stores licensed as check-cashing places, as “banking swamps.”

“There may be places to get financial services, but it’s going to hurt you more than help you,” Murdock said. “They’re selling to people this idea that, ‘Other people won’t help you, but we will.’ They see themselves as providing a great service. I believe it’s legalized loan sharking.”

The typical payday loan has an 382% annual percentage rate. Borrowers renew 60% of payday loans two weeks later, the same day the previous one is due.

More than 80% take out another loan within 30 days, with many borrowers taking out eight to 10 loans a year, according to the Indiana Institute for Working Families. About 70% of payday borrowers are behind on a bill, like utilities or rent.

“If I’m short $300 now, the likelihood I’m going to have $400 in two weeks is just not there,” Macey said.

But advocates for the payday loan industry say they’re providing a needed service. Jamie Fulmer, senior vice president for public affairs for Advance America, which operates 10 stores in Indianapolis, said, “The need for reliable and safe forms of small-dollar credit remains intense in this country.”

Fulmer said banks long ago made a decision they “no longer wanted to serve consumers with small-dollar loans.”

Bowerman, the single mom of two, said she used to use payday loans. A few years ago, when her bills got particularly out of hand, Bowerman took out a $600 advance on her salary that would cost her $695 when she’d repay it.

“Every time, I had to keep reborrowing,” she said. “When it was time for me to pay it back, I realized I was in a cycle. I had to figure out how to get out of it.”

James Wilson, a community leader in the Martindale-Brightwood neighborhood, said most people he knows who use payday loans believe it’s predatory but don’t feel they have options.

“I know they’re pulling one on me, but I still need it,” Wilson said. “It just is what it is. I’ve got to pay my bills. What’s my other option?”

Some residents have alternatives, but those choices don’t offer the same immediate gratification.

At Mount Zion Federal Credit Union, a tiny, 400-member institution associated with Mount Zion Church that primarily serves church members, Indianapolis resident Doris Doggett is trying to “help people break that cycle” of payday lending by offering small loans.

But there’s a problem: The payday loans “are instant. We are not,” Doggett said.

“With payday lenders, you just walk in and they can instantaneously give you the money,” she said. “It’s convenient.”

‘Unbankable’

The lack of access to banks in 46218 led Eastern Star Church to attract a credit union to the east side—a step Murdock said is vital to improving the financial health of the neighborhood.

Financial Health Federal Credit Union, which formed in 1971 to serve Methodist Hospital but now has six branches in Indianapolis, opened a branch last fall in Arlington Woods on the far-east side.

It’s quickly gained popularity with residents, who’ve opened nearly400 accounts.

“We have a lot of people who are unbankable,” said Felicia Cox, the branch manager.

Credit unions are not-for-profits whose members own the institution. They are federally insured by the National Credit Union Administration. They often offer lower loan rates, charge lower fees, and require lower deposit balances than for-profit banks.

CEO Shawn Wolbert said banks and credit unions have different incentives, which changes their relationship with low-income borrowers.

“Banks are owned by a group of shareholders and the bank’s job is to deliver a return on investment to the shareholders,” Wolbert said. As a result, banks are motivated to take fewer risks than credit unions might.

“The risk of serving [low-income people] is much higher … . We’re going to take higher losses on our loans and have higher write-offs to the risk we take to try to help people, but our board is committed to providing that service.”

Lara Lara

For example, Wolbert said, Financial Health’s charge-off risk is about 3%, meaning 3% of the credit union’s assets, or about $900,000, are at risk of loss from customers not paying their cards or overdrawing their accounts.

“Our regulators really have a hard time with us being different from other financial institutions,” Wolbert said. “But this is our mission. Every loan we do to help is a loan no one else would do.”

One Financial Health customer is Cherise Sanders, who said she opened checking and savings accounts with the credit union shortly after it opened in the neighborhood.

Sanders, a dialysis technician who is trying to save money to put a down payment on a house, said she believed the credit union would do more than a traditional bank to help her save money.

She said the credit union regularly encourages its members to build emergency funds and start saving for Christmas gifts early, and it offers low-interest-rate, smaller loans.

“They work with you to build your credit,” Sanders said. “I think it’s a great credit union.”

Market reform

On a national level, some politicians and advocates for the poor are pushing for big structural changes.

Vendor Shawn Eldridge will lose convenient access to a bank when his Chase branch at East 12th Street and Arlington Avenue closes in August. (IBJ photo/Hayleigh Colombo) Vendor Shawn Eldridge will lose convenient access to a bank when his Chase branch at East 12th Street and Arlington Avenue closes in August. (IBJ photo/Hayleigh Colombo)

Some Democratic presidential candidates—including Bernie Sanders, Elizabeth Warren and Kirsten Gillibrand—have championed postal banking: providing low-cost financial services via the U.S. Postal Service, which has offices in most communities.

According to the Campaign for Postal Banking, 59% of post offices are in ZIP codes with either no banks or only one.

Postal banks would offer such services as check cashing, bill payment, savings accounts, and small loans.

“They’re worth considering,” Prosperity Indiana’s Lara said. “We’re looking at all the options. What we would like to see is reform of the market that cuts down on predatory activity and [expands the type] of lending wherein mission-driven organizations are fulfilling community credit needs.”

Lara and other advocates are pushing for reforms at the state level, as well.

Community groups, veterans’ organizations and churches have tried unsuccessfully for years to get the Indiana General Assembly to reimpose a 36% annual interest-rate cap on payday loans.

Prosperity Indiana is working with community groups and lenders to create a payday-loan alternative: community loan centers, designed to grant up to $1,000 loans at a maximum interest rate of 18%. Borrowers have up to a year to repay.

The program, which originated in Texas, relies on local lenders partnering with employers, which offer the service as a payroll deduction.

So far, community loan centers serve 22 Indiana counties, but not Marion.

Prosperity Indiana’s Logan Charlesworth said the program would be valuable in Indianapolis. The hurdle is that a not-for-profit would have to agree to run the center, and it would need to raise $100,000 to $250,000 to make the initial round of loans.

“There is interest, but it’s a matter of getting it started,” Charlesworth said. “A program of this size and of this undertaking takes a lot of effort. Nonprofits are stretched pretty thin already.”

‘I need cash’

Financial counselors are doing the day-to-day work of helping residents understand the ins and outs of banks, payday loans and budgeting, to try to escape the cycle of fees.

Gamble-Moore Gamble-Moore

But it’s hard to reach people before a crisis strikes.

“They come through the door with an immediate, ‘I need cash’ crisis,” said Schrimshaw, the Center for Working Families executive. “You have to deal with those issues to get people even to a point where they can start thinking more long term.”

There are victories. For instance, Heck said he helped a client finally pay off the sixth refinancing of a payday loan.

And Taylor’s work with single-mom Bowerman has drastically improved her finances.

When the two started working together in December, Bowerman’s monthly budget was negative $200. The next month, she would be negative $100. Then negative $50.

“Now, I have $40 left for the month,” Bowerman said. “It has gotten better. Kim is a blessing to me.”

Without counseling, Schrimshaw said, people are left to navigate the system by themselves.

“People are living paycheck to paycheck,” he said, “and have to make the best bad choice they can.”•