Banks Springing Up to Serve the Underserved

A customer at Nuestro Banco, whose long-term goal is to become a regional Hispanic bank in the Southeast.

AT first glance Raleigh, N.C., may not seem like a logical place to open a Latino-oriented bank. After all, Raleigh is not a city like Los Angeles, for instance, where more than 47 percent of the population is Hispanic.

But David Flores, a former senior vice president at Chase Manhattan Bank, looked at the skyrocketing Hispanic population in North Carolina — from 1990 to 2006, it rose to 593,385 from a mere 76,726 — and saw a business opportunity.

Last September, Mr. Flores opened Nuestro Banco, offering a host of specially tailored services that other banks in the area were not, among them check cashing for new immigrants and small business loan applications in Spanish. The bank building is replete with Hispanic-inflected touches: a stucco exterior with a tile roof and bilingual signs.

“Our long-term goal is to become a regional Hispanic bank in the Southeast,” said Mr. Flores, the bank’s president and chief executive.

Nuestro Banco is certainly outside the mainstream of banking in this country, a mainstream dominated by financial giants like Bank of America, Chase, Wachovia, Wells Fargo and Citibank. But many bankers and banking customers find benefits in that niche position, where particular consumer and small-business demographics can be accommodated — to the profit of all.
For bankers, focusing on a niche is a way to set themselves apart from the competition.

“If a person sees three banks on the same block, each one offering the same products at the same price, what differentiates you?” asks Steven F. Young, senior vice president for consumer banking at Wainwright Bank and Trust in Boston. Wainwright’s reputation as a socially responsible bank that invests most of its deposits in community development and progressive nonprofit organizations “has led us to be very profitable,” Mr. Young said. “People like what we’re doing with their money.”

For consumers and small businesses, niche banks offer products, services and expertise that are often unavailable elsewhere. “With the big banks, you have a fairly impersonal relationship,” says Ingo Walter, a finance professor at the Stern School of Business at New York University. “Small banks are part of the community and people perceive that they get a different level of service.”

Though no one keeps records indicating whether the number of niche banks is rising or waning, experts in the banking field see growth in three particular areas: Hispanic banking, environmentally responsible banking and banking aimed at observant Muslims.

Hispanic-focused banks are the largest trend, Mr. Walter said. “It’s a giant-sized niche.”
The number of Hispanics in the United States is expected to triple by 2050, to more than 102 million. According to a 2004 report by the Federal Deposit Insurance Corporation, the “rapid growth of the underbanked Hispanic market suggests a new growth opportunity for many institutions.”

In fact, Mr. Flores said, “25 or 30 Hispanic banks are either starting up now or have started up in the last two or three years.” Among them is Plaza Bank in Seattle, which offers low-fee fund transfers and Spanish-language checks, statements, loan applications and online banking. “All of our personnel are bilingual and bicultural,” says Carlos Guangorena, Plaza Bank’s chief executive. “That helps people who haven’t been banked come into the fabric of the economic community.”

Similarly, many of the nation’s almost five million Muslims have special banking concerns that often go unaddressed by mainstream banks. In particular, Sharia, Islamic law, forbids the charging or paying of interest. “This hampers most bank transactions,” said Amjad Quadri, assistant vice president for business development and new markets at the University Islamic Financial Corporation, a bank based in Ann Arbor, Mich. As a result, many Muslims decide to rent rather than buy homes. “And most Muslims only have interest-free checking accounts and credit cards that they pay off at the end of the month,” Mr. Quadri said.

To accommodate special concerns of Muslims, University Islamic, with additional offices in East Brunswick, N.J., and McLean, Va., offers rent-to-own agreements for home buyers, along with savings accounts that offer “profit sharing” rather than interest. (The bank’s profit-sharing rates are competitive with those at other financial institutions.)

This profit-sharing strategy has enabled Haaris Ahmad, a lawyer in Canton, Mich., to earn money in a money market account for the first time. “Now, my wife and I get the same benefits that other people have, but in a way that’s compliant with our faith requirements,” Mr. Ahmad said.

For environmentalists — be they consumers or small- business owners — banking with a large bank can pose problems as well since large banks are often the underwriters for projects like coal-fired power plants and unsustainable logging. “I was concerned that a bank was going to invest my money in companies that might help cause global warming or human rights abuses,” said Adam Taylor, a green building engineer in San Francisco.

Mr. Taylor had been a customer of the West Coast banking giant Wells Fargo. But in 2006, he decided to switch his accounts to the New Resource Bank in San Francisco, which invests its deposits in green businesses. “If I was thinking about where my coffee beans were coming from,” Mr. Taylor said, “why wasn’t I thinking about who was investing my life savings?”

The founder and vice chairman of New Resource Bank, Peter Liu, says his bank understands green businesses in a way many mainstream banks do not. “A lot of times, in lending, it comes down to an assessment of risk,” he said. “If you don’t understand the business, a banker will see a lot of perceived risks — like the higher price point of organic food — as opposed to real risks.”
Those kind of perceptions can lead some larger banks to deny financing to green businesses.

“When you focus on an industry, you learn to appreciate the real risks and you underwrite to those.”

Banks like New Resource and ShoreBank Pacific of Ilwaco, Wash., often introduce products and services tailored to the special environmental interests of customers. ShoreBank offers free consulting to small businesses.

“When borrowers come to us,” said Laurie Landeros, the bank’s vice president for ecodeposits, “we help them move up the scale on their environmental and social health, as well as their fiscal health.”

New Resource Bank introduced a reduced-rate home equity loan that allows homeowners to purchase solar electric and thermal systems with no money down, at rates that are often lower than their monthly electric and home heating bills.

Mr. Walter of New York University said he did not “see any evidence of a systematic shift in market share,” from large banks to niche banks. But at a time when the large banks make many users feel like numbers rather than cherished clients, he added, “customers appreciate the service the niche banks offer.”