Remittance Services Can Help Your CU Tap Hispanic Market

thePoint
February 4, 2005

Financial institutions would do well to keep expanding their offerings for the Hispanic market with mortgages, credit cards, and other personal banking products, two FDIC reports conclude.

For 30 years the growth in the Hispanic population has been based on immigration, but over the next 20 years, second- and third-generation Hispanics will account for 75% of the group's population growth, according to a study cited by the FDIC. This population is "likely to grow into a large and profitable market segment ripe for greater development," said a report in the winter edition of the FDIC Outlook. But the report also focused on what many say the Hispanic market wants now: remittance products and financial education. In the Midwest, both small and large institutions are capitalizing on remittance flows as a short-term strategy to draw immigrants into the formal banking system.

More than 200 credit unions in the U.S. offer remittance services through IRnet—an international remittance program sponsored by the World Council of Credit Unions (WOCCU) and CUNA. The average cost of a transaction via IRnet in 2003 was 2.64%--well below the industry average of 4.4%. Last May, more than $32 million was transferred via IRnet, which was the best month ever on both the sending and receiving end, according to WOCCU.

At least 60 banks and thrifts offer remittance products, according to the FDIC report. Some banks are beginning to use the automated clearinghouse service offered by the Federal Reserve System and the Mexican government as a cheaper alternative to wire transfers. And about 178 are accepting matricula consular cards for opening accounts, according to the Mexican government.

Mortgage products designed for the Hispanic market are less widespread. The $84 million-asset Mitchell Bank is one of the few banks to offer them, according to a recent American Banker.

The Milwaukee bank makes the mortgages available to those with taxpayer identification numbers, which the Internal Revenue Service issues to people who pay federal taxes but are not eligible for Social Security numbers. (Interest-bearing accounts and loans require customers to have a government ID number for tax purposes.) Mitchell Bank has made about 40 such loans this year—twice as many as last year—as word has spread in the Hispanic community. Mitchell offers 30-year fixed-rate loans at market rates, and none have defaulted in the program's four-year history. Typical borrowers have been in the United States for about six years and at their current job for at least two.

Still, the FDIC says the market is largely untapped. "The difference in homeownership rates by ethnicity demonstrates the potential demand in this largely untapped market," the Outlook report said. "As Hispanics become more acculturated and their incomes rise, they should become a major source of demand for mortgage products."

The national homeownership rate was 69.3% as of June 30, versus 47.4% for Hispanics. Other indicators that the Hispanic market will keep growing include a study the FDIC cited that says the group's purchasing power is expected to approach $1 trillion by 2009. Additionally, the number of bank branches in the 277 U.S. counties deemed high Hispanic growth areas grew 8% from 1994 to 2000, versus the nationwide growth rate of 5%, according to data analyzed by the FDIC. Deposits in these counties grew 53% over the same period, compared with 27% nationwide.

Whatever institutions do to target the Hispanic market, they must first build trust with customers and be prepared to work with the community.

This story first appeared on The Point for Credit Union Research and Advice website at http://thepoint.cuna.org. Reprinted with permission.