Second Chance Banking: A Guide for Returning Citizens

Learn about second chance banking options for returning citizens, how ChexSystems affects account approval, and why joining a credit union may be the best path to financial independence.

Formerly incarcerated individuals face significant challenges when it comes to accessing mainstream banking services — and second chance banking programs exist to help close that gap. Limited access can have a huge impact on economic wellbeing and the ability to achieve sustainable financial independence.

More than 600,000 people are released from our prison systems every year and attempt to rebuild their lives – many are unbanked or underbanked and credit invisible.

While there is increasing support from government and community-based organizations for housing and employment, when it comes to affordable financial services, many people hit a roadblock. Formerly incarcerated individuals frequently encounter a financial system that doesn't welcome them back into the mainstream, often forcing them to use check cashers, payday lenders, and other high-cost, non-bank options. They have difficulty opening a checking account, have often had their identity stolen, and find it nearly impossible to get a loan.

But the news isn't all bad. There are several options for justice-involved individuals in today's market. Being an educated consumer with a better understanding of each of these providers — and their advantages and disadvantages — can help you decide which option may be best for you.

What are Second Chance Banking Programs?

Second chance checking may be an option if you've been unable to open an account due to prior banking problems. Consumers can access these programs through financial institutions located in all 50 states. However, because of the higher risk, the terms and conditions may be less attractive than accounts available to general consumers. Many financial institutions impose service charges, minimum balance requirements, or other account restrictions.

On a brighter note, a number of credit unions and banks have started offering more affordable products aimed at helping underbanked and unbanked communities. The Cities for Financial Empowerment Fund's national Bank On platform supports financial institution efforts to connect these consumers to safe, affordable bank accounts.

To learn more, download our free guide to affordable banking options for returning citizens.

Banking with Fintechs

These "challenger" or "neobanks" typically have great technology platforms and are easy to use and convenient. Some do not use credit reporting agencies, like ChexSystems, as part of their account screening process. This means it may be easier for people with prior banking or other issues to open a new account than at most traditional financial institutions

Fintechs do have their limitations, however. While the technology may be state-of-the-art, the products available on these platforms are usually limited to basic checking accounts and debit cards. There may be some other bells and whistles thrown in, but essentially that's it.

Many of these for-profit providers earn the bulk of their revenue from interchange fees — fees paid by merchants to card providers based on a percentage of the transaction amount. This means the more often you "swipe" your debit card, and the larger the purchase, the more money flows back to the fintech. Overdraft fees and out-of-network ATM fees can be another substantial source of revenue for these banking providers. So be sure to read the fine print, especially when a fintech claims it has "no hidden bank fees."

Fintechs are generally low-touch by design — most don't offer the financial guidance and counseling that banks and credit unions typically provide, since their business model depends on scaling accounts and transactions quickly rather than building long-term relationships.

Fintechs are generally transactional, not relationship-oriented

It's definitely worth reading the fine print carefully. In one notable case, JPay — a dominant for-profit provider of financial services to prisons and jails nationwide — was fined $6 million in consumer redress and penalties by the Consumer Financial Protection Bureau (CFPB) for charging excessive fees on prepaid debit cards that formerly incarcerated individuals were forced to use to access their gate money and other funds owed upon release.

Before you open an account with any provider, you should know what to expect, and whether the products, pricing, and customer service is consistent with your needs and financial goals.

To be sure, technology platforms certainly have value and can save people time and sometimes even money, but they may be better suited to individuals who do not require additional support services, such as mentoring and credit counseling, or access to a broad range of loan, savings and retirement planning products.

The Credit Union Difference

Individuals restarting their financial journey should consider the value of developing a long-term relationship with a traditional financial institution. Many of these organizations provide consumers with important financial guidance from knowledgeable professionals who can help them improve financial health, build credit, and create wealth. Community-based credit unions are particularly committed to helping individuals and families facing financial challenges. Credit unions, in particular, are not-for-profit financial institutions know to be more about people than profits.

In the United States, there are nearly 6,000 credit unions providing services to more than 100 million members. Like banks, credit unions accept deposits and make loans. But when someone joins a credit union, they become a member-owner, not just a customer.

Credit unions are not-for-profit financial institutions that exist to serve their members, and provide a safe place to save and borrow at reasonable rates, rather than concentrating on profit margins, as do most banks.

Banks and fintechs are for-profit entities that are generally owned by individuals and/or companies (i.e., shareholders). When banks or fintechs show a profit, they return most if not all of the money to these investors. Credit unions, on the other hand, are owned by their members who are people in the community that have accounts and loans with the credit union. Unlike their for-profit counterparts, credit unions return profits to their members in the form of higher savings dividends, lower loan rates, and other perks like ATM Fee reimbursements. In addition, savings and checking accounts have lower fees and minimum deposit requirements than at most banks. A credit union manages the collective resources of their members, so every business decision they make is with their members’ best interests in mind. A credit union may also be more willing to work with someone who has poor credit or difficulty qualifying for a loan.

Aside from access to broad financial products and pricing benefits, credit union members also receive exceptional customer service.

When you open an account at a credit union, you're more than just an account number — you're a member of a community. Credit unions also offer a wide variety of financial education resources to help members improve their knowledge and meet their financial goals. As "financial cooperatives," credit unions work with each other in ways for-profit banks cannot. The national network of credit union service centers known as the Co-Op Shared Branch Network, allows credit union members to visit Shared Branch locations across the US for basic banking transactions — no matter where you're located, you're probably not far from a partner credit union or ATM network.

Credit unions create lifelong relationships with their members.

How many times have you heard someone say they got their first car loan from a credit union and are still with the same credit union to this day? That kind of loyalty comes from the relationships credit unions build with their members and their commitment to helping people create a healthy, secure financial future.

Ready to Take the Next Step?

Opening the right account is one of the most important steps toward financial independence after incarceration. Whether you're weighing second chance banking, a fintech option, or a credit union membership, you don't have to figure it out alone.

First Step Alliance is working on starting a new credit union tailored to the needs of justice-involved people and their families — and in the meantime, depending on your location, we can refer you to several credit union partners.

●      Download our free guide for a list of some affordable banking options

●      Schedule a call with one of our financial coaches to talk through your situation