PEOPLE COME to Kyung Choi for help when they are in pain and because he speaks Korean. He runs a massage therapy business in south Tacoma that is part of a strip mall of Korean-owned businesses. Choi says running his own business was what he always wanted to do, ever since he immigrated to the United States with his family in the 1980s. But starting his business wasn't easy. Tacoma's TwinStar Credit Union turned him down for a loan because he had no credit history. "I had to wait three years before they would give me the loan," says Choi. In the meanwhile, he worked as an assistant for his church pastor and as a caretaker at a Korean retirement home, while his father worked as a janitor.

But when Pacific International (PI), a Seattle-based Korean-American Bank, opened a branch across the street from Choi's business on South Tacoma Way, he opened an account with them. And this month, he'll apply for a loan to open a second massage center in Federal Way. He says he feels more comfortable banking with Korean bankers.
 
"When I walk in there, it feels like I'm in Korea again," Choi says. "They speak my language, and I feel like I'm visiting family rather than a business. That is how my customers feel when they come in for a massage."

Customers often turn to PI Bank, says Steven Faust, senior vice president at the bank, because the bank is more flexible when it comes to approving loans. While mainstream banks look primarily at customer's assets, debt ratio, earning history and credit history, Pacific International also takes into account other factors, such as whether family members are working at the business and will help stabilize it with their labor and commitment, and the assets the loan applicant may still have abroad. While those assets aren't guaranteed to be secure, the bank will nevertheless accept them as part of the loan applicant's financial picture.

"Biographical facts like these," says Faust, who has held positions with Wells Fargo, First Interstate Bank and Bank of America, "are going to carry less weight at mainstream banks during the loan approval process." He adds that even if a mainstream bank does agree to provide a loan to an immigrant, the bank is likely to conclude that the customer represents a higher credit risk and charge a higher interest rate.

The family connection is one important aspect in considering loan applications from the immigrant community, adds Faust. Many of the businesses PI Bank finances are retail operations in which both husband and wife, and often the children, work to keep it open for extended hours seven days a week. Those families may have a network of contacts to draw on for employees, to help with permitting, taxes or accounting, and to act as loan guarantors to help their relatives get started in business.

Such tightly-knit immigrant communities can also be an easy source of character references, who may even be found among the bank's staff, directors or other trusted members of the community. "Character is very important to us," explains Faust. "In small businesses, owners have complete control of cash flows. Willingness to sacrifice if necessary to pay debt is as important as capacity to pay debt."

He adds that the experience of immigrating to the U.S. is itself an indication of strong character. "An important intangible for us is understanding how the applicant has overcome difficulties in the past," he says. "Immigration is a wrenching and empowering experience, so we begin by crediting first-generation loan applicants with a certain amount of spark and grit." Confronting past difficulties in a straightforward manner and putting obligations to others ahead of personal comfort can help overcome an applicant's limited credit history, Faust says.

Pacific International is one of 110 ethnic banks nationwide that are benefiting from a growing mixed community of ethnic minorities and recent immigrants. These banks have led the industry in asset growth for the last seven years, and though their financial resources, branches, and profits don't match those of mainstream institutions, their growing customer base has helped to narrow the gap, says William Cunningham, CEO of Creative Investment Research, a Minneapolis-based research and management firm. In 2004, the return on assets declined in the U.S banking industry by .09 percentage points, while it increased by .19 percentage points for minority-owned institutions, narrowing the gap in returns between ethnic banks and mainstream banks. Cunningham expects ethnic banks to con- tinue to catch up with  mainstream banks.

COURTING THE UNBANKED
Mainstream banks also have begun to see potential in developing banking relationships with minority communities. But they tend to regard the business as just one of many important market niches. John Rindlaub, CEO of Wells Fargo Bank's Pacific Northwest Region, argues that banks in Washington state that specialize in serving ethnic communities have benefited from a strong overall economy in the region. "A lot of money has been made and people are looking for places to invest," says Rindlaub. "It's a good market in which to start up a bank." But Rindlaub expects ethnic banks to remain a relatively narrow niche in the overall banking business because almost all banks, large and small, have committed resources to serving ethnic communities. They are developing new marketing campaigns, adding new staff and establishing strategic partnerships with community outreach organizations to reach these customers.

In 2003, US Bank partnered with the United States Hispanic Chamber of Commerce and pledged to lend more than $1 billion to small businesses in high-growth Latino markets nationwide. In return for attracting customers, U.S. Bank gives referral payments to the local chambers for every loan that is booked through the program. Different variations of minority lending programs like this can be found in all mainstream banks, which are revamping their marketing approach in order to better relate to their minority customers.
   
Using bilingual bank tellers who can make customers feel more comfortable is the "number one focus" when it comes to targeting ethnic communities, says Chris Heman, US Bank regional manager in Seattle. He says the diverse branch staff and "Capital!" - a small business loan program targeting the Latino market - have increased minority customers exponentially.

A few years ago, King County branch employees of Bank of America created banking teams - Chinese, Korean, Vietnamese and Latino - to build their customer base and interact with communities. Each team looks for new ways to market to the specific communities.

Bank of America will pay for any event or membership that banking team members want to join in order to get more direct contact with the communities. Similar teams have formed in other minority-concentrated areas across the country.

Immigrants belong to a category of people often referred to as the "unbanked," because many of them don't have bank accounts. Banks have traditionally ignored them because they did not meet their underwriting standards. Among the estimated 28 million people who make up the unbanked, about 11 million of them are undocumented immigrants. And an estimated 3,000 new immigrants arrive in the United States each day, adding to those numbers. Analysts estimate that the unbanked nevertheless receive, through their labor and through social services, almost $1 trillion each year, and that many start small businesses and build substantial savings.

Although mainstream banks want to attract minority customers, they often have trouble defining them as customers because many immigrants lack identification, have little or no credit history, and have unsteady flows of income. So in recent years, big banks have been changing the structure of traditional banking to better attract the nontraditional bank customer, especially the Hispanic immigrant. One recent change is that some banks are now accepting the Matricula, an ID distributed by the Mexican consulate, and the Mexican Voter Registration ID, as documentation for opening checking accounts. Some banks consider the IDs sufficient documentation for home loan approval. These policies have invited a rush of new customers who are likely to use other services these banks offer, such as wire transfers.

Capitalizing on the estimated $200 billion industry in remittances (money sent to family members in home countries), banks now offer money transfer options and ATM remittance services to Mexico and Latin America, and last year the Bank of America made their wire transfer services free.

In 2004, Wells Fargo experimented with a program called Farm Worker Outreach in central California, which still exists today. By teaming up with local nonprofits and lending money to undocumented farm workers of Latino, Thai and Hmong origin, the bank helped workers build repayment histories through their utility bills, jewelry, furniture and rent payments, in hopes of making them Wells Fargo customers.

This approach to cultivating new customers is probably the most successful strategy mainstream banks have tried. But these banks still face a challenge gaining the trust of ethnic communities. Many of the new low-income minorities come from countries that either have corrupt businesses and governments or have weak, unstable banking systems. These people would rather keep their money hidden away at home. Some immigrants have become victims of loan sharks, who charge exorbitant interest rates. Such experiences make them more reluctant to deal with financial institutions.

Even today, predatory lending is at an all-time high, says Cassandra Espinoza-Rowe, a marketing adviser to US Bank and to Plaza Bank, a bank that opened this summer in Kent, which caters largely to Latinos. "It's a huge issue and it makes it even more difficult for legitimate institutions to step up to the plate and say, 'We want to help.'"

To overcome suspicion, banks are relying on word of mouth. Billions have been poured into local education campaigns that consist of workshops, seminars, educational materials for K-12 outreach and support for nonprofits and low-income housing. "You can't just put top dollars in major cities anymore, because minorities are everywhere now," says Rowe.
 
Once mainstream banks achieve trust, they have a strong competitive advantage as a result of their expansive 24-hour automated telephone services, bank branches and ATMs. By combining outreach and structural change, mainstream banks are now able to meet the credit needs of the poor in the areas where they do business - exactly what the federal Community Reinvestment Act (CRA) of 1977 required.

The CRA was established by Congress to prevent banks from discriminating against poor communities, and it requires that banks offer equal access to financial services to all those in their surrounding areas. But until now, the CRA had only existed on paper, and banks got by with just meeting its minimum requirements. Efforts reached only as far as setting up a single branch in a low-income area that extracted deposits from the residents but did not offer them loans, according to William Cunningham of Creative Investment Research. "Mainstream banks have always been pressured to meet CRA requirements," says Cunningham. "In the past, they fought against the CRA, because they thought they were being forced to give unprofitable loans. After some activism and research, they found out that's not the case."

What was perceived in the past as "unprofitable" promises to be a competitive advantage for mainstream banks as they capitalize on changing realities in the industry and commit more of their resources to ethnic and immigrant communities. And the strategies of the so-called "niche banks" are showing them how.