A Rich Man's Problem
Financial Inclusion in the United States
Surely, financial exclusion is only a problem in developing countries! Or is it?
When I came to live and work in the UK many years ago, I faced an uphill battle to open a bank account. I was close to penniless as my salary was not going to be paid in cash. Having held a bank account when growing up in Germany and a credit card even as a student, difficulties associated with financial exclusion were beyond my radar. Even in high-income countries, financial inclusion is a matter of concern to their governments. This post explores financial exclusion in one of the richest countries – the United States.
Who are the Unbanked?
The interactive tool provided by the World Bank to extract data from the Global Findex database shows that 93% of Adults older than 15 years in the US have bank accounts. Not much change had been recorded between their 2014 and 2017 surveys:
As a national average, just under 7% of adults do not have bank accounts in 2017. In rural areas, it is slightly more and it has actually increased more than the national average since the last survey in 2014.
For the reasons, we need to turn to other surveys, such as the FDIC survey from 2015. They also translated the percentages into numbers:
“Approximately 9.0 million U.S. households, made up of 15.6 million adults and 7.6 million children, were unbanked in 2015.”
They also revealed a staggering 19.9 % of U.S. Households that were “underbanked” which means that they have a bank account with a regulated and insured financial institution but either did not use it and/or use other financial services outside the banking system. Those were money orders, check cashing, international remittances, payday loans, refund anticipation loans, rent-to-own services, pawn shop loans, or auto title loans. Above average un(der)banked rates were found among lower-income households, less-educated households, younger households, black and Hispanic households, and working-age disabled households.
Why are they not using bank accounts?
Income volatility, the variation between weekly/ monthly incomes in a household, plays a significant role in the banking status. This is closely related to the most often cited reason for not having a bank account: having not enough money for keeping an account. Privacy and trust issues, and previous experience of high or unpredictable fees were also among the most cited reasons.
What are the consequences?
In June 2016, the Obama administration published a report about the state of financial inclusion in the U.S. It acknowledges that there are still too many households whose financial needs are not met.
“By turning to alternative financial services, families often face substantial costs, including not only direct monetary ones but also lost economic opportunities. These costs disproportionately affect households with the fewest resources,... “
For example, the cashing of checks can cost between 1-5% of the cheque amount. Not seldom, a household with annual earnings of USD22000 easily pays USD1000 in fees whereas a checking account would typically cost in the region of USD100. Households who do not have access to affordable services are less likely to invest in education, property or businesses. They are also less likely to be able to manage economic shocks.
How is this being addressed?
The Treasury Department's financial inclusion initiative was followed up by The Atlantic in November 2016. Increasing media attention and the creation of the Consumer Financial Protection Bureau (CFPB) “tasked with protecting consumers and ensuring fair and equitable financial access to financial products” led to greater awareness. It also started a momentum that built on and strengthened the work of non-profits and other groups addressing the needs of the un(der)banked. “Many of the solutions for the U.S. involve boosting financial access within communities by encouraging investment and community-banking initiatives. The Community Development Financial Institutions Fund (CDFI) program has taken on the challenge of providing small-dollar loans as a replacement to costly payday and auto-title options that have recently been become subject to new regulations by the CFPB.” The Obama administration still launched the IRA savings plan My Retirement Account (MyRA) which had 15000 subscribers at the time the article was published. It also planned to introduce financial literacy training into workforce development and set up the Franklin Fellows program to attract experts helping the administration to advance financial inclusion. Judged by the lack of publications about this topic by the Trump administration and the drop of the MyRA still in 2017, it may have taken a back-seat (again).
For now it seems that financial inclusion efforts again mainly rest on the shoulders of private and non-profit organisations, such as Elevate, a Texas based online lender focusing on the non-prime market (= not immediate credit-worthy).
The U.S. Based company Oportun even has 270 physical outlets. Their instalment loans typically carry an interest rate of 32%. The required basic documentation for their automated loan approval process is scanned and decisions are available within minutes also using advanced data-analytics. The terms and repayment amounts are set to what they believe the customer can afford. By reporting their lending to credit bureaus, they help their clients to build credit histories. Oportun was a finalist in The Wall Street journal financial inclusion challenge: “Oportun has disbursed more than $5 billion through 2+ million loans and helped nearly half a million people establish credit history for the first time. “ An independent research estimated that Oportun saved their clients in excess of $1.1 billion.
Hope won the Wall Street Journal's financial inclusion challenge in May 2018. HOPE (Hope Credit Union, Hope Enterprise Corporation and Hope Policy Center) improves lives in Alabama, Arkansas, Louisiana, Mississippi and Tennessee, regions that are among the most impoverished in the US. From its beginnings in 1994 to today, “... HOPE has generated over $2 billion in financing that has benefited more than 1 million people.”
Are there some learnings?
Not every product design and delivery to the un(der)banked works out as expected as in the experience of RiteCheck and IPA (Innovation for Poverty Action). They developed a simple no-fee savings account for check cashing customers called “Cash & Stash”. Instead of the expected increase in savings, marketing reminders significantly increased the number of transactions made from the accounts. This surprising usage pattern challenged their perceptions of financial well-being. Almost at the same time, September 2017, the CFPB published the first ever undertaken National Financial Well-Being Survey. It shifts the focus from products and providers to the ultimate goal of financial inclusion: financial well-being. The survey found that four pivotal elements in financial well-being: financial security, control, flexibility and achievement of financial goals. Thus, “Cash & Stash” may have actually increased financial well-being through giving their customers more flexibility and control. They conclude:
“..we need to think outside the box when it comes to measuring financial well-being, especially as we become more product and provider agnostic.”
2015 FDIC National Survey of Unbanked and Underbanked Households published in October 2016: https://www.fdic.gov/householdsurvey/2015/2015execsumm.pdf