Underserved and Underestimated

I've spent most of June at events that have explored how best to help underserved financial consumers. Beyond the American Bankers Association regulatory gathering in New Orleans (see prior blog post), I was at the exciting Emerge conference of the Center for Financial Services Innovation in Los Angeles, and then at a meeting of CFSI's board, on which I serve. Last week I was in Reno with the CFPB's Consumer Advisory Board -- I serve on that as well.

I sense a turning point in how both industry and government think about the stubborn, seemingly unsolvable problem of the underserved, the "underbanked." It's complex, but a starting point is to replace old stereotypes with some new insights:

• First, lower-income people are typically more, not less, savvy than average consumers in handling their money, simply because they have to be. They generally know what money they have coming in, and when, and what they need to pay for, when, because they have tight timetables with little cushion. Most are playing close attention.

• The data are striking: lower-income people have very high rates of smart phone usage, not for banking, but for many financial functions like payments and shopping for discounts. This is a powerful foundation on which to build new, inclusive, affordable financial services.

• This means many actions that look "irrational" to financially comfortable bankers and policymakers may actually be smart choices. For instance, conventional wisdom assumes everyone benefits from using a bank. But what if you must pay a bill immediately upon receiving the funds to cover it? You may not want to put that transaction through a bank, waiting for a deposit to clear or worrying whether it will clear in time. Instead, you might just cash your check and pay the bill in person, even if it's time-consuming and the fees are high.

• At the same time, many Emerge speakers noted that lower-income consumers often prefer face-to-face service. This means they like the most expensive business model, despite being generally a low-profit customer group (at least for providers who won't exploit them). This mismatch is a key obstacle to widening access. At Emerge, Jose Quinonez of San Francisco's Mission Asset Fund suggested that the old "high-touch versus high-tech" thinking can be replaced with "high-tech touch," using technology to cut operating costs while keeping the customer interface personal. That makes sense, but future progress will also require drawing these consumers into technology channels that really work for them. This will happen naturally as the population ages, but the issue deserves hard thought.

• A highlight of Emerge was Princeton’s Dr. Eldar Shafir, co-author of “Scarcity: Why Having Too Little Means So Much.” The book uses behavioral economics to refine classic economic theory by recognizing emotional and cultural factors that compete with pure rationality in how people make decisions. Behaviors change under stress caused by shortage of a key resource like money, time, or food. People focus so tightly on the scarce thing that tunnel vision develops, blocking out both peripheral and long-term thinking and causing decisions that don’t make sense to others. This insight – that self-sabotaging behaviors are often driven by circumstances rather than ingrained life habits – could spark some fresh policy solutions. Note that Dr. Shafir’s coauthor is Sendhil Mullainathan, who led the startup of the CFPB’s research function.

• Dan Schulman, who leads Enterprise Growth at American Express, gave a remarkable speech at Emerge. Amex is repositioning its vaunted elite brand as an inclusive one, through its initiatives on Serve and the Bluebird/Wal-Mart card. Schulman spoke passionately of “reimagining” financial services to work better for more people, and on the enormous potential market this offers. Amex says surveys of its top-level cardholders show brand approval rising, not falling, based on the new, less exclusive approach.

• Schulman also urged viewing the new film “Spent: Looking for Change” , which Amex funded. I saw it this month with a group that sat in silence through the closing credits, still absorbing the powerful stories presented. One in four Americans – 70 million people – are struggling in a marginal financial world exacerbated by the financial/housing crisis and weak recovery. Millions spend as much on high-cost financial services as on groceries, and consume huge time and energy managing their financial lives. “Spent” attacks the stereotype that only impoverished or uneducated people use alternative financial services – these consumers also the “middle class.” The film is produced by Davis Guggenheim, who made “Waiting for Superman” and “An Inconvenient Truth.” It’s 35 minutes extremely “well spent.”

• CFSI’s CEO Jennifer Tescher spoke eloquently on the need to define the challenge as financial health. That approach -- being consumer-centric rather than product- or regulation-centric – is critical. Speakers suggested we develop health-like benchmarks of financial well-being, as we do for blood pressure or cholesterol.

I’ve worked for decades with the challenges of the Community Reinvestment Act, which channels bank lending to low- and moderate income people through a legal mandate. The results can be debated, but one thing is clear -- 35 years of CRA have not solved the problem. Time for some innovative thinking.

Please write to me with your ideas.