Context

With nearly one in three Americans still underserved (unbanked or underbanked) by banks in the US – spending $103 billion annually on fees and interest for mainstream and alternative financial services – financial inclusion is a significant social and business problem. Some providers have started offering innovative products, such as prepaid cards, but this is not widespread and improvements in the financial health of low-to-moderate income consumers ‘has been truly disappointing’ (Cohen et al., 2015, p5). Unless organisations, including regulators and financial institutions, work together to develop innovative solutions and novel product designs approaches to financial inclusion look unsustainable.

The study

The paper focussed on the needs of low-to-moderate income consumers (presumably adults) in the US. It was commissioned and funded by the Ford Foundation. The main questions the research implicitly poses include why there has not been more progress with the financial inclusion agenda and what is needed to make financial products better meet the needs of low-to-moderate income consumers.

As such, while providing some analysis of primary and secondary evidence (primarily quantitative in nature) the paper is mainly characterised by a ‘think piece’ which sets out a case for a new approach to banking. It proposes a new integrated model for solving the banking problem which benefits providers and low-to-moderate income consumers. And it makes recommendations, in the form of a call to action, to financial institutions, regulators, advocates, funders and researchers.

Key findings

Why there hasn’t been more progress to improving financial inclusion:

• Financial providers find it difficult to serve low-to-moderate income consumers profitably, due to their low and unstable balance, high use of branches, and high default risk.
• Their main response has been to offer low-priced services (which they cannot afford to do), but this in turn is based on false perceptions that low-to-moderate income consumers do not want to save, are bad at managing their finances and cannot pay for financial services.
• Instead, consumers need products which help them manage cash flow volatility and behaviours which result from this, which includes short-term crisis management and help in planning for the future. Current (traditional) financial services provision does not meet this need; as such there is a mismatch between provision and need.

What is needed to make financial products better meet low-to-moderate income consumer needs:

• Low-to-moderate income consumers need better tools for managing cash flow volatility. Financial stability requires support during both peaks and dips.
• A new, integrated product which provides adequately for both credit (spending and saving) and debit balances, that can better serve consumers when income and expenditure are mismatched. It can provide consumers with financial stability (for example, by saving up for loan repayments) and reinforce consumer behaviours that reinforce this stability.
• Building in behavioural design elements (e.g. reminders, budgeting tools, rewards and saving automation), can also reinforce consumer behaviour by promoting self-control and commitment to outcomes. The integration of features would reduce the amounts consumers spend on fees, improve trust in financial institutions and increase financial resilience.
• In turn, the new product would give providers more information about the financial health and behaviour of consumers which can help providers screen better for credit risk and promote customer loyalty, which makes them more economically sustainable to offer.
• Financial services providers, regulators, advocates, funders and researchers need to coordinate their efforts to develop and test novel integrated product designs. These in turn need to reflect market opportunities, the regulatory framework and intra-organisational coordination of function.

Points to consider

• Low-to-moderate income consumers, and unbanked and underbanked consumers are not defined, which makes assessments of the relevance and applicability of the findings difficult. However, it is implied in Appendix B that low-to-moderate income is between 20th and 40th percentiles. The research draws on a range of statistical resources, some of which are comparatively dated.
• Financial inclusion remains an important issue in the UK, and the work of this study has important implications for extending the provision of Basic Bank Accounts to include credit. However, the results may not be applicable to the very lowest income consumers and the model of provision suggested (which includes credit) may not be appropriate for those with severely damaged credit histories.
• The study includes a number of sample consumer profiles and profitability assumptions which may not apply in other contexts (e.g. countries) or markets, but the framework for which may still be used to inform work elsewhere.

Full report

Reimagining financial inclusion - full report