Nearly a third of Americans either don’t have a bank account or are “underbanked,” meaning they lack access to checking services or credit cards. That’s a big problem. Being outside the mainstream financial system puts people at a disadvantage. They can’t access the credit they need to move ahead. And, generally, they pay high rates for alternative finance, like payday loans. Financially “underserved” Americans paid a staggering $103 billion in fees and interest payments in 2013.
How come so many people lack something as fundamental as a bank account? Two reasons. First, banks find it unprofitable to service people with low balances: There’s little interest to be made, and a lot of service costs involved (poorer customers tend to use bank branches more often than non-poor customers, for instance). And two: high fees. To make their numbers, banks charge a lot of money for going overdrawn, which puts people with precarious finances off from having an account in the first place.
A new report argues that it’s time for a radical new approach to bring the financially excluded into the mainstream, because what’s been tried so far hasn’t really worked. There have been all kinds of financial inclusion initiatives in the last decade–including several from mainstream banks themselves–but these haven’t moved the needle much. “Use of these products is far from widespread, and progress on improving [low- and moderate-income] consumer financial health has been truly disappointing,” say ideas42, a research firm applying behavioral science to social problems, and Oliver Wyman, a New York consulting firm.
The idea is to integrate spending, savings, and credit into one mechanism. When customers are in the black, the account automatically sets aside money for bills and savings. When they’re in the red, it provides small amounts of credit (at low rates) to cover the shortfall (which customers pay back as soon as they can). “Consumers living paycheck to paycheck need better tools for managing income and expense volatility,” the report says. “Because this volatility includes both spikes and dips, financial stability requires intervening in good times as well as in bad.”
The key issue, says the report, isn’t a lack of money. If the underbanked can pay $103 billion to payday lenders every year, they can easily afford a bank account. The bigger problem is cash management, or always having money for every eventuality. “When consumers have an effective way to manage volatility, many of the problems mainstream financial institutions associate with the [low- and moderate-income] population (low and volatile account balances, credit risk) fade,” say ideas42 and Oliver Wyman.
To “reinforce positive behaviors,” the report suggests an array of reminders, spending tools, and automated features. Research shows that regular bank-customer contact helps customers to avoid late fees and stay on the right of side of their balances (which makes you question why banks don’t alert their customers more).
In fact, there are some financial stability-type products already on the market. Digit, which we covered here, automatically collects savings from people’s accounts. And an app called Even helps employees smooth out differences in paychecks week to week. Doing what ideas42/Oliver Wyman recommend doesn’t sound too hard, especially for companies with deep pockets.