A recent study by the Federal Deposit Insurance Corporation revealed that 30 million households in the United States—approximately one-quarter of all households in the country—were either unbanked or underbanked.1/ As defined in the study, "unbanked" refers to households with no current checking or savings account, while "underbanked" refers to households that have accounts but have also used nonbank money orders, nonbank check-cashing services, payday loans, rent-to-own agreements, or pawn shops at least once or twice a year or have used refund anticipation loans at least once in the past five years. These nonmainstream financial service providers tend to charge high fees and generally do not provide a means of building savings or assets.
Why do many households use nonmainstream banking services? What are some innovative strategies for reaching these consumers—especially those with low or moderate incomes—and helping them enter the financial mainstream? And how can financial education help? To explore these and other questions, Community Dividend spoke with Jennifer Tescher, the founder, president, and CEO of the Center for Financial Services Innovation (CFSI) in Chicago. Tescher, a nationally known expert on financial access and asset building for unbanked and underbanked consumers, established the CFSI in 2004 with the aim of opening the doors to financial stability and prosperity for all Americans. The CFSI develops and distributes research and strategies that serve underbanked consumers. It also provides funding to promising financial service companies and facilitates cross-sector business collaborations.
Note: The CFSI uses the term "underbanked" broadly, to refer to consumers with or without banking accounts. The conversation that follows uses the CFSI's definition.
Community Dividend: When the CFSI started its work, what barriers did you face, in terms of understanding underbanked consumers and developing strategies to help them prosper?
Jennifer Tescher: One of the biggest barriers when we got started was that we didn't know exactly who we were talking about. Early on, we did research to identify who the underbanked are. The research showed that the number of underbanked people who had a bank account was much larger than the number who did not, and that the people who had accounts continued to rely on an array of other financial service providers to meet their day-to-day banking needs. In other words, their relationship with their bank or credit union wasn't cutting it for them. So, the situation turned out to be more nuanced than people had thought.
CD: What were some of the reasons why their banking relationships weren't "cutting it"?
JT: Most people had thought the reasons were "I don't have enough money to make an account worthwhile," "I don't feel comfortable in a bank," or "I want to live anonymously." But when we took a more nuanced approach, we realized that the available products and services are not effective for people who are living at the margins. The products aren't designed or delivered in a way that truly meets the needs of those consumers. For instance, checking accounts—which tend to be the primary tool that banks use to get new customers—aren't useful for you if you don't have direct deposit and you need immediate liquidity. You're not going to be able to access the funds unless you have some kind of cushion or reserve in your account. If you deposit your check at a bank, that institution will put a hold on it, maybe just for a day, until the check clears. For people living paycheck to paycheck, that day is too long. Instead of dealing with that uncertainty or the possibility of paying an overdraft fee, consumers will pay up front, even if it is a little bit more, for the certainty of having immediate access to their money and knowing how much something is going to cost.
CD: A number of recent articles and studies discuss strategies that nonprofits, banks, and credit unions can use to help underbanked consumers prosper. If these organizations could do just one thing, because they may have limited resources or capacity, what should it be?
JT: I would encourage them to shift away from "pure" financial education and toward a financial capability approach. If financial education is what you know, financial capability is what you do. Until now, the primary tool for helping people make good decisions, manage their financial affairs, and plan for the future was financial education, which was usually classroom-based and relied on consumers to put what they learned into action. However, everything we now know about human behavior, especially from behavioral economics, suggests that's not the most effective way to encourage people to take action. In light of this, I would strongly encourage organizations to find ways to embed financial information and advice into the fabric of what they're already doing and into the financial services that they or their partners are offering directly to people.
CD: Can you provide an example of what you mean by "financial capability" in action?
JT: Sure. We're working with a consumer credit counseling agency that helps people reduce their debt through a debt management plan. The agency is trying two different but related financial capability strategies in order to reduce the number of families who leave their program prematurely. The first strategy is to have each family provide a list of five friends or family members who can be contacted in the event that they "fall off the wagon" of their debt management plan. If they do, members of their support group will get an e-mail, text message, or phone call that says, "Hey, your family member could use some support from you right now." Second, they've created a system for sending out text message alerts to proactively remind people of bill payments, provide encouragement, and deliver financial management tips. These are examples of providing real-time information and guidance, often aided by technology, that is focused on the behavior as opposed to the knowledge that people may or may not have.
CD: A lot of these initiatives are very new. Has there been any effort to see how effective they really are?
JT: When we started this work about two years ago, we looked around and asked, "What is going on in financial education and what appears to be working?" Our literature review suggested that there weren't many completed evaluations of programs. There were findings that showed a knowledge gain by participants but not much of an overall behavior change. Efforts that did appear to change behavior often included relevant, timely, actionable, and ongoing information delivery. We used those ideas, combined with other ideas from behavioral economics and technology, and put a call out for innovative ideas from nonprofits around the country. We received more than 250 proposals, and we selected 5 to receive additional support so we could evaluate their ideas. We're subjecting all of them to rigorous evaluation so we can see which ones work.
CD: On a slightly different topic, Bank On initiatives are often touted as a way to bring people into the financial mainstream.2/ What are your thoughts on how effective these efforts have been, and is there anything we can learn from them?
JT: I think Bank On has been most effective at raising awareness of banking issues at a local level and bringing together important groups of stakeholders to focus on how to make change. I think local governments have enormous bully pulpit power and reach and can bring the right people to the table. The jury is still out as to whether a Bank On checking account is positive for those who sign up. I don't think there has been nearly enough evaluation of the ultimate impact on consumers who have signed up for Bank On, and given the comments I made earlier on the limitations of checking accounts, I think that's an important question that needs to be considered.
CD: In 2010, the federal government initiated a number of changes to federal banking laws that will affect the number and amount of fees that customers pay for banking services. How will these changes affect efforts to aid the underbanked?
JT: I think Americans are incredibly frustrated with the financial services industry, especially around fees. Because of changes to overdraft and interchange regulations, banks lost a lot of revenue and are trying to find new ways to make it up. Many are now considering charging up-front fees in the form of checking account monthly fees and the like. From the perspective of the consumer, there is now greater transparency and clarity around the costs associated with accounts. That's good, because it allows people to make informed choices about which financial services will meet their needs. Now that a checking account is going to cost you something, you may decide—especially if it's really not doing much for you—that you don't want to use it anymore. Then the questions become, What is the alternative? If consumers can't afford or don't find value in what's being offered, what other choices do they have?
That, I think, will be a positive story, because there has been tremendous financial services innovation in the last decade and there are now more choices than there have ever been. For instance, prepaid cards are now a far more significant product than ever before, and they offer a true alternative to a bank account, since they originate from multiple providers.
CD: What are some issues around prepaid cards for the underbanked that need to be addressed, especially for low- and moderate-income (LMI) consumers?
JT: Prepaid cards have grown and developed tremendously in the last ten years and are now a real product with substantial volume: billions of dollars loaded every year and growing. They're sold in many convenient places, and they don't require a credit check. They provide immediate liquidity, so they have a lot of advantages for LMI consumers. However, they're not yet on a par with traditional bank accounts from a regulatory perspective. For example, they're not required to provide FDIC coverage or coverage for lost or stolen cards. Regulators are only now beginning to address these and other issues.
We also need to do more to make sure prepaid card fees are transparent and comparable from one card to another. The fees have come down dramatically over time, and there are now plenty of cards that you can get for a monthly fee of five dollars or less, which is going to compare quite favorably with some of the prices banks will charge for checking accounts. However, prepaid card providers tend to charge a broader array of fees. Card providers and regulators need to work to shrink that list and make it easier for consumers to compare across providers.
CD: When it comes to banking the underbanked, how should we define success?
JT: We need to reframe the problem, because "banking the underbanked" makes it seem like the primary problem is not having an account and the solution is having an account. Instead, we need to think about what success looks like for consumers. I think success means being able to meet one's day-to-day financial needs effectively. Success also means being able to plan and build for the future. I think there are a variety of ways to meet people's short-term and long-term financial needs. Many times that will involve a bank, and sometimes it will not. The real question is, What products, services, and practices will help people prosper financially? Given all of the technological changes we have seen and will continue to see in this country, I feel there will be no shortage of new products and ideas in that arena.