Amy Cao | Program Associate | The Financial Clinic
Financial technology, dubbed FinTech for short, continues to grow rapidly as an industry, revolutionizing the landscape of financial service delivery. We are witnessing the onset of a changing tide — powered by smarter technologies — to improve the way we manage money.
Indeed, leaders of America’s largest banks and disruptive tech entrepreneurs alike have found common ground in utilizing web-based communication technology as a low-cost delivery channel for quality products and services. But within the sweeping waves of innovative development, there also lies an enormous opportunity that is too-often missed — to broaden the traditional financial consumer demographic and extend services to America’s financially underserved.
VISIONARY PRODUCT DEVELOPMENT FOR LMI POPULATIONS
Low-to-moderate income (LMI) households that have long been precluded from formal banking institutions and service providers could stand to gain the most from widely accessible product designs that depart from the traditional banking products and services model. Yet, many creative and cutting-edge FinTech tools are not developed with these populations in mind.
IDENTIFYING THE GAPS
Until recently, available data on low-income consumers’ needs and preferences have been largely unreliable or difficult to capture. According to the 2015 FDIC National Survey of Unbanked and Underbanked Households, the underserved population consists of 9 million unbanked and 24.5 million underbanked households — almost 35 millions Americans effectively rendered “invisible” from the financial system.
This stark reality is not surprising, especially for those of us working in the field of financial coaching. At The Financial Clinic, customers get by on a median income of $17,000, and nearly 48 percent live below the federal poverty line. Underserved households pay considerably more for essential banking services like check cashing, bill pay, money transfers, loans, and so on. Recent reports from Change Machine show customers’ monthly financial transaction fees racking up as high as $80 for maintenance fees, $40 on check cashing, and $50 on money orders.
Without bank visibility, and with additional barriers such as immigration status or identity theft, these households bear a hefty premium on alternative financial services. Also known as “fringe” financial services, businesses like check cashers and predatory payday lenders claim they are serving communities that banks do not; and they’re not wrong. Since the 1990s, banks have withdrawn from local communities, particularly from low-income areas and communities of color, where branches were less profitable compared to higher net worth regions. With far fewer banks and credit unions per capita in LMI neighborhoods than in prosperous ones, it is no wonder that the unmet needs in “banking deserts” have enabled fringe enterprise to plant their roots and thrive, expanding by 15 percent each year.
UTILIZING FINANCIAL COACHING INSIGHTS
As a direct service provider, The Financial Clinic sources safe and reputable banking products offered by other organizations in the financial security field, FinTech start-ups, and even brick-and-mortar financial institutions looking to make an impact on the underbanked communities they serve. The Products Team derives insights about our customers’ needs directly from the coaching process using a mixed methods research approach and careful vetting. Synthesizing Clinic data collected from our web-based financial coaching platform, Change Machine, with customer stories and sample surveys, we are able to better understand trending issues in our customer community and determine the most appropriate and accessible tools and services necessary to complement our service delivery model both locally and at scale.
Much like the Clinic’s best coaching practices for developing savings plans or debt management strategies, many coaching conversations now center around the effective use of products, and setting a good rhythm to introduce new products as they come. The coaching relationship involves a great deal of trust in order to delve into sensitive financial issues, which, over time, fosters mutual accountability and confidence. For our coaches, maintaining this bond means being able to offer accessible and affordable options to our customers — nearly 50 percent of our customers still live below the federal poverty line despite 70 percent being active labor force participants. These persistent and widespread financial disparities call for inclusivity by product design, which FinTech and its very nature of swift and revolutionary transformation is perfectly primed to meet.
INCLUSIONARY PRODUCTS AND SERVICES
The Clinic applauds those companies and organizations that are laying the groundwork to leverage FinTech toward our shared goal of financial inclusion, better integrating the needs of low-to-moderate income populations with the evolving financial sector. CFSI has published numerous articles on the issue, including a report published last November on opportunities to reach the $9.1 billion underserved market. IDEO, known for their human-centered design approach, launched their very own non-profit wing, Ideo.org, which has formed coalitions across the financial security field to inform product development for underserved consumers. As a field leader, the Clinic has members of its staff on Ideo.org’s advisory council, providing input into the design of a whole class of projects to serve the financially insecure directly.
At the Clinic, we’ve begun implementing our very own vetting criteria to identify products that enable more effective and innovative programming from the service delivery process through to our customers, by promoting stronger outcome achievement.
The Clinic’s evaluation framework focuses on six key areas:
- Mission and outcomes achievement and acceleration
- Range and scope of service(s) offered
- Accessibility regarding cost, eligibility, and functionality
- Innovation and specialty in design or programmatic structure
- Reputation and reliable sourcing, management, and support
- Data security and transparent partnership
As one of the main pillars in the Clinic’s vision for lasting change, product integration allows us to recognize opportunities for compatible collaboration within the field of financial security and thereby broaden the scope and strengthen the value of the Clinic’s impact on the working poor nationwide.
The Clinic is proud to partner with Earn, an organization that offers the Starter Savings Program that rewards its participants after successfully completing a six-month consistent savings challenge, simply by linking the program to their existing bank accounts. For tech-savvy customers receiving SNAP, we also recommend the FreshEBT app by Propel, which helps users more actively manage their benefits by providing fast access to account balances, detailed spending and transaction history analysis, and location functionality that finds nearby EBT-accepting stores. The Clinic is also piloting the Focus Card by Community Financial Resources, a low-fee prepaid debit card for customers to receive and store their direct deposits, public assistance, and tax refunds, and includes an optional linked savings account through US Bank.
It is imperative that initiatives like these continue to grow and expand across the financial sector so that we can develop stronger insights about the vast diversities and unique challenges that characterize impoverished communities and better promote access for consumers at every level. The role of financial coaching here should not be underestimated in its ability to identify the needs of LMI individuals and families and to act as a trusted resource to recommend these innovations.
Having served more than 40,000 customers, Change Machine partners now in 23 states, and the financial security ecosystem launching nationally this year, we know firsthand that technology can be a powerful channel for social enterprise that enables scalable organizational impact for lasting change. We are committed to expanding this growth, which for us, means continuing to support marketplace innovations, while ensuring that financial products and services remain accessible, safe and relevant.