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The Next Phase in Financial Services: What Low-income Americans Tell Us

(Image via Shutterstock)

(Image via Shutterstock)

Both established players and disruptive entrepreneurs recognize that shifts in mobile, data, and payments are transforming financial services. Yet while everyone is trying to innovate, there is little real vision on how new solutions can redefine financial services so they seamlessly integrate with our lives and provide us with substantial improvements in how we manage our finances.

This is especially urgent when it comes to using new technologies to help the financially underserved in the United States—hardworking people in need of new solutions. Entrepreneurs and many financial service providers have been trying for years to develop affordable, scalable tools, but they often fail in part because of a lack of information about what underserved people really need and are willing to purchase and use.

While we know that more than 40 percent of Americans live paycheck to paycheck, the reality of their day-to-day financial lives is poorly understood by financial companies. For example, since nearly 54 million lack a traditional credit history, they are effectively invisible to financial service providers.

This is all about to change thanks to a groundbreaking national research project. For a year, U.S. Financial Diaries (the Diaries) tracked about 230 households, with incomes ranging from middle class to below the poverty line, to understand how they managed their finances down to the penny. The research, which was co-funded by the Ford Foundation, Citi Foundation, and Omidyar Network and led by a world-class team of investigators—Jonathan Murdoch from NYU, and Rachel Schneider from CFSI—was designed to provide deeper insight into the financial lives of low- and moderate-income Americans and inspire new financial products and solutions. Researchers observed what these families earned, spent, borrowed, saved, and shared—whether off the books or on, in cash or via electronic transfers, and whether transacted in the marketplace or between friends. The sample is big enough to show broad patterns, yet small enough to capture individual stories. As a result, the researchers were able to break through the statistics and reveal often-hidden elements of how life intrudes on finances and how finances can derail a family’s life.

Some of the earliest findings are intriguing and even heartwarming. One of the major ways people survive tough economic times is through community. They jerry rig their own social safety nets. They help each other when they can; they lend to those in need; they hold community fundraisers to pay for their neighbor’s hospital bills; they donate to churches, schools, and Boys & Girls clubs; and they organize lending circles that provide flexibility, discipline, and community connection. People can, and do, save—even the poorest set aside for needs like back-to-school shopping and holiday expenses. This all adds up to a solid picture of resilient and active family money managers, with an ongoing potential to grow and a natural capacity and inclination to share their own good fortune—no matter how meager—with families, neighbors, and communities.

Yet, concurrent with this picture of classic American resilience, the Diaries also reveal a worrisome countervailing forcerising volatility of income and expenses, coupled with a growing unpredictability about the economic future. As traditional manufacturing jobs decrease, replaced with service industry or part-time, seasonal jobs that do not offer benefits, people are seeing huge spikes and dips in income. This makes financial planning almost impossible. How can you plan for next year when you aren’t even sure where you will be six months from now? Never mind retirement.

This volatility is a massive hidden tax with measurable economic costs to individuals, frustrating and impeding long-term planning. But perhaps more importantly, financial volatility—and the stress it induces—can be a debilitating mental tax with consequences. A study in the journal Science indicates that financial stress can temporarily subtract a remarkable 13 IQ points.

This status quo is untenable. Capital in the 21st century requires that we move beyond stovepipe financial services that just manage transactions, to platforms and solutions that help people comprehensively manage their financial lives. There is a particular role for innovation from startups to traditional financial service companies. The U.S. Financial Diaries provide first-ever insight into the services people need to smooth this volatility and better manage the risk.

Creative, innovative solutions most often come from where you least expect them. Indeed, many of the best solutions probably lie in formalizing and scaling the clever financial recipes the U.S. Financial Diaries reveal people have crafted on their own.

At Omidyar Network, we believe that all people are inherently capable—they just need full and fair access to opportunity. Having appropriate, affordable, and dependable financial services that allow them to build a secure future for their families and communities is a first step in making that happen. The resulting conviction in having firm ground under one’s feet—financial stability and security—is the foundation from which we can all reach higher and realize our version of the American Dream.

Chris Bishko leads investments in technology-enabled financial services companies in the United States at Omidyar Network. He focuses on for-profit companies that empower individuals and merchants in underserved markets through innovative products and services and nonprofit organizations that strengthen the financial services sector overall.

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2 Responses to “The Next Phase in Financial Services: What Low-income Americans Tell Us”

  1. What we all want is a safe and easy way to add value and be paid for it. “…They jerry rig their own social safety nets.” So actually, its hard to start a business due to bureaucracy. And the transaction mediums are all fiat currencies so have the hidden tax of monetary inflation, and tax of political mismanagement. The ideal money is shares in entities that consistently add value and can offer dividends — which can reduce income volatility. The float is managed by supply and demand.

    We want the whole system though. Current conflict resolution is cruel joke. It should be peer 2 peer with “judges” that are actually accountable. Judges should be expert in the topic, and close cases in weeks, not years. In fact everything should be peer 2 peer. A cashier does not need a terminal, just log into their job on their mobile device and ring people up.

    This system is not disruptive — its how nature works. What’s disruptive is letting go of the top down centralized control model that scales poorly and keeps billions living on $2.50/day.

  2. Jeff Ashe says:

    A Nepali student of mine told me about the savings circles most Nepali immigrants are part of. In one of these groups although most are living on less than $30,000 per year they save $1,000 per month in a group of 20. With their lump sum payment they make the down payment on a house, purchase a vehicle interest free or open a business or pay tuition. She told me that every Nepali business on one street in Queens was funded through the savings circles they belonged to. I have tracked similar stories among Ghanaian immigrants in Lowell, Mass. What do these immigrant communities have to teach to those living on the edge about disciplined savings and mutual support? We plan to find out.

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