When mainstream consumers swipe their debit cards at an ATM or at the checkout at a grocery store, they can assume, with a fair degree of certainty, that their money can be accessed immediately and efficiently. For this privileged group, paychecks are automatically deposited into a checking account, bills are paid online and credit cards extend adequate lines of consumer credit. The banking process is fairly convenient and painless.
However, traditional financial products do not meet the financial needs for an estimated 30 to 40 million households in the U.S. Roughly half of this group is unbanked, meaning they have no bank account at all. The other half are underbanked, meaning they may have a bank account, but they also rely on services like check cashing or payday loans to bridge the gap in their limited financial resources.
Research into the underbanked or unbanked is not hard to come by. The FDIC is legislatively mandated to do a biennial survey of banks’ efforts to serve these consumers. Nonprofit groups like the Center for Financial Services Innovation (CFSI) have done large surveys and worked to develop policies to promote financial inclusion. But in a new project underway in the United States, researchers have undertaken a small, but in-depth qualitative study about the financial lives of low-income Americans, using a methodology from groundbreaking work done in developing countries.
Over the course of 16 months, researchers will be conducting bimonthly interviews with 300 low-income families in four regions across the country. A partnership between Bankable Frontiers, CFSI and the Financial Access Initiative, the U.S. Financial Diaries aims to track every single penny earned and every penny spent, what it’s being spent on and which financial services are being used. In other words: a detailed cash flow analysis.
“There’s some other really important research being done, but there’s nothing like this that gets to the cash flows of a family,” explained Rachel Schneider, innovation director at CSFI and moderator at a panel this week at the Microfinance USA Conference in New York that previewed this new research.
“This study is all about depth, not breadth,” Daryl Collins told the panel. Collins, a senior associate with Bankable Frontiers, has done similar research in South Africa tracking the financial lives of low-income households. She is also one of the authors of “Portfolios of the Poor,” which looks at the results of her research in South Africa, as well as similar studies in India and Bangladesh conducted in collaboration with Jonathan Morduch, a professor of public policy and economics at NYU. Schneider, Morduch and Collins are all helping to lead the U.S. Financial Diaries project, which starts collecting data this fall.
“What we’ve found when we got to know poor families was that those ups and downs matter as much or more often than the level of their income on average,” Morduch told the panel. But in the U.S., similar data on income volatility just doesn’t exist. “The promise of this project is to document those ups and downs in a much, much more reliable way than we have in the past. And for us, that totally shifted the way that we started to think about poverty.”
Schneider told the panel that, “My intuition is that in fact we’re going to see these same issues,” including income volatility as a major cause of distress. But she added, “We don’t have the data.”
The researchers also expect that completing this research in a developed economy like the United States, where the consequences of staying in informal financial networks can be substantial, may diverge from the previous work. “If you don’t build a credit score … there’s a significant impact on your ability to grow your own financial life,” Schneider explained. “And so that’s a major problem with staying off the financial grid.”
The goal of the project is both to help inform policy decisions as well as be a source for new ideas for more accessible and effective financial products. For instance, Schneider points out that many low-income families often did not have the right tools to plan for expenses, and, as a result, spent an enormous amount of time dealing with money issues.
“If the poor can just be thinking about their money less, I think that would be an enormous contribution,” said Collins. “If we actually managed to move that down then people could spend a lot more of their head space thinking about how to grow their next income scheme or advance themselves” in other ways.
“Often our questions around low-income people and their finances take the form of ‘why aren’t they — fill in the blank,’” said Schneider. But part of the power of this kind of research is that you can “go to a household with a very open mind and say, ‘Well, why are you?’ Not, well, here is my expectation of how you should behave and you’re not conforming to it. But, what are you doing, and there must be a reason.”