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Tuesday, September 30, 2014

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Update Newsletter: Winter 2007

Payments, Credit, and Savings: The Experience for LMI Households

Today, financial products and services are evolving at a rapid pace. As these changes take place, the Payment Cards Center seeks to provide a forum through which experts from the financial services industry, policymakers, community leaders, and academics can examine products, services, and the practices of businesses looking to meet consumers’ financial needs. While mainstream consumers and their financial practices have received the majority of attention thus far, the Payment Cards Center has also focused on developing insights into the trends and behaviors of low- and moderate-income consumers.

Michael Barr, Professor of Law, University of Michigan Law SchoolMichael Barr, Professor of Law, University of Michigan Law School

One example is the 2005 conference “Payment Cards and the Unbanked: Prospects and Challenges,” which brought together a number of experts to discuss the roles played by banks and nonbanks in meeting the financial needs of underserved consumers, requirements for consumer education, and the regulations that govern existing financial products and services. At that conference, keynote speaker Michael Barr, a professor of law at the University of Michigan Law School, argued that the movement toward electronic payments will, in many cases, create a myriad of more efficient options to meet the basic financial needs of the underserved consumer. Barr noted that 22 percent of low-income U.S. families (10 million households, or 22 million people) had no banking relationship at all and that a larger number of households – the underserved – did have some type of bank account but lacked reliable or cost-effective vehicles to make payments, access credit, or accumulate savings.

On May 21-22, 2007, at a conference entitled “Payments, Credit, and Savings: The Experience for LMI Households,"* the Federal Reserve Bank of Philadelphia’s Payment Cards Center and Community Development Studies and Education Department revisited the themes discussed in 2005 and explored Barr’s recent research on the financial practices and attitudes of low- and moderate-income households and the financial products and services available to them. The research discussed at the conference was derived from the 2005-2006 Detroit Area Study (DAS), conducted by the University of Michigan’s Institute for Social Research, Survey Research Center, where Michael Barr serves as the faculty investigator. The two-day event brought together participants from the financial services industry, academic community, consumer and community development organizations, and federal and state regulatory agencies to consider data and early findings from the study.

Sandra Braunstein, Director, Division of Consumer and Community Development Studies and Education, Federal Reserve Board of GovernorsSandra Braunstein, Director, Division of Consumer and Community Development Studies and Education, Federal Reserve Board of Governors

Delivering the keynote remarks, Sandra Braunstein, director, Division of Consumer and Community Development Studies and Education, Federal Reserve Board of Governors, set the tone for the day’s discussion. She pointed to technological advances, payment innovations, and the entrance of alternative financial services providers as critical new forces supplying a greater range of choices and improving the delivery of financial services to LMI households. Braunstein also argued that these changing dynamics are presenting challenges for consumers, providers, and regulators in moving toward a more inclusive financial system.

Barr characterized one of these challenges as a “financial services mismatch.” He argued that a mismatch exists between the often undifferentiated value propositions delivered to LMI households by traditional financial services providers and the more distinct needs for functionality and pricing demanded by this market segment.

Gathering data from the Detroit metropolitan area, the DAS sought to gain a better understanding of how and why LMI households use a wide variety of financial services, how they assess the relative costs and benefits of such services, and how these households would respond to potential new financial products specifically tailored to their needs. While the DAS covered a wide range of topics, the conference was divided into three sessions, each addressing a specific financial activity: making payments, accessing credit, and setting aside savings. For each session, Professor Barr or one of his co-authors shared preliminary insights from the study and then welcomed remarks from a panel of subject matter experts. Jonathan Zinman of Dartmouth College and Ronald Mann of Columbia University Law School, both visiting scholars at the Payment Cards Center, served as panelists.

Conference participants noted several trends. First, LMI households, although once perceived as an unprofitable segment of the banking services consumer market, are now generally viewed by financial service providers as an ever increasing source of new revenues – an untapped market for financial institutions. This revised view is, in part, a consequence of cost efficiencies that have changed the traditional economics related to serving these consumers and recent research that indicates that significant potential profits exist for business models that effectively target these consumers. Second, the DAS data indicate that the market for financial products and services for LMI households has evolved mainly outside the financial mainstream. The study shows that these consumers frequently make use of nonbank check cashers and payday lenders for services such as paying bills, cashing checks, and accessing credit. Barr noted that while financial institutions seem to be motivated by the opportunities in this market, they are still struggling with how to leverage their existing products and payment infrastructures to cost-effectively serve consumers who may be intimidated by bank branches, who mistrust banks, or who feel that bank products are too complex, costly, or inconvenient.

Shown here (left to right) are conference participants Jennifer Tescher, Ed Bachelder, Bob Bucceri, Patricia Hasson, and Jonathan Zinman.Shown here (left to right) are conference participants Jennifer Tescher, Ed Bachelder, Bob Bucceri, Patricia Hasson, and Jonathan Zinman.

Overall, the 2005-2006 Detroit Area Study was designed to help researchers, policymakers, and private-sector providers better understand LMI consumers’ attitudes, preferences, and choices when it comes to making a variety of financial decisions. While no one is certain how the financial services market for LMI households will evolve, conference participants were able to contribute a number of insights into how institutions might simplify value propositions, leverage existing behaviors, and more appropriately match products and services to the specific needs of low- and moderate-income consumers. Ultimately, the organizers hope that the development of more finely tuned products and delivery mechanisms will bring more LMI households into the financial mainstream.