Pitfalls for Low Income Earners
In recent years, hundreds of millions of people around the world have gained access to financial services for the first time. This explosion in access is fueled largely by innovations in digital technology that reduce the cost of service delivery and generate better consumer data, as well as by the efforts of financial institutions and governments to reach the unbanked. Many low-income consumers around the world are now able to access affordable financial services and products without ever having to set foot in a bank.
For the banking sector, the expansion in access is an exciting business opportunity. But numbers can be deceiving—millions more have access to accounts, but account ownership is only the first step towards realizing full financial inclusion. So how can banks turn increased access into a profitable market opportunity that also enhances financial inclusion for new and existing underserved consumers?
In other words, products must be designed around humans, not the other way around. Tackling demand first, our research has shown that even the extreme poor want to borrow and save, make payments and manage risk.
In other words, we should not misinterpret the 20 percent of Americans who are underbanked or the million dormant accounts around the world as a lack of demand for financial services. Where banks cannot reach, informal products and cash generally dominate.
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For example, borrowing from moneylenders, saving in informal circles, hiding cash under a mattress and buying livestock are all widespread customs among the poor in developing and emerging economies alike. Similarly, check cashers and payday lenders fill a critical gap in rich countries, such as the US and the UK. So if nearly everyone can save, and many do find ways to borrow in order to manage risk and make investments in their lives, then what is keeping people from using safe and formal financial products to satisfy their needs?
Much of our research focuses on these questions. Thus far, we have identified various ways banks and electronic-payments providers can improve their products and services to make them work better for low-income consumers, while also protecting the bottom line. One-size-fits-all products may be easier to implement at lower costs for financial institutions, but may not offer the flexibility consumers need to manage inconsistent cash flows or expenses.
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And there may be ways to offer some flexibility to clients without driving up costs. In Kenya, researchers found that using water tanks as collateral for loans for farmers increased loan take-up with no effect on late payments.
Financial decisions are often influenced by procrastination, inertia, impulsive judgments or emotions—all of which can get in the way of rational and effective financial decision-making. Small nudges such as commitment devices, reminders and default options can help overcome these irrational tendencies and help consumers make better financial choices—often at low cost for financial-service providers.
We partnered with a bank in the Philippines and found that clients offered a commitment savings account saved 82 percent more than clients not offered such an account. Other than the commitment feature, the account was identical to a standard savings account, making it a low-cost design tweak for the bank.
We have found that there is demand for commitment savings in the US, too.
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We partnered with a credit union in New York City and offered an interest-earning commitment savings account to low-income customers. Preliminary results have shown that more than 20 percent of those who were offered an account opened one—a high rate, by industry standards—and on average, people saved 70 percent of their goal amount.
In Bolivia, Peru and the Philippines, text message reminders were a cost-effective way to increase savings balances and help people meet their savings goals. I am part of a team of researchers working with banks around the world to continue testing and improving these reminders. This helps overcome inertia and procrastination to place people into what they are most likely to want, but also gives full freedom to people to change to something else, should they not want the default option.
Defined contribution savings plans typically require employees to enroll and decide how much of their salary to save.
When employees were automatically signed up, enrollment in the plan was 95 percent, a percentage-point jump over enrollment rates among those who had to opt-in to the plan. Studies in countries as wide-ranging as Afghanistan and Denmark confirm the power of defaults on savings behavior. Finally, even when suitable, well-designed financial products or services are available, people do not always know about them due to lack of information disclosure and transparency.
Research by the World Bank and Innovations for Poverty Action, a research and policy nonprofit, has found that the quality of information provided to low-income consumers on products and services is often inadequate. In Colombia, Mexico and Peru, researchers posed as low-income consumers and visited commercial banks, lending institutions and microfinance institutions to gather information about products. Their findings were disconcerting: bank staff somehow routinely failed to voluntarily provide information to clients about avoidable fees, especially to people who appeared to lack financial knowledge, and clients were almost never offered the cheapest products.
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These results suggest that in addition to making products accessible and affordable, we need to find ways to ensure more appropriate disclosures and that consumers have clear and accurate information when making decisions. Churches and other places of worship also often offer financial assistance and literacy programs, Robb said. Universities, especially state universities, also often offer those resources, he said, so it can pay off to contact a university extension that is in your community.
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Beware of any organizations that offer to negotiate debt for you, and then become your creditor, Robb said. And any organizations that require you to pay up front are probably not trustworthy. When seeking debt help, look for debt management agencies rather than debt settlement companies, Nelms said, The former category includes non-profit organizations that belong to the National Foundation for Credit Counseling , while the latter are usually for-profit.
Also, see if the agencies are reviewed by the Better Business Bureau. ActiveHours receives donations from users in the form of tips. Both companies market themselves as an alternative to payday loans, which can have triple-digit interest rates.
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Consumers can also sign up for notifications , either from banks or third-party apps, when their bank accounts run low. And some companies, including Grameen America, part of the Washington, D. Economic Calendar Tax Withholding Calculator. Retirement Planner. Sign Up Log In. The changes include a new, responsive design featuring extended-hours data and more news. Poor children tend to score lower on standardized tests, receive lower grades and have higher dropout rates. Here are some of the challenges low-income children face when they are in school.
Finance for the Poor: How Can Financial Services Work Better for Low-Income Consumers?
Lack of preparation : Fewer low-income children have access to quality early childhood education so they enter kindergarten lacking basic skills such as letter recognition and counting skills. Vocabulary : Study after study shows low-income children enter school having heard 30 million fewer words spoken than their middle-class peers. A limited vocabulary makes it difficult to learn to read when children have never been exposed to the words. Poor nutrition : Children sometimes come to school hungry, which makes it difficult to concentrate.
Many schools are able to combat that by offering free breakfast and lunch. Lack of Medical Care : Low-income children may not see the doctor that often so vision problems, dental problems and mental health issues do not get addressed as quickly and make it harder for children to learn.