Why financial innovation may be the key to eliminating poverty
American Banker has a new article that bounces off the calls-to-action in the Ferguson Commission report entitled, “Ferguson Report Recommends Bank Reforms to Reduce Inequality.” As the report mentions, banking services such as payday lenders and title loan lenders are allowed to charge up to 1000% APR (no typo — one thousand percent interest) to working class people, many of whom are without bank accounts. Interest and other fees can often catch people in a never-ending cycle of poverty.
The commission’s research showed that communities with access to those traditional financial services are able to build wealth, but too frequently the only resources that can meet those needs are lightly regulated predatory lenders.
“It has been shown that very poor families can save and accumulate assets when well-structured products, programs, and policies are accessible,” the report said. “In many areas, the number of alternative financial service providers (check cashers, title lenders and payday lenders) far exceeds the number of bank and credit union branches.”
The commission specifically called for revisions to the Community Reinvestment Act, the federal anti-redlining law that requires banks to offer loans and other financial services to low- and moderate-income borrowers in the areas where they operate.
This is one of those issues where the pace of change can rise to meet these challenges. From Bitcoin to mobile banking, financial innovation is at perhaps an all time high. Not only is digital technology zooming ahead as fast as ever, those technologies are mobile and distributed to the pockets of individuals at every level of the socioeconomic hierarchy. We are rapidly approach a point where there should be minimal friction between workers and their pay, as well as access to fair, easy-to-understand, convenient credit options.
Check this chart of total Bitcoins in circulation over the last five years:
More and more people are embracing currencies that not only feature some benefits — secure, anonymous, an so on — but also feature certain values, such as reinvestment in local communities, or not charging interest rates that would make a loan shark blush.
We have options. Will we explore them and take action?
For more on how financial innovation such as digital payments and alternative currency can serve communities, watch this episode of Al Jazeera English’s The Stream where I am the featured guest talking about “The Currency of Protest.”