At IDEO.org, we’ve been working on financial innovation for the poor. More than 2B people globally have no access to financial services, and in the US, 138M people are struggling financially. We think this matters: financial health gives you the money you need for the day and the ability to plan for the future. It protects your family from shocks and empowers you to take advantage of opportunities.
We think this is a complex design problem, and we’re out to fix it alongside lots of other innovators in financial health. Here are five reasons why design is so critical for financial services:
1. Financial products weren’t designed for poor people.
Historically, financial services have been designed for people with steady incomes, a variety of investments, and fixed assets like homes. And less than 8% of assets — 401(K)s, pensions, etc. — are owned by the bottom 50% of Americans. When we take a closer look, this group is still earning and moving money with a high level of proficiency — they are just using a different system. Why use a credit card when cash is easier? Why travel to a far away bank when a payday loan is right next door? There is an open playing field for creating new products, services, and business models that are specifically targeted towards the bottom 50% of Americans.
2. People know what they should do, and then they do the opposite.
According to a report from the Center for Financial Services Innovation (CFSI), 50% of American households — regardless of income level — have less than $1,000 in savings. We also know that short-term thinking often drives decision-making, which can have significant implications for the savings of a person with low income. This presents a massive opportunity for digital tools to intervene. IDEO.org worked with Moneythink to address this gap in knowledge and short-term action with low-income high schools students in Chicago. After observing both social and financial behaviors of the students, IDEO.org partnered with Causelabs to design a new mobile app which leverages behaviors like peer applause and recognition when students save, spend mindfully, and use financial products safely. It socializes the experience, lending students accountability and shifting those short-term behaviors.
3. Income cycles are mismatched with expenses.
If you’re being paid hourly or taking odd jobs, you don’t always know when your next paycheck will arrive, or even its size. Expenses, however, are often quite regular: the rent, electricity bill, and the phone bill come around the same time every month. The day a bill is due, plenty of consumers who might otherwise be able to pay might not have the cash on-hand.
We see a tremendous opportunity for cash-flow smoothing. Tools that help bridge the gap from the bills to the paycheck can relieve a huge pain point and protect people from added fees or predatory lenders.
Partnering with Econet, Mercy Corps, and Consultative Group to Assist the Poor (CGAP) in Zimbabwe, IDEO.org designed a micro-savings and micro-credit product that allowed families to set aside money for school fees as they earned it. In cases where they didn’t have enough money when school fees were due, a small line of credit would advance the difference and could be paid back interest-free over the next 30 days.
4. Design for smartphones. Everybody’s got one.
Smartphones drastically decrease the cost of reaching people, empower customers to know more about their accounts, offer a safe space for a conversation on a private matter, and open new and exciting channels of communication. There’s a reason so much fintech innovation has happened on smartphones: smartphones are easy to build on and, if you’ve got a successful product, quick to scale. And yet, traditional banks still have a high in-person costs of service, and a mere 7% of their products are digital end-to-end. Fintech innovators are seizing this golden opportunity to create disruptive products and upend traditional business models.
5. Many people are one emergency away from serious debt.
Though you don’t know when, unexpected emergencies always happen. Non-salaried workers suffer the most from this: if your child stays home sick or your car breaks down, you can’t get paid and savings are quickly depleted. Suddenly, opportunities for access to capital are shut down. You’ve got a poor or no credit score, your savings are dry, and you’ve tapped out all your resources. And this isn’t an experience only for low-income Americans: according to a recent Shed report, almost half of Americans would be unable to pay a $400 unexpected expense.
At IDEO.org, we find that the biggest pain points for people are often the strongest opportunities for design to play a role. In 2015, we partnered with Neighborhood Trust Financial Partners (NT) to develop a “When Life Happens Fund,” a product specifically designed for emergencies. The idea was to create a fund which is paid into directly from paychecks (like a 401(k)) and where possible, matched by employers). When an emergency happens, you have access to the amount you would save for the full year. Early prototyping provided compelling results.
Calling all designers!
These may sound like massive problems, but there’s good news — there is so much more to design! And now, there are initiatives in the financial health space with eyes solely focused on these issues and capital to help the most innovative solutions come to life. For example, Neighborhood Trust — a more traditional, small nonprofit — is beginning to stretch its financial innovation muscles thanks to the support and capital provided by the Financial Solutions Lab through its 2015 challenge, which sought innovative solutions to the issue of income volatility.
This is only the beginning of what we hope becomes a wave of innovative fintech solutions. At IDEO.org, we will continue to design at the edges around the world, and we can’t wait to see the innovators who join the next class of the Financial Solutions Lab to continue to push the envelope of what design can do for financial health.
The Financial Solutions Lab is now accepting applications for its second Challenge, which seeks products that help Americans weather financial shocks. Applications are due April 7, there’s no fee to apply, and there’s a lot to gain — $250K in capital per winner, plus unprecedented access to resources that can help the companies scale. Did we mention that IDEO.org is one of those resources? Now we have. More here: finlab.cfsinnovation.com