Unfinished Business: Time to Invest in Americans’ Financial Health
By Sarah Morgenstern
The Atlantic’s headline-grabbing piece last month on “the secret shame” of the middle class took the Internet by storm: nearly half of all Americans would have trouble coming up with $400 in an emergency. But the article’s peek into the fragile state of Americans’ financial lives is just the tip of the iceberg.
Dig deeper into the growing body of U.S. consumer finance research, and the picture is even more sobering: the majority of U.S. households struggle with financial health, income volatility is pervasive, 65 percent of Americans worry they won’t have enough money to retire, and racial disparities are stark.
As impact investors, we view these bleak statistics not just as a pressing public policy problem, but also as a fundamental market failure. Which begs the questions: what’s holding the system back from helping consumers manage these tough challenges? And can innovation change the way things have always been done?
What’s Ailing Americans Financially
Weak financial health means living paycheck to paycheck or scrambling to keep up with bills. Sometimes it means not having a financial cushion if things go wrong or lacking access to financial tools to meet long term goals.
While the root causes of poor financial health are varied and complex — wage stagnation and intergenerational poverty, the rise of the 1099 workforce, an economy and a culture that depends on debt-financed consumption — all too often, the financial system itself exacerbates the problem.
Most fundamentally, day-to-day money management is harder and more expensive than it should be for millions of low-to-moderate income families. In 2014 alone, underserved households spent over $130 billion on fees and interest payments. Each year, a typical unbanked household could spend as much as $1,100 managing its finances.
Moreover, the status quo is costly in more than just dollar terms. Trust has been eroded, and Americans’ confidence in banks has plummeted.
Three Breakthroughs That Could Change the System
Financial health is a messy problem rooted in a complex interplay between high fee and interest-based business models, legacy infrastructure, an antiquated regulatory landscape, and consumer behavior.
As investors, our goal is not to lay blame for this dynamic, but to scale solutions that could make low-to-moderate income Americans better off.
Fortunately, three big trends — in technology, product design, and policy — now have the potential to make systemic change possible to an extent inconceivable just five years ago. At Omidyar Network, we’re optimistic that this is a genuine window of opportunity for innovative practitioners to improve the financial services landscape serving low-to-moderate income consumers.
This conviction is grounded in three recent breakthroughs:
Technology: Now in the hands of nearly 80% of mobile subscribers in America, smartphones have fundamentally changed the feasibility of delivering quality, appropriately priced financial services to the mass market.
As my colleague, Tilman Ehrbeck, noted in his recent Huffington Post column, smartphones make it possible for consumers to carry around an “Einstein in their pocket,” combining big data, machine learning, and voice recognition in a way that could democratize high-end financial advice and products.
Product design: For centuries, financial products have been designed the way an idealized, perfectly rational consumer would behave. We now know that all of us — rich or poor — do not conduct our daily finances like “homo economicus” would; we’re affected by a slew of subconscious biases when we make financial decisions. And financial products are rarely designed with these cognitive quirks in mind.
Research into the way Americans really live their financial lives, such as the U.S. Financial Diaries project, has paved the way for a new generation of financial solutions grounded in a much sounder understanding of consumers’ financial needs and behaviors.
Policy and innovation: Thanks to this new understanding of behavioral finance — and the political momentum coming off the Great Recession — we’re seeing growing support for building an inclusive and transparent financial services system. We’re also seeing redoubled policy focus on the need to promote private sector innovation as one of many tools to achieve that objective.
Recent efforts by the CFPB, OCC, and the Federal Reserve offer encouraging signs of the potential for greater collaboration between industry and regulators in the future.
The Path Forward
Fintech has begun to capitalize on these three developments and prod the financial services system forward. So far, however, the latest wave of investment has been primarily concentrated on credit and payments, highly fragmented, and largely focused on prime borrowers. As a result, there remains vast untapped mass market opportunities to help the 130 million Americans who struggle with financial health to better manage their financial lives.
At Omidyar Network, we are committed to backing entrepreneurs — both for-profit and nonprofit — who are taking this new set of financial service possibilities and translating them into improved outcomes for low-to-moderate income households.
Our hope is that a broad set of actors in the private, public, and social sectors will band together to seize this moment and make real positive change for Americans’ financial lives.
Sarah Morgenstern (@MorgensternON on Twitter) is an associate on Omidyar Network’s Financial Inclusion investment team
