5 Questions For… Aaron Klein
Aaron Klein, MPA, is Miriam K. Carliner chair and senior fellow in Economic Studies at the Brookings Institution, where he focuses on financial technology and regulation policy. What’s Next Health spoke with Mr. Klein about his Robert Wood Johnson Foundation-funded project to imagine a financial services system that meets the needs of working families.
This interview is part of our 5 Questions For…Series, where we learn about the ways RWJF’s Pioneering Ideas for an Equitable Future grantees are helping us get to a healthier tomorrow by paving the way today.
Q: What do you hope to learn and accomplish through this work?
A: It is expensive to be poor in America. The less money you have, the more money it costs to deal with money. We have built a financial services system that is a reverse Robinhood, taking from those with less and showering benefits on those with more.
For example, a basic checking account is often free as long as you have $1,000 in the bank and when you have less than $1,000 in the bank, it’s $10 a month. Access to credit, whether in the form of a $500 loan or simply a few days of overdraft coverage when your bank account goes below zero is shockingly expensive if you’re living paycheck-to-paycheck, while it’s relatively cheap to borrow $20,000 if you’re wealthy.
My project is trying to reimagine the financial system from the point of view of working people. That is, if we were going to build a new basic financial services system from scratch to meet the needs of people with low-to-moderate incomes, what would such a system look like?
Too often the research and policymaking in financial services has been driven by assumptions held by those with money about how those without money live. By listening to working families, I hope to find new facts and realities about the world they experience. For example, my past RWJF-funded research uncovered that 70% of people who use check cashers also have a bank account. When faced with that data, you realize the policy prescription of getting people into the banking system is not the solution to expensive alternative financial services such as check cashing. That’s why we want to start by finding out what consumers need from their perspective, then imagine what the system to meet those needs could look like.
Q: What signals of the future or emerging trends were you noticing that led you to want to do this project?
A: The digitization of financial services is creating a whole new way for people to move, access and engage with money. For example, it’s allowing people to access their money without requiring physical proximity, and opening up a brand-new set of information available to make credit determination. This trend presents an amazing opportunity to alter and propose new sets of financial services in the 21st century where the power of a bank branch is in the palm of every smartphone.
Second, the crypto boom was heavily adopted by young people and people of color. This indicates a willingness of millions of people who were ill-served by the current system to jump headfirst into a new system. Crypto has faced major problems and may not be the right answer, but the fact that so many people with so little were willing to invest and give it a shot signals a huge appetite for something new and different.
Q: Looking ahead five, ten, fifteen years from now, how do you see this work helping individuals and communities create healthier, more equitable futures?
A: The financial services system is a silent driver of inequity. It’s a system predicated on the outdated assumption that people always have a little cushion in their bank account, a predictable and steady stream of income for themselves and their family, and easy access to low-cost borrowing when needed.
But the way many people are earning money today has changed — with more gig, freelance, hourly, and temp workers — and more people are living paycheck-to-paycheck. Family structures have changed. Expenses and income have become more volatile. As a result, people experience significant financial stress and are forced to make a set of challenging choices as they manage what they can afford to buy with when they have access to their money: Do I refill my prescription when the pills run out but incur an overdraft fee or a costly payday loan because I’m waiting for my paycheck to clear? Or do I skip a couple days of medicine while I wait for my wages so I can afford my pills? Has a doctor ever asked a patient, “How many pills should I prescribe to get you through to the next pay period?” Or do they simply write 30 days?
If we can create a system where people can access and move money more cheaply and efficiently, we will reduce the high cost of being poor. And by reducing, or even eliminating, this set of financial expenses, we can create more opportunities for people to use their funds to create a healthier life for themselves and their families — to pay for health care, housing, healthier food, transportation, and other necessities. In the process we can reduce stress and increase resilience against shocks.
Q: What one thing should people read, watch or listen to that will help them understand more about your ideas?
A: Knowing that people consume information differently, here are a few options: If you’re a technical wonk junkie, I recommend this 19-page comment letter to the Federal Reserve on how they could improve their payment system to address the needs of Americans with low incomes. If you like podcasts, I’ve talked about the failings of our financial services system on Planet Money and Banking with Interest. If you enjoy a good 45-minute talk, I’ve given a lecture on the payment system as a hidden driver of income inequality at Duke University and at Brookings Mountain West at the University of Nevada Las Vegas.
Q: What didn’t we ask you?
A: People are often making the best choice they can. The problem is they’re facing a bad set of options. Over a century ago, a group of people in Germany were unhappy with how banks were allocating credit. And so, they came up with a concept called a credit union, which is now a global phenomenon. Today in America, there are more credit unions than there are banks. The point here is that they didn’t just tinker at the edges, they came up with a better way by creating a new structure and entity.
Policies aimed at financial inclusion are often predicated on the concept that we have a really good structural system, and if we just brought more people into it, their lives would be better. Part of the problem with that notion is that the set of financial products and services available to the wealthy are not necessarily the sets of products and services the non-wealthy need.
When you delve deep into the system we’ve developed, it’s a great system for those who have money: Sapphire, diamond, and platinum rewards cards are great for people who spend $50,000 a year on their credit card, pay their bill on time every month, and never pay interest. The banking system works great if you always have $5,000 in your bank account, or if you don’t care if your paycheck is available on Friday or Monday.
Trying to include people in a system that isn’t designed for them is the wrong answer. We need to rethink what the right system is for everyone and then build that system. Coming up with a vision and an alternative structure and framework can be a very powerful way of reorienting our financial services system toward equity.
The views expressed are those of the interviewee(s) and do not necessarily reflect those of the Robert Wood Johnson Foundation.
