Increasingly, underserved Americans are turning to prepaid cards to meet their basic financial services needs. Functioning much like electronic banks accounts without checks, general purpose reloadable, or GPR, prepaid cards can be used make purchases, pay bills, access cash, monitor one’s finances, ...
Research Papers
Building Consumer Credit
Submitted by Jessica_Kumar on June 2012Building Consumer Credit: A Winning Strategy for Financial Institutions and Consumers
Many financial institutions elect not to provide credit to consumers with damaged or insufficient credit history, believing the risk these consumers pose to the institution outweighs the potential benefits of serving them. This mindset is potentially detrimental to consumers, who may be inadvertently subjected to harm when they are forced to rely upon low-quality credit products, and to providers themselves, who miss out on real profit opportunities as well as the potential to develop loyal and long-term customer relationships.
Banks and credit unions can and should be doing much more to support consumer credit building – and, more importantly, they can do so in ways that align their own success with the success of their customers. With few large-scale consumer credit building solutions existing today, banks and credit unions have a critical role to play in bringing scale to the innovative solutions that do exist but that are not yet widely available to consumers. In this paper, we suggest a number of initiatives that banks and credit unions can undertake to help build the credit profiles of low and moderate income consumers. We offer initiatives that can be implemented in the short-term, medium-term, and longer-term, with the short-term solutions being the least labor and cost-intensive, and the longer-term solutions requiring a more significant effort on the part of individual financial institutions as well as more systemic, industry-wide change.
Strategies for Banks and Credit Unions to Support Credit Building:
Short-term – Credit Building Tools, Services and Partnerships:
- Connect customers to online and mobile-enabled credit score tracking tools
- Connect customers to personal financial management (PFM) tools, or build in-house PFM tools
- Partner with non-profits to offer high-touch products and services
- Connect customers to online and offline debt management programs
Medium-term – Risk-Limited, Credit Building Products:
- Develop and market secured credit products or credit builder loans
- Develop and market low credit lines
- Offer loan terms that improve with good behavior
- Invest in marketing efforts for credit building products
Longer-term – Go Beyond Traditional Credit Files:
- Consider New and Deeper Sources of Data for Credit Decisioning
Consumers approach banks and credit unions in search of an appropriate small-dollar credit product every day, and in some cases, these consumers do not qualify for the product they are seeking. However, consumers should never have to leave a financial institution completely empty-handed and without any knowledge of how to improve their credit standing. No matter the level of time and resources banks and credit unions are able to devote to customer credit building initiatives, there are a number of ways for financial institutions to help customers. Those institutions that do so will derive significant long-term benefits in customer loyalty and retention, and also uncover new potential revenue sources.
Click below to read the full research paper.
Financial Technology Trends in the Underbanked Market
Submitted by Jessica_Kumar on May 2013An emerging industry of financial services technology startups, known as FinTech, are creating a new wave of products for financially underserved customers. The underbanked market in the United States is currently estimated at $78 billion in annual revenue, serving 68 million consumers across 22 different financial product types. The Center for Financial Services Innovation and Core Innovation Capital co-released Financial Technology Trends in the Underbanked Market on May 7, 2013.
This report examines four key trends in emerging financial technologies impacting the underbanked marketplace today and highlights a selection of noteworthy companies capitalizing on these trends to improve consumer financial health and their own bottom line. The trends include:
- Harnessing Social Networks: The power of the crowd – online communities easily linked and self-sorted for mass communication and organization – can influence personal financial management, enable opportunities for peer-to-peer lending, and improve the quality and depth of data used to identify credit risk.
- Solving the Cash In/Out Problem: Digital payment networks can smoothly transition funds to cash and back again through secure loading, single-click purchasing, and other real-time touch points for the many consumers who continue to prefer cash in an increasingly electronic financial world.
- Leveraging Big Data for Better Risk Management: Advanced analytic tools for credit evaluation, account monitoring, and risk management are unlocking access to new sources of available capital and a wider field of qualified borrowers with greater accuracy.
- Scaling Up by Going B2B2C: Startup companies are exploiting B2B distribution channels to rapidly reach their target underserved consumer base through white label products and innovative partnerships between new and established industry players.
This paper has been sponsored by Morgan Stanley and has benefited greatly from the company’s strategic input.
Download Financial Technology Trends in the Underbanked Market below.
Stretch Time: Continuing to Reach for Financial Capability- Trends from the FCIF II
Submitted by Jessica_Kumar on April 2013
Driven to help households better manage their finances and attain financial stability, a number of nonprofits, financial services providers, and government agencies have turned to the concept of financial capability in the search for effective solutions. Programs and tools designed to build financial capability focus on helping consumers adopt or improve upon good financial behaviors such as saving consistently and making good use of financial products.
The Center for Financial Services Innovation (CFSI) has been a proponent of financial capability since 2009, when we assessed the landscape of promising strategies for affecting consumers’ financial behavior. Inspired by the opportunities for innovation, we launched the Financial Capability Innovation Fund in 2010. Through the Fund, CFSI provided technical assistance, strategic guidance and a total of $1.5 million to five nonprofits whose projects proposed to test new strategies for building financial capability.
In 2012, CFSI launched the Financial Capability Innovation Fund II (FCIF II) to support another round of innovative nonprofit-led efforts to help low-income and underserved consumers build financial capability. With the support of a collaborative of funders led by the Citi Foundation and also including the Capital One Foundation, NYSE Euronext Foundation, Charles Schwab Bank, Charles Schwab Foundation, and Experian, the FCIF II will provide eight projects with a total of $2.5 million in addition to valuable non-monetary support (full descriptions of the projects are provided in the Appendix).
While we were only able to select eight projects for the FCIF II, the application pool contained many high-quality proposals and provided valuable insights into how nonprofits are promoting financial capability. Though opportunities for further growth and innovation remain, many nonprofit organizations appear to be making significant strides toward creating effective solutions for helping consumers take better control of their financial lives.
Download below Stretch Time: Continuing to Reach for Financial Capability- Trends from the Financial Capability Innovation Fund II.
Double Duty: Payments Cards as a Doorway to Greater Financial Health
Submitted by Jessica_Kumar on March 2013On March 28, 2013 CFSI and the Hudson Institute Released Double Duty: Payments Cards as a Doorway to Greater Financial Health.
Electronic payments are growing by leaps and bounds, overtaking paper as preferred payment mechanisms. Governments at all levels have embraced this change, often not just encouraging a move from paper checks but even requiring it. Electronic payments have advantages for all parties. Governments lower the cost of distributing benefits. The payments industry realizes further economies of scale and greater revenue from wider use of the payments network. For individuals, electronic payments lower the incidence of lost checks and potentially improve efficiency and convenience.
Electronic payments 1.0 is a success story. Electronic payments spare government the cost of writing and distributing checks while delivering funds to recipients more safely and reliably. But electronic payment methods can do more—and defining “more” will be the next chapter in the story.
By far, most recurring government electronic payments, such as Social Security and unemployment benefits, are made via direct deposit. However, direct deposit does not work for people without bank accounts. Payment cards—prepaid debit cards with a 16-digit number, magnetic strip, and network logo—are an electronic option that does not need a bank account. When state and federal governments require recipients to receive their benefits electronically, those who do not choose direct deposit receive the default choice instead—a prepaid debit card. And this is where the next chapter begins.
Electronic government payments can serve as an entry into lower-cost, broader-function payment tools that support recipients’ financial lives. They can offer increased choice among financial services and a range of financial service functions. Above all, they have the potential to help people improve their financial health and capability, whether through access to more information or a transition to greater use of higher-quality, more effective services. The same systems that made electronic payment possible can also help people understand and plan their financial lives.
Download Double Duty: Payments Cards as a Doorway to Greater Financial Health below.
A Complex Portrait- An Examination of Small-Dollar Credit Consumers
Submitted by Jessica_Kumar on August 2012Every year, millions of American consumers use small-dollar credit (SDC) products for quick access to cash. Yet, these products—payday loans, pawn loans, direct deposit advance loans, auto title loans, and non-bank installment loans—often come with high fees or interest rates and can lead consumers into a cycle of repeat usage and mounting debt. This study seeks to elucidate the reasons why so many consumers rely upon these potentially dangerous products and to glean what can be learned from their experiences to promote the development of high-quality credit solutions.
This study covers the following angles of the SDC Consumer: who they are, how they decide to use a SDC product, how they fare once they have used a product, and what they think about the products they use.
Some key findings from the research:
- An estimated 15 million consumers used at least one SDC product in the past year
- The average household income for an SDC consumer was $32,000 compared to $40,000 for non-SDC consumers, although 20% of SDC consumers had an average household income between $50,000 and $75,000
- Only 27% of SDC consumers had a credit card, compared to 61% of non-SDC consumers
- The top 3 reasons for funds shortage included:
- living expenses consistently more than income
- bill or payment due before paycheck, and
- unexpected events such as emergency expenses or income drops
- While 66% of SDC consumers had no savings, more than half of those that did have savings chose not to use it all and relied on credit instead
- The top 3 loan attributes that mattered most to SDC consumers were:
- quick access to money
- ability to qualify, and
- clear terms
- Although experiences varied significantly, many SDC consumers struggled with repeat usage, particularly users of payday and pawn loans who were often in debt for a considerable part of the year due to high levels of repeat borrowing.
- When looking across the entire year, payday borrowers took out an average of 11 payday loans or extensions, remaining in debt for approximately 150 days out of the year; pawn loan borrowers took out an average of 7 pawn loans, remaining in debt for approximately 200 days out of the year
- While a slight majority of SDC customers reported a satisfactory experience, a significant number reported quite negative experiences.
- Within the products considered, payday loans and auto title loans received the lowest ratings and deposit advance received the highest.
- 30% of SDC consumers reported the loan costing more than expected
Download the full paper "A Complex Portrait: An Examination of Small-Dollar Credit Consumers below.
