Technology has changed how Americans experience most things—how we watch TV, read, connect with friends and family, even grocery shop. Yet with the notable exception of mortgages, consumer financial services have barely changed. Checking account design, for example, has remained basically the same since World War II. The most far-reaching shifts in how most people manage their day-to-day financial lives—the invention of the ATM, and debit and credit cards—occurred decades ago.
Today, however, the financial services industry is at the beginning of a wave of change that will upend how millions of Americans spend, save, borrow, and plan. Inspired by better consumer insights and enabled by technology, these innovations have the potential to solve cash-flow challenges and many other impediments to building consumer financial health.
As described in prior articles in this series, data have shown high levels of household income volatility in the United States. One family that participated in the US Financial Diaries research project, the Hossains, experience ongoing cash-flow challenges that get in the way of their financial security and mobility. Over the course of just nine months, their income bounced back and forth between $3,000 and $1,700 three times. Their average monthly income of $2,345 covers their average monthly expenses of $1,900, with a little room to spare. But seldom do income and expenses match up. Instead, the family experiences months with high expenses and low earnings, and vice versa.
For the most part, the Hossains solve this problem exactly how personal finance advisors and economic experts would advise: by saving. They put away as much money as they can in the high months to spend in the low months. But like others struggling with the realities of being low-, moderate-, or even middle-income in today’s economy, it is tough for them to accumulate a sustained financial cushion.
The combination of volatility and little cushion makes the exact timing of bill payments important. When Shaila Hossain switched jobs so that she could earn more, she had two weeks of unpaid training for her new position, and another few weeks passed before she received her first paycheck. Rent was due before then.
Financial services—payments, credit, savings, and insurance—can help families like the Hossains bridge from a bad month to a better one, from a job that pays less to one that pays more. By doing so, they can help them generate more income over time, which means they will be able to save more, develop greater resilience, and take advantage of new opportunities.
Low-income, underserved households spend approximately $138 billion on financial services each year. But pften these services don’t deliver what families like the Hossains need to build their financial health. Checking accounts, for example, work well for people whose income and expenses spike and dip—as long as they stay above a minimum balance. But if the spikes and dips are happening right at break-even, then checking accounts are a source of monthly fees and overdraft charges for bounced checks. For people with no cushion and a lot of volatility, access to immediate liquidity is crucial. Waiting three to five days for a check to clear, or to find out if they’ve been approved for a loan, are problems. Speed matters.
At the Center for Financial Services Innovation, we work with a broad network of organizations—including large banks, nonprofits, and start-ups—aiming to create higher-quality products and services that deliver on what these households need. Here are some early trends we are seeing across the changing universe of financial services providers.
1. Disruption of existing product silos can provide what households most need. Even—a financial-technology service that seeks to address volatility head-on by simulating the experience of a steady, predictable paycheck—calculates its users’ average monthly income based on past cash flows. It then normalizes spikes and dips by shifting funds into a separate account when income is high and depositing interest-free, extra money when income is low. The company charges a weekly fee of $3 for the service, and provides easy ways to flexibly re-pay funds or pause the service without penalty. Its services have attributes of traditional credit, savings, and insurance products, but by combining elements of all three in an integrated design and delivering elements of each product as needed, it can cut to the core of what people really need.
2. Cross-sector partnerships can expand the broad-based benefits of improving household finances. Employers have reasons to care about the financial wellness of their employees: Financially stable employees are more focused, productive, and reliable. Many financial technology start-ups seek to partner with employers to deliver services on-site. Financial technology company FlexWage, for example, makes it possible for employees to access their wages before payday if needed. The specific pay cycle that employers choose, whether it is biweekly or monthly, may not correspond to when employees need the funds, leading them to take out costly loans or go without needed purchases. By integrating FlexWage’s Wage Bank technology into their payroll systems, employers can give employees another way to manage cash-flow volatility.
3. Helping people make real change in their finances requires combining advice and opportunities for action—and, ideally, making it fun. Low- and moderate-income households in particular are time-starved and need ways to sort the useful from the less useful. Financial service organizations that provide advice in an inviting way and offer an immediate opportunity for behavior change are best-positioned to help them along.
Nonprofit organization D2D Fund was one of the first to see the need for innovation and has been working on how to design savings products that meet these criteria for a decade. One of its latest projects, the SavingsQuest app, helped more than 300 low- and moderate-income users save almost $300,000 collectively during a three-month pilot. SavingsQuest works similarly to the fitness tracker Fitbit: It tracks saving behavior automatically, and savers earn badges and complete challenges. SavingsQuest leverages new thinking: that it is more important to focus on changing behavior (where “every action counts”) than on outcomes. In other words, instead of pushing savers to accumulate a specific amount, the app rewards savers for regular saving activity. It is easy to imagine how this idea would resonate with the Hossains, who are spending down and rebuilding their savings several times a year, rather than putting away an untouchable lump sum. Just as importantly, instead of presenting savings as medicine to swallow, SavingsQuest is a fun game to play.
These new services represent just the beginning of what is possible. Financial innovations have the potential to be tremendously helpful to households—particularly those with unsteady, unpredictable cash flows—by enabling them to establish stability in the present, and develop a greater ability to weather shocks and take advantage of opportunity in the future.