Perspectives on financial challenges facing low- and moderate-income families in New England Perspectives on financial challenges facing low- and moderate-income families in New England

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July 30, 2016

The Boston Fed’s Regional and Community Outreach group works on a range of issues related to financial well-being for low- and moderate-income populations in the First District. We asked Brian Clarke, a senior financial institution relationship manager, to shed light on some of the common struggles faced by families and how traditional banks, the Fed, and other organizations are trying to address them.

1. You spend many of your days working with community banks across New England on issues ranging from credit and lending conditions, to ensuring fair access to financial services for traditionally underserved market segments. In your experience, what are some of the more pressing financial issues facing low- and moderate-income families in the region?

In my work with some of these smaller financial institutions, I have a pretty unique window into the tough challenges low- and moderate-income families are dealing with in respect to both personal and business finances. Many are living paycheck to paycheck, and lack the savings needed to be able to handle the unexpected. For example, the inconvenience of needing a car repair can have a domino effect because without transportation, a job can suddenly be in jeopardy. The need for quick access to cash can lead to reliance on payday loans – short-term loans with extremely high interest rates – which can just replace one financial problem with another.  Access to capital can be difficult to come by even through a traditional bank; for individuals applying for a personal or business loan, prior issues with credit may limit their ability to secure funds. So not only is it difficult to keep up, it may seem almost impossible to get ahead.

2. What are some of the ways that the banking community and other organizations are responding to these issues – and what role does technology play?

Fintech – the intersection of technology and financial services and banking – is incredibly important right now, as banks are working on ways to support underserved and ‘unbanked’ customers by improving access to products and information. The banking community is looking at the structure of traditional banking products – which may require minimum deposits to set up accounts, charge monthly fees, lack mobile banking options, or must be open in-person at a branch – to determine how they can be improved using technology to improve customer features and keep the costs of providing the accounts down.

General Purpose Reloadable Cards – or GPR cards, which work like a debit card with a prepaid balance are now widely available, and making it easier for people who don’t have checking accounts or qualify for credit cards to make purchases. Data is incredibly important, of course. Increasingly, financial institutions are working to provide improved access to data that can help families learn where their money goes and improve short-term savings habits; and to help lenders more efficiently evaluate loan applicants. Companies like Mint have made a lot of progress in this space. Push alerts on your smart phone are another promising technology-enabled savings tool. Imagine getting an alert on your phone the day your paycheck hits via direct deposit where a simple swipe could transfer money into your savings account.

3. So what is the role of the Federal Reserve in consumer financial health for low-mod populations?

It starts with discussing with community banks best practices in customer engagement strategies for traditionally underserved populations. Making a few simple changes might bring people in for the first time – and hopefully get them to come back. As the banking community is well-aware, we must adapt to consumer habits and available technology if we’re going to encourage sustained savings habits.  

Second, despite improvements in the fintech space, there remain numerous unknowns as far as the value of new products for customers. Surely there’s an opportunity for the Fed, with its reputation for high-quality research and data, to engage firms driving fintech innovation and allow them to test their ideas in a research environment known for its independence and rigor. 

Third, in the small business space, I think you will continue to see interesting developments in the nonbank online alternative lending space as the business models are tested through a credit cycle. Dr. Lael Brainard of the Federal Reserve’s Board of Governors spoke last year about the opportunities and challenges in this space for banks. If you look at the results from the Fed’s own Small Business Credit Survey, the customer satisfaction scores for online lenders are pretty poor and small banks score really well. There’s definitely an opportunity there for small banks that are able to take the best parts of the online lending platforms and combine it with their current, relationship-based business model.  Unsecured business loans may be a way to increase access to promising small businesses in traditionally underserved communities.

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