Households these days aren't doing very well financially.
The majority of US households--57%--are struggling, meaning that most of us are barely keeping up with our day-to-day expenses, let alone investing in our futures. Many of us struggle to pay our bills and utilities, we forego preventive medical treatment, we do not have savings to deal with financial emergencies, and we are increasingly relying on debt to make ends meet. In the land of supposed American dreams and unlimited financial opportunity, financial struggle is a fairly universal experience.
If we care about the extent of households' financial struggles, then we should also care about financial inclusion. This is because financial inclusion--access to basic bank or savings accounts--can operate as a "bridge" to households' improved financial health. A bridge is an infrastructural solution that offers safe passage over rough terrain and a connection to new opportunities. For households stranded on islands of financial struggles, a bridge may be a welcomed passageway to secure ground. With the right financial products and services, households may be better able to afford their day-to-day expenses like rent and utility bills and save for financial emergences like an unexpected job loss or major car or home repair. Once on secure ground, households can advance on their journey more easily. They have enough money saved to recover from financial emergencies, keep their debt at manageable levels, and begin to invest in the future by saving for retirement. (Scroll to the bottom of this article for the evidence on financial inclusion's potential).
Financial Struggle is Universal, Financial Inclusion is Not
Unfortunately, while financial struggle is fairly universal, financial inclusion is not. Too many households do not have access to the basic bank or savings accounts that they so desperately need to manage their financial lives. Thirty-one percent of all households do not have a savings account and 20% to 25% of lower-income households do not have any bank account at all. Households' insufficient funds and fears of costly maintenance and overdraft fees prevent them from opening accounts. These fears are justified given that account holders paid nearly $17 billion in overdraft fees in 2011.
Even households that do own basic bank or savings accounts still need access to more advanced financial products and services to manage their financial lives, like credit and short-term loans. When these products and services aren't available to them from the financial mainstream, households turn to high-cost alternative financial services. Upwards of one third of households regularly use both mainstream and alternative financial services. Eighty percent of those that take out a loan from these alternative financial services renew their loan within 14 days and 15% renew their loan at least 10 times. Lower-income households end up paying a lot of money to use these alternative financial services, spending roughly 10% of their annual income on interest and fees.
No one wants to risk driving over a defective bridge. And if financial inclusion is supposed to be a bridge to households' financial health, then this bridge is in great need of repair. Households--especially lower-income or financially vulnerable households--should not risk their financial health by using financial products and services that will collapse on them in times of need. Costly maintenance and overdraft fees, early warning or screening tools that limit eligibility for account opening, and inconvenient bank branch and ATM locations are examples of how basic bank or savings accounts used for financial inclusion can be unreliable.
Policies to Build the Financial Inclusion Infrastructure
In order to put the financial inclusion infrastructure into place, we need a set of policies that are designed to work in harmony for achieving mutually beneficial goals. In other words, it is insufficient to only focus on mending one or two policies whose benefits are temporary or fade 10 years into the future. After all, households cannot be expected to rely on a bridge that has an expiration date. To improve households' financial inclusion and health in a meaningful way, a set of policies is needed. Some of these policies include regulating the financial services industry to protect consumers, creating safer and more affordable bank accounts, revising how credit scores are calculated, expanding access to branch and ATM locations in residential communities, supporting localized or regional financial inclusion efforts, and encouraging FinTech innovations to facilitate the delivery of financial products and services.
One way that regulation could improve financial inclusion is through the Consumer Financial Protection Bureau's (CFPB) efforts to improve checking account access, recently calling on the largest mainstream banks to offer safer and more affordable accounts. Another example is to use Community Reinvestment Act (CRA) ratings to strengthen mainstream banks' incentives for increasing the number of bank branch and ATM locations in lower-income, residential communities. Currently, 97% of banks receive CRA ratings of "satisfactory" or "outstanding," which is inconsistent with the state of households' financial inclusion.
Local and regional efforts are underway to expand financial inclusion, and policies that support these efforts should continue. For example, the Cities for Financial Empowerment (CFE) Fund and Bank On coalitions are operating in 84 cities around the US, developing partnerships between local government, businesses, and nonprofit organizations to encourage safer and more affordable financial products and services within their communities. The US Department of Treasury and National Credit Union Administration recently announced a partnership to double the number of Community Development Financial Institutions (CDFI) serving lower-income communities. The American Postal Workers Union (APWU), along with policymakers and scholars, have proposed a return to offering basic financial products and services through the US Post Office. Additional policy examples can be found here.
Taken together, a set of policies such as these can better ensure that financial inclusion is a sturdier, longer-lasting bridge to securing and advancing households' financial health. And we need to make these policies happen: our financial health depends on it.
Evidence for the Potential of Financial Inclusion
Financial inclusion has great potential for reducing households' financial struggles and securing and advancing their financial health. Something as simple as owning a basic bank or savings account relates to whether households maintain relationships with banks or credit unions in the financial mainstream, accumulate savings, and access healthy debt. Their accumulated savings and access to healthy debt provides a buffer against unexpected expenses, like losing a job or having a medical emergency that could otherwise chip away at their financial health. They can also invest in entrepreneurship like starting a business. Here's some of the evidence for why we should care about financial inclusion:
Maintained Financial Services, Diversified Portfolios, Accumulated Assets
Accessed Secured Debt, Protected from Unsecured Debt
Buffered from Financial Emergencies, Income Shocks
Invested in Entrepreneurship
--
Dr. Terri Friedline is an Assistant Professor of Social Welfare at the University of Kansas. She has published extensively on financial inclusion, with her most recent work focusing on how access to safe and affordable financial products and services can improve households' financial health. She is the Faculty Director of Financial Inclusion at the Center on Assets, Education, and Inclusion (AEDI) and a Research Fellow at New America in Washington, DC. She can be reached for comment at tfriedline@ku.edu or followed on twitter @TerriFriedline.
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The majority of US households--57%--are struggling, meaning that most of us are barely keeping up with our day-to-day expenses, let alone investing in our futures. Many of us struggle to pay our bills and utilities, we forego preventive medical treatment, we do not have savings to deal with financial emergencies, and we are increasingly relying on debt to make ends meet. In the land of supposed American dreams and unlimited financial opportunity, financial struggle is a fairly universal experience.
If we care about the extent of households' financial struggles, then we should also care about financial inclusion. This is because financial inclusion--access to basic bank or savings accounts--can operate as a "bridge" to households' improved financial health. A bridge is an infrastructural solution that offers safe passage over rough terrain and a connection to new opportunities. For households stranded on islands of financial struggles, a bridge may be a welcomed passageway to secure ground. With the right financial products and services, households may be better able to afford their day-to-day expenses like rent and utility bills and save for financial emergences like an unexpected job loss or major car or home repair. Once on secure ground, households can advance on their journey more easily. They have enough money saved to recover from financial emergencies, keep their debt at manageable levels, and begin to invest in the future by saving for retirement. (Scroll to the bottom of this article for the evidence on financial inclusion's potential).
Financial Struggle is Universal, Financial Inclusion is Not
Unfortunately, while financial struggle is fairly universal, financial inclusion is not. Too many households do not have access to the basic bank or savings accounts that they so desperately need to manage their financial lives. Thirty-one percent of all households do not have a savings account and 20% to 25% of lower-income households do not have any bank account at all. Households' insufficient funds and fears of costly maintenance and overdraft fees prevent them from opening accounts. These fears are justified given that account holders paid nearly $17 billion in overdraft fees in 2011.
Even households that do own basic bank or savings accounts still need access to more advanced financial products and services to manage their financial lives, like credit and short-term loans. When these products and services aren't available to them from the financial mainstream, households turn to high-cost alternative financial services. Upwards of one third of households regularly use both mainstream and alternative financial services. Eighty percent of those that take out a loan from these alternative financial services renew their loan within 14 days and 15% renew their loan at least 10 times. Lower-income households end up paying a lot of money to use these alternative financial services, spending roughly 10% of their annual income on interest and fees.
No one wants to risk driving over a defective bridge. And if financial inclusion is supposed to be a bridge to households' financial health, then this bridge is in great need of repair. Households--especially lower-income or financially vulnerable households--should not risk their financial health by using financial products and services that will collapse on them in times of need. Costly maintenance and overdraft fees, early warning or screening tools that limit eligibility for account opening, and inconvenient bank branch and ATM locations are examples of how basic bank or savings accounts used for financial inclusion can be unreliable.
Policies to Build the Financial Inclusion Infrastructure
In order to put the financial inclusion infrastructure into place, we need a set of policies that are designed to work in harmony for achieving mutually beneficial goals. In other words, it is insufficient to only focus on mending one or two policies whose benefits are temporary or fade 10 years into the future. After all, households cannot be expected to rely on a bridge that has an expiration date. To improve households' financial inclusion and health in a meaningful way, a set of policies is needed. Some of these policies include regulating the financial services industry to protect consumers, creating safer and more affordable bank accounts, revising how credit scores are calculated, expanding access to branch and ATM locations in residential communities, supporting localized or regional financial inclusion efforts, and encouraging FinTech innovations to facilitate the delivery of financial products and services.
One way that regulation could improve financial inclusion is through the Consumer Financial Protection Bureau's (CFPB) efforts to improve checking account access, recently calling on the largest mainstream banks to offer safer and more affordable accounts. Another example is to use Community Reinvestment Act (CRA) ratings to strengthen mainstream banks' incentives for increasing the number of bank branch and ATM locations in lower-income, residential communities. Currently, 97% of banks receive CRA ratings of "satisfactory" or "outstanding," which is inconsistent with the state of households' financial inclusion.
Local and regional efforts are underway to expand financial inclusion, and policies that support these efforts should continue. For example, the Cities for Financial Empowerment (CFE) Fund and Bank On coalitions are operating in 84 cities around the US, developing partnerships between local government, businesses, and nonprofit organizations to encourage safer and more affordable financial products and services within their communities. The US Department of Treasury and National Credit Union Administration recently announced a partnership to double the number of Community Development Financial Institutions (CDFI) serving lower-income communities. The American Postal Workers Union (APWU), along with policymakers and scholars, have proposed a return to offering basic financial products and services through the US Post Office. Additional policy examples can be found here.
Taken together, a set of policies such as these can better ensure that financial inclusion is a sturdier, longer-lasting bridge to securing and advancing households' financial health. And we need to make these policies happen: our financial health depends on it.
Evidence for the Potential of Financial Inclusion
Financial inclusion has great potential for reducing households' financial struggles and securing and advancing their financial health. Something as simple as owning a basic bank or savings account relates to whether households maintain relationships with banks or credit unions in the financial mainstream, accumulate savings, and access healthy debt. Their accumulated savings and access to healthy debt provides a buffer against unexpected expenses, like losing a job or having a medical emergency that could otherwise chip away at their financial health. They can also invest in entrepreneurship like starting a business. Here's some of the evidence for why we should care about financial inclusion:
Maintained Financial Services, Diversified Portfolios, Accumulated Assets
- Owning savings accounts is associated with being two times more likely to maintain their ownership of accounts five years later.
- Households' ownership of savings accounts is associated with being two times more likely to own checking accounts, three-and-a-half times more likely to own savings accounts, three times more likely to own certificates of deposit, two-and-a-half times more likely to own stocks, and own significantly more financial products four years later.
- Households almost always diversify their asset portfolios at around the same time they open savings accounts, like opening checking and retirement accounts and investing in stocks.
- Owning a combination of stock and retirement accounts, themselves products of savings account ownership, is associated with accumulating liquid assets of over5,000.
- Households' opening of savings accounts relates to an increase in having at least100 saved. The amount of assets held across bank, bond, stock, and investment accounts also increases by 137%.
Accessed Secured Debt, Protected from Unsecured Debt
- Households' ownership of savings accounts during the macroeconomic growth of the 1990s is associated with a 15% increase in their accumulated secured debt and a 17% increase in this type of debt during the Great Recession of the late 2000s.
- Owning savings accounts during the 1990s is associated with a 14% decrease in households' accumulated unsecured debt, while closing accounts during the late 2000s is associated with a 12% increase in this type of debt.
- Owning savings accounts is associated with a 14% decrease in carrying burdensome debt and a 26% decrease in using unsecured debt from alternative financial services.
Buffered from Financial Emergencies, Income Shocks
- Owning savings accounts is associated with being 224% more likely to save for emergencies than those without accounts.
- Households' sufficient assets are associated with being better able to pay their bills and afford daily expenses, whereas those without sufficient assets may struggle or make financial trade-offs.
- Compared to having no assets, lower-income households who accumulate their assets up to2,000 are less likely to miss paying their telephone, utility, and mortgage or rent bills.
Invested in Entrepreneurship
- Accumulating higher amounts of assets relates to the increased probability of self-employment, a relationship that strengthens as households acquire more assets.
- Housing equity, such as when home owners enjoy unexpected appreciation, has positive effects on the probability of self-employment.
- Households' accumulated liquid assets, debt, and net worth relate to the increased likelihoods of Blacks' and Latinos/as' self-employment. However, discriminatory lending practices likely force Blacks and Latinos/as to rely more heavily on their own assets, debts, and net worth for funding their entrepreneurial pursuits when compared to Whites who have more lending options.
--
Dr. Terri Friedline is an Assistant Professor of Social Welfare at the University of Kansas. She has published extensively on financial inclusion, with her most recent work focusing on how access to safe and affordable financial products and services can improve households' financial health. She is the Faculty Director of Financial Inclusion at the Center on Assets, Education, and Inclusion (AEDI) and a Research Fellow at New America in Washington, DC. She can be reached for comment at tfriedline@ku.edu or followed on twitter @TerriFriedline.
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