Wednesday, September 28, 2011

The Homeless as Theater

Two months ago I wrote a piece about Families in Distress. It was prompted by a very disturbing report done by “60 Minutes” on the growing number of families and children living in poverty in the United States. What is so shocking about the report is that it shows that even normal, functional families are can face unthinkable hardship and humiliation through little or no fault of their own. As uncomfortable as this makes us feel however, we are inspired by their determination to stay together and overcome their problems.

Hunter’s Point, a new play by Elizabeth Gjelten being performed at St. Boniface Church in San Francisco as a benefit for The Gubbio Project, deals with a different cast of characters who we more easily identify with as “the homeless.” These are hardened street people, fierce outsiders used to hustling the tourists or gaming the system. But are they really that different from the families in the “60 Minute” report? Sure, they are a little crazy—some even clinically so. But don’t they also have families, people who care for them? Shouldn’t we feel the same empathy for them as we do for the more “normal” homeless families struggling to make it?

The core of the play is the relationship between two sisters: one, Eva, is homeless and clearly psychotic; the other, Ruthie, is guilt ridden about her inability to help her sister as she pursues her career as a travel writer. Eva knows she is not well but she also knows the medicine she is given only drives her deeper into her illness. She is desperate to find a clinic that provides a drug-free, “moral treatment.” But such is not to be found within the social welfare system. In fact, Eva’s options keep diminishing as programs are cut.

It is not coincidence that the play is being performed at St. Boniface, or that it should be benefiting The Gubbio Project which I wrote about in a posting a year and a half ago. Click on the link to the right and see a video about the project which provides sanctuary to people like Eva every day. Then go see the play. There are three more performances on September 29th and 30th and October 1st. It’s not only good theater, it’s good for the soul and for a good cause.

Wednesday, August 31, 2011

Regulators and the Underbanked

What can banking industry regulators do about payday lending and other predatory products of so the called alternative financial service providers? In most States, not much, unfortunately. National regulators such as the Office of Controller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) have no remit to regulate these non-bank purveyors of dubious financial services. The new Consumer Financial Protection Bureau which was established as part of the recent Dodd-Frank financial reform bill, can only act to control the payday lending industry with the approval of individual state regulatory entities.

With the economy continuing to linger in the doldrums of a jobless recovery, a majority of Americans appear unable to meet a $1,000 emergency expense. According to a recent report by the National Foundation for Credit Counseling only 36% of American households have the funds available to meeting an expense of this modest magnitude. No wonder the business of the payday lenders is booming and some commercial banks are beginning to offer their own payday-style products.

So-called “direct-deposit advance” loans are increasingly being used by low-income consumers with bank accounts linked to some form of direct deposit like a paycheck or social security benefit. Much like the payday loan, they are for a short duration and come with effective triple digit interest rates. Although they are less expensive than the typical payday loan, consumer advocates argue that they still lead to crippling dependency on debt. In fact, the Center for Responsible Lending urges regulators to immediately stop the banks they supervise from making such loans.

But would this really be helpful? After all, low income consumers do need the money and the bank product is arguably better than that offered by the alternative financial service providers. Would not such regulatory action simply drive these borrowers in greater number to the more predatory lenders. Instead of prohibiting banks from offering short-term, payday-style credit, why not require them to offer a product that meets the consumers’ needs and helps them to manage their debt needs responsibly?

Market purists would argue that banks should take such action on their own and this would be one more example of over intrusive government regulation. But the opportunity for short-term gain often trumps sound long-term corporate strategy. The subprime lending crisis that largely precipitated and certainly exacerbated the current economic crisis is ample evidence of this. And who would argue that stringent, government mandated warnings on the dangers smoking hasn’t induced large segments of the population to give up very harmful behavior?

In fact, regulators already have a tool, the Community Reinvestment Act, sufficient to encourage and reward banks for lending more responsibly to low income communities. As I reported in my previous blog post, Emerge Workplace Solutions, a for-profit social venture works with employers and mainstream financial institutions to provide financial wellness coaching and credit products that help workers re-build rather than destroy their credit. And now Citibank is pioneering with the Center for Community Self-Help in developing a “Micro Branch” model to compete with payday lenders in low-income communities.

Until we can outlaw the underlying need in low income communities for short-term credit it makes no sense to prohibit mainstream banks from providing it. However, we can and must ensure that this need is met in a way that alleviates rather than causes greater poverty.

Wednesday, July 20, 2011

Market Forces and the Underbanked Consumer

The blog piece I wrote a few weeks ago about “Understanding the Underbanked Consumer” generated an interesting comment on one of the discussion sites I posted it to.  The commenter asked "why market forces don't bring new competitors into a segment that spends $29 billion each year on financial services” especially since these underbanked consumers seem to be only asking for “basic things like clear communication, simplified products, and respect in exchange for their business.”

It’s a good question.  Part of the answer, I believe, is that the lower-income market segment is very expensive to serve.  Providing “clear communication, simplified products and respect” is a high-touch proposition and there isn’t much upside in this market segment for traditional financial service providers.  Higher end products sold through on-line media are much easier and cheaper to sell, and higher end clients can be “cross-sold” higher value, higher margin products such as investment services, insurance and small business loans and services.   

Secondly, it must be recognized that the lower-income segment is inherently more risky and engaging in high-risk, low-return business activities is not something shareholders or regulators tend to appreciate.  The FDIC may claim that it encourages the banks it regulates to make “small dollar loans” to low income clients.  However, when the examiners show up they often criticize banks for making loans to low-income borrowers and require them to increase reserves for such loans.  Regulated financial service providers are actually “dis-incented” from serving the low income consumer. 

Consequently, despite the requirements of the Community Reinvestment Act and the desire to demonstrate good corporate social responsibility, mainstream financial service providers are primarily located in higher income communities.  Pay-day lenders, or as they prefer to be called, alternative financial service providers, are left to fill the void for financial services in low income communities.  Even worse, according to this interesting report, some of the largest mainstream banks actually fund the predatory business practices of the pay-day lenders! 

It needn’t and shouldn’t be so.  Mainstream financial institutions can partner with social ventures focused on serving the working poor to bring services to financially stressed lower and middle income consumers.  One good example is Emerge Workplace Solutions, a for-profit social venture that works with employers and mainstream financial institutions to provide financial wellness coaching and credit products that assist workers re-build rather than destroy their credit. 

In these challenging economic times workers are increasingly living closer to the financial edge.  They must pay more for health care, higher tuition for their children and increased contributions for their retirement.  Their ability to save for life’s emergencies has been greatly constrained, making them all the more vulnerable to “alternative” lenders when emergencies do arise. 

The Emerge Workplace Solutions model is designed to bring scale to the high-touch business of providing financial services to the low income market segment.  It is a rare catalyst for bringing market forces to bear on the issues facing the underbanked consumer.  

Wednesday, July 13, 2011

Families in Distress

It is never easy to look poverty in the eye.  Even when it is some poor benighted street person whose poverty seems self inflicted we want to turn away and pretend he or she isn’t there.  But with the economy continuing to wallow in the doldrums of an at best anemic recovery, families are falling into homelessness to levels not seen since the Great Depression.  According to this shocking report seen on the program “60 Minutes” 25% of children in the United States now live in poverty.

The stories of these innocent victims of economic hard times are almost unbearable.  Imagine going to school so hungry you will ask another student for the food they may not want to eat themselves.  Or having to get on a school bus in front of a cheap motel where your family has moved after losing your home to foreclosure.  Or enduring the shame of seeing you father stand by the side of a road with a sign that reads “Family of Five, Please Help.” 

8 million families and 16 million children in distress in America is overwhelming social welfare systems and charitable organizations struggling to provide needed assistance.  As individuals, we feel powerless to help.  Last year I wrote about Home & Hope, a non-profit organization in San Mateo County that is specifically designed to engage individuals in the effort to assist homeless families. 

I can say from personal experience with this organization (I have joined the board and have spent the night with some of our families in a shelter) that we can and must become personally involved in creating solutions to the tragedy of families becoming homeless in America.  The Home & Hope/Family Promise model keeps families together while helping them to reconstruct their lives and transition back to employment and housing. 

Witnessing the bravery of the children is especially humbling.  Listen to the boy in the “60 Minutes” piece state with such conviction “as long as you’re with your family you will make it through this…all of it.”  Or the young girl say “when things get better we know there will still be people struggling and we will be able to help them.”  We must find it in us to respond to such courage.  Family of five, please help.

Tuesday, June 21, 2011

Understanding the Underbanked Consumer

The second session at the recent Microfinance USA conference Banking on the Poor was asked to review concerned financial services for the underbanked consumer. The session was subtitled “…and the Future of Financial Services.” This was a bit of an over-reach and, frankly, I was a little disappointed at the depth of this session. Nevertheless, it is a critical subject for millions of American families and if anything, the session underscored how more needs to be done to serve this market segment.

Why would one pay a large fee to cash a government check or pay a bill? What induces some people to pay an effective annual interest rate of 400% for a short-term secured loan? Two studies, one by the Center for Financial Services Innovation (CFSI) and another by the Pew Charitable Trust (PCT) provide some answers to these questions and were the basis for the session concerning “Understanding the Underbanked Consumer and the Future of Financial Services.”

Rachel Schneider outlined the findings in the CFSI study which found an ethnically mixed population of 21 million American households with little or no bank relationships. According to the CFSI study these low-income consumers spend $29 billion per annum on financial services. While the study determined there was significant overlap between the unbanked and subprime borrowers, some 25% would be considered prime borrowers and 42% simply had too thin a credit profile to qualify for prime credit products.

The study also found that the banked and the un-banked borrow and save for essentially the same reasons. Roughly 40% of both populations borrow because they have trouble covering living costs from current income. And, the major reasons for savings for both groups are also similar—emergency fund, retirement, college savings, buying a home purchase and purchasing a car.

However, the un-banked must rely on so-called “alternative financial service providers” (AFS) who tailor their product offerings to be more appealing to the unbanked while those with access to banking services address their needs at lower costs and often with government subsidies. As a consequence, while both banked and under-banked low income consumers were hard hit by the economic downturn, those with access to standard banking products faired much better.

The PCT study, presented by Eleni Constantine, documented the interesting phenomenon that as many low income consumers seem to be exiting banking relationships as opening accounts. This suggests that as individuals circumstances change for better or worse, they gain or lose options in the financial services arena.

So why might rational consumers opt for products and services that are significantly more expensive? Both studies pointed to the greater simplicity of the AFS products and how AFS providers made greater efforts to make low-income consumers comfortable. The studies quoted participants as saying they felt more appreciated and respected by the AFS providers and that their products, such as pre-paid cards, kept them from bouncing checks and running up large credit card balances.

The PCT study forecast a growing need for low-income financial products and services—especially for credit—and noted the growing participation of retailers, such as Wal-Mart in catering to the needs of the underbanked. It recommended that credit products be integrated with savings products and credit repair services, and warned that the growth in financial services provided by non-banks risked the creation of a two-tier system for the banked and the unbanked.

Ms. Constantine concluded that recent regulatory efforts designed to protect consumers from high banking fees could actually push more low-income consumers out of the banking system and into the high cost environment of largely unregulated alternative financial service providers.

Tuesday, June 14, 2011

Shame Fame and Video Games

Banking on the Poor attended the Microfinance USA conference again this year. It was held in my old neighborhood in New York City which I help “gentrify” when I moved to New York to begin a corporate career more than 30 years ago. From the conference center I could look across the street and see our old apartment which now sprouts an urban forest on the roof where I had installed a hot tub. How ironic that I would return for a conference dedicated to finding solutions to poverty!

I think there is a good blog piece in that irony which I will work on for posting later. However, as with last year I was invited to blog on some of the conference sessions. Here is the first which dealt with new ways to engage the “wired generation” in financial literacy.

In the break-out session on “Designing Products that Promote Financial Capability” participants outlined efforts to use social networking technology and video games to change consumer behavior related to personal financial decisions. Rob Levy of the Center for Financial Services Innovation (CFSI) moderated the session which addressed the apparent ineffectiveness of traditional financial education programs to improve the “financial capability” of American consumers.

According to a recent study by the CFSI, 49% of U.S. households are unable to meet monthly expenses from current income despite years of financial literacy training. Furthermore, the CFSI study rated U.S. consumers deficient in other factors they define as key determinants of financial capability such as using a budget and having the ability to select and manage basic financial products and services.

The CFSI concludes that to be effective in promoting financial capability practitioners must “think beyond the classroom” and design programs that are relevant, timely, actionable and ongoing. Financial literacy education must be linked to access to financial services, leverage technology, incorporate the principals of behavioral economics and utilize cross-sector partnerships.

Innovations for Poverty Action (IPA) has been engaged in the international sector since 2002 and recently turned its attention to the issues of high debt, low financial resiliency and low savings in the United States. Brooke Berman explained that IPA sees the problem of low financial capability in a broader social context. That is, behavior considered rational for the individual (e.g. maintaining a reserve of savings) is not often viewed as optimal from a social perspective.

IPA solutions stress such techniques as commitment contracts and automated reminder messages that, in effect, shame consumers who spend rather than meet announced savings targets. This is a similar approach some weight-loss programs or anti-smoking campaigns work to get participants to change unhealthy behavior. Ms Berman described the “Borrow less Tomorrow” (BoLT) program in which participants identify debt they know they should pay down, commit to a repayment schedule and enlist their social network contacts to provide peer pressure to achieve their goals.

Doorways to Dreams (D2D) has developed a number of video games designed to teach adults about financial capability and help them change financial behavior. Tim Flacke said that D2D’s approach is predicated on their belief that poor financial behavior is a “demand side problem”—people are inherently resistant to changing behavior. D2D has produced what they describe as “financial entertainment” which differs from traditional financial literacy training by being engaging rather than earnest, targeted rather than comprehensive, interactive rather than static and accessible rather than restriced. Their games are available at

Piggymojo, works at behavior change by making savers “heroes” to their partners. Designed to be used by couples, the program turns impulse saving into a better “feel good” experience than impulse spending. The founder of Piggymojo, Jayson Halladay, said that a family with an annual income of $45,000 typically spends 20% of their income, or $8,000 on impulse, inessential purchases. Piggymojo rewards people when they make a decision not to spend by sending a text to the other half say that he/she, rather than buying something, put the cost of the purchase into a joint savings account. The program tracks the respective “saves” of each partner and creates an image over time of the goal the couple has mutually agreed to save for.

These approaches to improving financial capability are clearly not your father’s kind of financial literacy training. Designed to appeal to the “wired” generation it will be fascinating to see if these innovations take hold and produce a more fiscally responsible generation.

Sunday, March 27, 2011

Grameen Bank Undermines the Work of the Government

If you have yet to see the excellent documentary by Gayle Ferraro, To Catch a Dollar: Muhammad Yunus Banks on America, March 31st would be the perfect time to do it. Not only would you see an inspiring portrayal low-income Americans struggling to lift themselves out of poverty with the help of Grameen America, but your presence in the theatre that day would send a message of support to Professor Yunus who, incredibly, finds himself under attack from political elements in Bangladesh that threaten to turn his Nobel Prize winning financial institution into an instrument of patronage and corruption.

Many commentators attribute the attacks on Grameen Bank and its founder to Professor Yunus’ audacity to criticize the Bangladeshi government and suggest he might form his own political party and run for office himself. However, as David Bornstein noted in his op-ed piece “Microfinance Under Fire” in the New York Times on March 21, 2001:

Bangladesh has a long history of banks and cooperatives being used as political instruments. The state-owned banks have regularly extended loans to elite borrowers (who default at high rates) as a form of patronage. Unlike Grameen, which is financially self-sufficient, the state banks are perpetually in need of cash infusions from the government.

Perhaps it is just the existence of a bank that serves the poor without government assistance that is anathema to Bangladeshi politicians. Bornstein also suggests an ideological reason in a subsequent New York Times column, “Grameen Bank and the Public Good” (March 24, 2011) that “people in the government, as well as across Bangladeshi society…don’t think microfinance helps the poor and…that socially-minded businesses, like Grameen Bank, undermine the work of the government.” So, the solution to global poverty lies in getting out of the way and letting the government do the work?!! Why didn’t we see that? Amazing.

Clearly, what is upsetting to politicians in Bangladesh and elsewhere, and maybe even in the United States, is a solution to poverty that involves empowering the poor. As Professor Yunus states in the trailer to the film which you can see here, Grameen wants to bring a new kind of development theory where “banks lend money, not to make money, but to help people.” Now, there is a novel concept that is sure to disrupt governments' efforts to help the poor!

The film is being screened in 227 theatres throughout the United States on March 31st and attendance will be an important barometer of support for microfinance and Professor Yunus. The Grameen Foundation and the Yunus Center are beating the drums for supporters to turn out and, if necessary, host screenings of the film in their local areas if none is currently scheduled. By going to this link you can buy tickets for venues already in place or offer to host one yourself.

It would be impressive to see a large turn-out driven by the power of social media especially given the very short notice.

Wednesday, January 5, 2011

Consumer Protection Rules Blamed for Increasing Use of Loan Sharks

A recent op-ed piece in the WSJ (“Dodd-Frank and the Return of the Loan Shark” 1/4/11) blames an apparent rise in the number of Americans using payday lenders, pawn shops and local loan sharks for credit on the new federal limits on how credit-card issuers can price and adjust interest rates. These limits, mandated by Card Accountability Responsibility Disclosure (CARD) Act passed in 2009, protect consumers from exorbitant fees and interest rate adjusts. An unintended consequence of the legislation, claims the author, is that banks have had to raise interest rates, reduce credit limits and increase other banking fees pushing lower-income Americans into the laps of payday lenders who charge interest rates 10 times higher than bank credit card issuers.

This is nonsense of course. I wrote a blog post last June that Changes in Banking Regulations Will Impact the Poor. The fact is, through excessive overdraft charges and higher interest rates, the poor have been subsidizing many banking services used primarily by the more affluent. Now that new rules make it more difficult for the banks to reap profits from poorly informed consumers or those whose financial circumstances result in poor credit ratings and reduced credit limits, banks must charge everyone more transparently for their services. One way or another, we will all pay more—either directly through new fees or indirectly by forgoing interest on deposits that might earn more if invested elsewhere.

In another WSJ article published today (“At Banks, New Fees Replacing Old Levies”) a spokeswoman at Chase is quoted as saying “We don’t want to raise fees on our customers, but unfortunately, regulation is forcing us to do it, and as a result, some customers may end up unbanked.” More nonsense. Chase just needs to cover its cost and make a return for its shareholders. Fair enough. Just don’t blame the regulators for the fact that they must raise fees to compensate for the profits they were making over-charging for over drafts and late payments on credit card balances.

Serving the large number of people in the U.S. who are unbanked is a serious issue. The ranks of the unbanked are not growing because of consumer protection laws. They’re growing because too many people have been out of work too long and they are running out of financial resources. They are also growing because financial institutions in the U.S. haven’t developed innovative products and services that are available to the poor in many developing countries.

Rather than focusing on real solutions for serving the under-banked, financial institutions and their lobbyists are more inclined to spend their efforts convincing the new Congress to undo some of the recent financial reform legislation they find so inconvenient. What better way to do this than to claim it would help the poor?