The term “rural brain drain” was popularized nearly a decade ago when two sociologists published a book documenting <a href="https://www.wired.com/2010/02/how-do-we-stop-hollowing-out-the-middle-of-america/">their experience living in Iowa</a>. Their goal was to understand the exodus of a young, educated workforce from rural areas to urban hubs. Today there are many factors contributing to this population shift, among them deindustrialization, lack of high-paying jobs, and weak broadband connectivity. A <a href="https://www.federalreserve.gov/publications/files/consumer-community-context-201901.pdf?mod=article_inline">Federal Reserve</a> report published earlier this year brought to light another reason for this phenomenon that dozens of states are grappling with: student loan debt.

The student debt crisis made headlines in 2010 when student loan debt surpassed credit card debt in the United States, at a staggering $1.56 trillion today, student debt is growing much faster than <a href="https://www.finder.com/student-loans-to-overtake-mortgages">mortgage debt</a> (10.4 percent per year versus 0.6 percent for mortgages). According to the Federal Reserve Bank of New York, nearly two-thirds of this financial burden falls on Americans under the age of 39.

As young people are increasingly burdened by student debt, they are flocking to the places that offer high-paying jobs: cities. According to Pew Research, <a href="https://www.pewresearch.org/fact-tank/2018/03/16/how-millennials-compare-with-their-grandparents/">88 percent</a> of millennials live in metropolitan areas. The average age is higher in <a href="https://www.citylab.com/life/2018/05/mapping-americas-aging-population/561200/">the Midwest and the Appalachians</a>, regions that are struggling to keep pace with urban hubs in terms of broadband access, variety of jobs, quality of higher education institutions, and other success factors in today’s markets. As evidenced by the Fed’s report, individuals with student debt are less likely to remain in rural areas than those without debt. Furthermore, nearly two-thirds of the students most burdened by debt leave rural areas within one year after entering repayment. The term for this migration pattern has been coined the “rural brain drain,” and its impacts on the economic vitality of these regions are increasingly apparent. The inability of rural areas to attract a young, educated workforce is deepening the rural-urban divide.
<blockquote>Young people are flocking to the places that offer high-paying jobs: cities.</blockquote>
Some may argue that widespread access to education loans has created better opportunities for younger populations all over. However, according to U.S. Census data, wages have been stagnant since the 1970s, while the average cost of public college tuition has increased almost four fold. Simultaneously, homeownership among those under 35 has dropped <a href="https://www.census.gov/library/stories/2018/08/homeownership-by-age.html">10 percent</a> since 2006, and birth rates have declined every year since 2007. People in the age groups we might expect to be buying homes, settling down, and raising the next generation cannot afford to do so.
<blockquote>Wages have been stagnant since the 1970s, while the average cost of public college tuition has increased almost four fold.</blockquote>
We often look to countries like Finland, Denmark, and Norway, which offer tuition-free college to their citizens, as paradigms of what could exist here at home. Which country has the best model for us to try to replicate? According to former Secretary of Labor Robert Reich, the answer is <a href="http://inequalityforall.com/wp-content/uploads/2014/12/A_Visual_StoryPDF.pdf">the United States</a>. In post-war America, tuition fees were waved for veterans, and there was a massive proliferation of public universities. The GI Bill was one of the important factors that led to a tripling of the number of Americans with a bachelor’s degree from 1950 to 1977, and these educated workers helped the U.S. to grow to have the largest and most prosperous middle class in the world. At this time, public tuition was about 6 percent of an average male salary, compared to today’s 25 percent.

Times have changed, however, and modern problems require modern solutions. Refinancing and forbearance can provide some relief, but they ultimately increase debt in the form of interest. Other <a href="https://www.forbes.com/sites/andrewjosuweit/2017/11/05/6-ways-congress-can-help-ease-the-student-loan-crisis/#1cdcbb656cf6">proposals</a> to remedy the student debt crisis include erasing all debts, boosting the tax deduction for those making on-time payments, expanding the Pell grant program, creating a tiered system that lowers or eliminates debt based on income, and proper adherence to the <a href="https://www.nerdwallet.com/blog/loans/student-loans/public-service-loan-forgiveness/">Public Service Loan Forgiveness Program</a>. The latter program was created in 2007 to forgive remaining student loan balances of those who have worked for 10 years in public service. In 2017 applicants first became eligible for relief through this program, which has a two-year budget of $700 million. However, as of April this year, only 1.5 percent of those funds have been utilized. While the <a href="https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service/temporary-expanded-public-service-loan-forgiveness#how-qualify">requirements</a> for forgiveness are publicly available, the Department of Education has come under fire for not providing clear guidance to successfully navigate them.

Some believe that a policy to eliminate all or most student debt would be a major <a href="https://www.marketwatch.com/story/canceling-14-trillion-in-student-debt-could-have-major-benefits-for-the-economy-2018-02-07">economic stimulus</a>, spurring job creation and narrowing the wealth gap over the next decade. Our recent history proves that a well-educated population fuels a virtuous cycle of growth through competitive wages, increased tax revenues, and expansion of jobs. An affordable education lies at the foundation of this cycle, and will be a key factor in creating a more economically inclusive rural and urban America.

Rural America: Another Casualty of Student Loan Debt?

North America

United States

Consumer Protection

Over-indebtedness

Blog Post

Fueled by algorithms and software to assess credit worthiness, the financial technology industry’s growth has been such that regulators in the United States and elsewhere are <a href="https://www.ft.com/content/ae6a1186-9a2f-11e8-9702-5946bae86e6d">exploring ways for these companies to test new products</a> and innovate faster without jeopardizing the health of the financial system.

At the same time, however, there are <a href="https://www.americanbanker.com/opinion/occs-fintech-charter-is-a-mistake">calls from the traditional financial service sector</a> (especially community banks) to subject these companies to the same level of regulatory scrutiny banks face, while <a href="https://www.pymnts.com/news/b2b-payments/2018/bis-fintech-credit-business-p2p-lending/">questions</a> continue about their potential risk to the financial system.

In such an environment, it would be a big mistake for fintech companies to maintain a low profile and focus solely on delivering value to their customers and the financial institutions they partner with. Political risks, as well as opportunities, must be factored in.
<blockquote>It would be a big mistake for fintech companies to maintain a low profile and focus solely on delivering value to customers and partners.</blockquote>
Lawmakers responsible for oversight of the financial services sector have <a href="https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401750">made it clear</a> that one of their priorities will be issues they consider to be critically important for the economic well-being of Americans. This includes encouraging what they consider “responsible innovation in financial technology,” as well as promoting diversity and inclusion in the sector. Given the heightened scrutiny on the industry from Capitol Hill, fintech companies should be actively seeking out opportunities to engage with key stakeholders in Washington, D.C. to demonstrate why their endeavors should be encouraged, not hindered.

The Federal Deposit Corporation’s 2017 <a href="https://www.fdic.gov/householdsurvey/2017/2017report.pdf">National Survey of Unbanked and Underbanked Households</a>, a report assessing "Americans’ access to safe, secure, and affordable banking services," is an example of a perfect educational opportunity.

The report notes that 18.7 percent of U.S. households were “underbanked” last year, meaning they had an account at an insured institution but also tapped alternative financial services such as: money orders, check cashing, international remittances, payday loans, refund anticipation loans, rent-to-own services, pawn shop loans, or auto title loans.

Many of the above options come with double or triple-digit interest rates, and that is one reason U.S. regulators have encouraged banks, rather than unregulated providers, to <a href="https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-51.html">make more small-dollar loans</a> to customers.

The FDIC report presents a great opportunity for fintech companies, in conversations with lawmakers, regulators, and media, to underscore the key role the industry plays in making loans to under-served borrowers and communities ignored by traditional banks - and without the predatory terms common in payday and title loans. As the report notes, the majority of households using alternative financial services were in a less-advantaged group: low-income, less-educated, younger, black and Hispanic, disabled, and with volatile income.

For banks to offer small-dollar loans to these customer segments in a cost-effective manner will require partnerships with technology firms. Fintech companies can provide access to a broader range of data and analytics, potentially helping banks to serve more consumers responsibly. Richard Cordray, the former director of the Consumer Finance Protection Bureau (CFPB), recently <a href="https://www.fastcompany.com/90318224/now-wanted-by-equifax-and-other-credit-bureaus-your-alternative-data">noted</a> how "alternative data from unconventional sources may help consumers who are stuck outside the system build a credit history to access mainstream credit sources."

Additionally, point-of-sale lending is popular with younger borrowers, who are reluctant to take on credit card debt, but are comfortable borrowing for specific purchases. Point-of-sale lending is being fueled by fintech firms, such as Affirm and GreenSky, which have the necessary technology and also relationships with thousands of merchants. They can connect banks with borrowers.

Point-of-sale loans are an important driver of consumer loan growth for banks at a time when many are cutting back on auto lending activity and demand for home equity loans has declined. Smaller, community banks, especially, can become overexposed to specific market segments, particularly commercial real estate. Offering these types of personal loans helps to diversify their risk.

Furthermore, U.S. retail banks <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/49360224">are closing branches</a> at the fastest rate on record – 1,947 in 2018 alone – as consumers continue to migrate to online and mobile banking options. Clearly, the future of banking is the internet, and community banks need to partner with fintech firms to keep up with the large Wall Street banks. More to the point, without fintech partnerships, many community banks may go out of business, creating banking deserts that would be a significant blow to greater financial inclusion.

An excellent example of community banks using fintech to compete with the big banks is <a href="https://globenewswire.com/news-release/2018/02/07/1335463/0/en/Radius-Bank-Mantl-Launch-New-Digital-Account-Opening-Platform.html">Radius Bank</a>, a $1 billion asset institution in Boston, which is <a href="https://www.americanbanker.com/news/fintech-partnerships-can-work-see-radius-bank">establishing long-term relationships</a> with fintech providers, and is finding them to be mutually beneficial. The bank is serving more customers, and standing out from the crowd by partnering with technology firms. The bank is trying to become the Amazon of banking, but according to the article, "It's hard for banks to reach Amazon-like levels of usability on their own."

Many U.S. lawmakers have been vocal about their desire to end predatory lending practices, and fintech companies (and businesses more generally) need to aggressively seize opportunities such as these to show how they are part of the solution.

<em>Image Credit: <a href="https://www.flickr.com/photos/ponyrojo/5637105898/in/photolist-9A8Dc1-2dkvzjP-bp9LdB-96Ht48-27CpeT9-4vhcKu-7EuRys-9KyKpy-5ZUyW1-8m4vvW-64LqPo-hqLSF-2beKjsV-SP3mQu-roCJtM-9i41MQ-6i2uAC-84xWrA-29RVSQ-8hJ4zN-7iRxSm-P3c5Y-c54Cjs-21dQrj1-9gAKEo-92AuVC-gMXTWR-4DbgiZ-5Gp5GJ-hqLQP-huPt-5x3P5Q-cDPYro-7wL6oK-5jPeF5-4NGwPF-rNw91C-hNRXw-64fGf6-ZdSeUE-ahPTgp-9vk1JA-2bQq4PY-JrFe1G-ohepF-9s5tkC-6JTkec-64rPAo-9cHsn3-ifNojx">pony rojo</a> /  <a href="https://creativecommons.org/licenses/by-nc/2.0/">CC BY-NC 2.0</a></em>

Seizing Opportunities for Proactive Public Policy Engagement on Fintech

Credit

Delivery Channels

Digital Financial Services

Enabling Environment

Financial Technology

Payday Loans

Policy, Regulation and Government Initiatives

What would you do with an extra $500 a month?

Mayor Michael Tubbs of Stockton, California, posed this question to his constituents last year. In February, the city began its 18-month universal basic income (UBI) pilot. Through a privately-funded program, Stockton’s government will distribute <a href="https://www.huffpost.com/entry/stockton-california-universal-basic-income_n_5c697700e4b05c889d20203a">$500 on a monthly basis</a> (the first $500, pre-paid debit cards have been sent), no strings attached, to 130 of its low-income residents. <a href="https://www.ycombinator.com/about/">Y Combinator</a>, a California-based startup accelerator, plans to launch a similar trial this year in Oakland.

Tubbs knew there would be obstacles in getting this pilot off the ground; he would have to convince people across the political spectrum that it was a good idea. However, there was one segment he did not expect push back from: the people the program intended to help.

“There were conversations I had with folks who are one paycheck away from deprivation saying, ‘We don’t deserve anything,’ so really the challenge has been reshaping the conversation. This is not a handout. This is part of what you get as a citizen of Stockton. You are eligible for this not because you need anything, but because you are a citizen of this city, ” Tubbs explained in an <a href="https://iop.harvard.edu/forum/stockton%E2%80%99s-economic-empowerment-demonstration-guaranteed-income-initiative">interview</a> last year. He hopes that this program will empower people to have more agency.
<h2>Differences Between Stockton's UBI Pilot and Others</h2>
A UBI pilot like this has never been done in the U.S. before, so it’s difficult to hypothesize how the Stockton trial will turn out. While most pilots focus on the quantitative data – how funds are spent, whether employment rates changed, and the like – the Stockton pilot aims to <a href="https://basicincomepodcast.com/podcast/updates-stockton-basic-income-trial-feat-mayor-michael-tubbs-lori-ospina/">humanize the results</a>. Through surveys, qualitative interviews, and local artists, the city intends to engage participants more deeply and stimulate discussion more broadly.
<blockquote>Humanizing the results: Stockton's universal basic income pilot participants will be engaged deeply and stimulated by discussion.</blockquote>
Finland recently ended a <a href="https://www.nytimes.com/2018/05/02/opinion/universal-basic-income-finland.html">two-year trial</a> that awarded 2,000 Finns roughly $630 per month, but that was targeted exclusively at the unemployed.

The fact that it targeted exclusively the unemployed is important for a couple of reasons. First, it didn’t teach us how people who have a source of income, especially on the low or irregular end, would treat this extra funding. Second, the Finnish government changed its unemployment laws concurrently with the pilot such that if you could not prove you were actively seeking a job, you lost your government benefits. In the first three months, <a href="https://yle.fi/uutiset/osasto/news/finlands_activation_model_brings_benefit_cuts_for_94000_people/10145894">94,000 Finns saw their benefits cut</a>.

UBI is not meant to be contingent, and cutting other benefits shifts the financial liability for things like health care back to the individual. In many ways it’s similar to Clinton’s <a href="https://aspe.hhs.gov/report/personal-responsibility-and-work-opportunity-reconciliation-act-1996">Personal Responsibility and Work Opportunity Reconciliation Act</a>: among other things, it forces the unemployed to accept gig work, and businesses can lower wages because people have to accept a job or risk losing benefits.

The closest thing we’ve seen to a large-scale UBI is the Alaska Permanent Fund, which has been active since 1982. The fund receives most of its capital from the revenue of oil companies operating within the state; each year, payments of equal amounts are distributed to all Alaskan residents (generally between $1,000 and $3,000). A 2018 report found that this cash transfer program <a href="https://www.nber.org/papers/w24312.pdf">did not significantly decrease employment</a>. However, as climate change issues surge, there are growing concerns regarding the source of revenue of the fund. While some board members <a href="https://www.juneauempire.com/news/what-does-the-alaska-permanent-fund-have-to-do-with-climate-change-this-group-will-tell-you/">attempt to downplay</a> the percent of the portfolio invested in fossil fuels, its former Chair William Moran <a href="https://www.adn.com/opinions/2018/05/24/how-alaska-permanent-fund-investment-policies-fail-to-consider-the-changing-world/">noted</a> last year that “every last cent of the $65 billion initiative is a financial derivative of fossil fuel interests. ” This sends a message that if the price is right, oil companies can buy their way into operation.

The United States already has an antipoverty cash distribution program called the Earned Income Tax Credit (EITC), which is designed to support low-income Americans. The program differs from the UBI concept in several important ways, however. It primarily supports people with children, rather than focusing on individuals. The disbursal amount varies each year, and it is only distributed once a year. This means that recipients never know how much they will receive, and often spend it on overdue expenses. <a href="https://www.nytimes.com/2012/04/17/us/antipoverty-tax-program-offers-relief-though-temporary.html?hp">Critics argue</a> the lump sum would be more effective if dispensed in installments.

Given that less than 10 percent of the EITC payout goes into savings account, this points to the critical problem that people still can't survive on working wages alone. Research by economist Alan Krueger shows that <a href="https://qz.com/851066/almost-all-the-10-million-jobs-created-since-2005-are-temporary/">nearly all jobs created since the recession have been contract, part time, or contingent</a>. These types of jobs don’t provide the same benefits as a 40-hour per week role, and it is increasingly <a href="https://scholar.harvard.edu/files/lkatz/files/katz_krueger_cws_v3.pdf">less likely that your job will provide the security</a> that it did 20 years ago. Some of the most successful companies in the past decade,<a href="https://slate.com/business/2018/12/google-walkout-protests-contract-workers.html"> including Google</a>, contract more than half of their staff. In combination with the rising concern of job loss to automation, UBI could be an insurance policy for future downturns that require workers to accept less stable short-term or gig positions, especially for those who have dependents, less varied skillsets, or otherwise require a degree of employment stability.
<h2>Beyond Income: Work Isn’t Just Monetarily Rewarding</h2>
Some scoff at the idea of UBI, deeming it welfare for those too lazy to work and believing it would lead to workforce gaps. However, according to the Economic Policy Institute, nearly <a href="https://www.epi.org/publication/poor-people-work-a-majority-of-poor-people-who-can-work-do/">63 percent of poor people in the U.S. who are eligible to work are currently employed</a> full or part time, and many of those who aren’t – about 3.3 million – are actively seeking employment. Furthermore, work is generally not just about a paycheck; unemployment is enormously traumatic, and studies have shown that people <a href="https://harris.uchicago.edu/news-events/news/universal-basic-income-policies-dont-cause-people-leave-workforce-study-finds">find purpose in work</a>. When it comes to poverty, a willingness to work is not the problem, but rather that work itself is no longer the solution. The next big economic idea will have to consider a myriad of factors – from increasing digitization to the ever-expanding wealth gap – to push for a more economically-inclusive society.

The idea of universal basic income isn't just about social justice – it's about stimulating economic growth. The United States <a href="http://inequalityforall.com/wp-content/uploads/2014/12/A_Visual_StoryPDF.pdf">prospers most</a> when it has a healthy middle class; in 1940, it was almost guaranteed that a child would grow up to have a higher income than his or her parents. By the mid-1980s, that probability was <a href="https://www.brookings.edu/blog/up-front/2018/07/25/fewer-americans-are-making-more-than-their-parents-did-especially-if-they-grew-up-in-the-middle-class/">down by about half</a>. When those who have less do better, <a href="https://www.americanprogressaction.org/issues/poverty/news/2011/12/06/10771/10-reasons-why-cutting-poverty-is-good-for-our-nation/">everyone benefits</a>: health costs go down, innovation goes up, and social mobility improves.
<blockquote>Universal basic income isn't just about social justice – it's about stimulating economic growth.</blockquote>
While UBI alone is not a panacea for economic inequality, its time has come as a force for serious and meaningful economic prosperity, and a counter to the ballooning inequality from which the U.S. suffers.

Work Isn’t Just About Money: Universal Basic Income and Potential Benefits for U.S. Working Poor

Financial Capability

Financial Inclusion Strategy

Payments

Personal Financial Management

The impact investing world is an exciting place to be. Investors’ hopes of doing good and doing well are alive and well. As impact investing matures, veterans in the field are asking how to focus resources. Should we seek high returns in order to attract mainstream investors, or maintain a clear social bottom line, even if returns fall below the market average? Which direction should our unique blend of development and capitalism take?

Two recent articles attempt to answer this question: one is a <a href="https://ssir.org/articles/entry/almost_everything_you_know_about_impact_investing_is_wrong">longer essay in Stanford Social Innovation Review</a> – by <a href="https://www.poverty-action.org/people/wendy-abt">Wendy Abt</a> – the other an <a href="https://www.ft.com/content/b6c893d4-f48e-11e8-9623-d7f9881e729f">interview with Elizabeth Littlefield in the Financial Times</a>. Both these accomplished women are well positioned to reflect on and shape the future of impact investing.

Abt is the founder of <a href="https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=51828662">WPA, Inc.</a>, an investment advisory firm, and former deputy assistant of USAID. Littlefield was the director of CGAP before becoming president of the Overseas Private Investment Corporation, which has shaped her current role as Senior Counselor of the <a href="https://www.albrightstonebridge.com/team/elizabeth-l-littlefield">Albright Stonebridge Group</a>.

There is a lot to agree on in both articles, but I have some reservations about them as well.
<h2>Abt: Market Returns, Better Measurement, Bigger Players, and a Different Investment Paradigm</h2>
Abt is right that greater clarity is needed regarding impact investing’s key principles and practices.

She contrasts two investing paradigms that come from mainstream investing but are often applied in impact investing. The first is venture capital (and incubators), an approach that prioritizes rapid growth and a clear exit strategy for investors. The problem here is that fast growth and clear exits can be incompatible with attention to social impact. Abt prefers an approach that more closely resembles project finance. While the analogy may not be exactly appropriate, project finance takes a longer-term perspective and considers complementary investments by other players.

She also points out that too many impact investors surrender to concessionary business models before they even join the fight for market returns. They offer a plethora of rationales to justify concessionary returns, arguing, for example, that subsidies are necessary because impact-oriented businesses take a long time to become financially self-sustaining. Many social enterprise business models need to start off with concessionary funding (subsidies) because the timeline for revenue generation is unclear: these are, after all, new operating models tackling social problems that big business has not taken on. Often however, this concessionary capital becomes “permanent” because the goal of moving towards financial sustainability takes a back seat to other priorities. So I agree that impact investors should expect their investees to move towards sustainability and profitability, and that requires clearly negotiated timelines and diligent oversight.

However, Abt makes some assertions that I disagree with.

Abt insists that the purpose of impact investing is to solve major social problems – like income inequality or global warming – by attracting non-concessionary capital into a competitive marketplace. I’m not on board with several parts of that claim. Impact investors should not have to carry the weight of building more competitive markets, and do not have to aim exclusively at non-concessionary capital sources. These are grand aims, but often they are too much to ask of investors wishing to use their own capital in socially positive ways.

As a result of her focus on non-concessionary capital, the only source of below-market capital Abt is willing to entertain is government, on the grounds that if impact investors do not anchor themselves to market returns, they risk serious misallocation of resources. I disagree. In fact, many impact investors, especially foundations, prioritize social return over market returns especially if their money can be used in a catalytic way to create a business with a social good. Why should they not be considered legitimate investors?
<blockquote>Many impact investors prioritize social return over market returns, especially if their money can be used in a catalytic way to create a business with a social good.</blockquote>
Because Abt’s vision is all about major social problems, she defers to the biggest corporations in a way I find a bit troubling. She asserts that only large regional and global companies, not small ventures, can make a difference in the complex sectors most critical to the poor, namely infrastructure, health, agriculture and logistics. She states, “impact investors are noticing the advantages that global and large regional firms have over smaller firms in low-income and fragile countries.” She cites successes of Carlos Slim in Mexico, Aliko Dangote in Nigeria, and Jack Ma in China.

It may be true that behemoths have advantages, but it’s simplistic and unrealistic to apply that thinking wholesale. It sends a message that impact investing is all about co-investing with or exiting to Alibaba or Dangote, who were themselves small disruptors at one time. But do the behemoths value social impact? What should happen in countries where big companies don’t invest? It’s true that the goal of many a small innovator is to sell to a global company – and that proves my point: impact investing is needed precisely for these smaller firms to innovate and test their ideas before large multinationals will give them a second glance.
<h2>Littlefield: Market Returns Not Necessary?</h2>
I put myself more in Littlefield’s camp, agreeing with her assertion that the impact investment sector should accommodate all investors, whether large or small, institutional or individual, philanthropic or commercial. Millennials are demanding investment opportunities, and not all are looking for above market rates of return. The “investment experience” is important along with social and financial returns. Research suggests that the demand for sustainability is <a href="https://www.inc.com/melanie-curtin/73-percent-of-millennials-are-willing-to-spend-more-money-on-this-1-type-of-product.html">firmly entrenched in mainstream millennial attitudes toward money</a>. As these millennials gain seniority in the business world, they won’t hesitate to advocate investment decisions that promote sustainability above traditional market returns, and data-driven decision making will help shape these investment decisions, even if it means their money grows more slowly. Many millennial investors are willing to experiment and refine. Time, of course, is on their side.

Moreover, a below-market return doesn’t mean a loss. Investors who prioritize social returns are also looking for the investee to grow and become profitable. With this in mind, I agree with Littlefield that the universe of impact investors has to be broadened, which is why I appreciate her wider definition of “impact investor” vis a vis Abt. There is no one type of impact investor, so there is no single approach or type of funding that will ensure success.
<blockquote>the universe of impact investors has to be broadened.</blockquote>
Abt’s search for a big business fix is not realistic. Yes, there is a lot to say for economies of scale, access to cheap capital and the big data that big players bring, but can we trust these companies to care for small impact investment projects, especially in cases of global economic headwinds? Will they let them fall by the wayside when they need to make revenue projections for a particular quarter? To succeed, the impact investment sector will need a broad and diverse community of investors. As we move forward, millennials will drive this diversification.

<em>If you’ve read this article, chances are you have a lot on your mind regarding the impact investing and how it affects financial inclusion. We’d like to hear from you! Please write your opinions in the comments below and let the world know what you think.</em>

The Future of Impact Investing: CFI’s Take on Dueling Views

Equity Investing

Impact Investing

Responsible Investing

Social Impact Metrics

‘Tis the season for shopping online, and if you’re one of the millions who uses the e-commerce behemoth Amazon to buy everything from streaming shows to steam irons, you could someday be ordering something else on Amazon: financial services.

There are indications that if Amazon went into financial services for individuals, they would be quite profitable – as with most things they do: a <a href="https://www.bain.com/insights/can-amazon-take-customer-loyalty-to-the-bank/">recent brief,</a> published by Bain &amp; Company, indicates that if Amazon were to get serious about this, there would be a lot interest from potential customers.

In fact, the brief revealed that among respondents who were Amazon Prime members – those who pay an annual fee for free two-day shipping and other services – 65 percent would be willing to try a free online bank account offered by Amazon. And even among people who don’t buy through Amazon, 37 percent would be willing to give it a shot.
<h3>In Amazon We Trust?</h3>
Consumers give Amazon a Net Promoter Score of 47, significantly higher than the score of 31 for regional banks on average, or 18 for the national bank average, according to the brief. (The Net Promoter Score measures the willingness of a customer to recommend a company’s products or services). While that sweater you received from a third-party seller might not have lived up to expectations, chances are minuscule that something went wrong on the payments side. And perks such as no-questions-asked returns have also bolstered trust among customers.
<blockquote>Perks such as no-questions-asked returns have also bolstered trust among customers.</blockquote>
“Creating a basic banking product would not only save Amazon on interchange costs, but also give it more direct influence and insight into customers’ finances and spending, rather than having banks as the intermediary,” the Bain brief states. “The bank account could become a platform for a whole new range of services for a company that already has enormous reach among America’s most valuable banking customers.” In-house loans could become among those new services.

Currently, Amazon’s financial services operate mainly at the B2B level, behind the scenes. For example, Amazon Web Services supports financial institutions such as Capital One with things like grid computing, data analytics and digital transformation.

However, it may come as a surprise that the company <a href="https://www.forbes.com/sites/rohitarora/2018/03/13/how-amazon-is-impacting-small-business-finance/#ea9da274dade">already makes small-business loans</a>, to the tune of $1 billion loaned out to 20,000 or so merchants in the US, UK and Japan. Amazon Lending (which lends to larger companies, too) gives loans up to $750,000 overall, and its Amazon Cash program allows non-bank account holders to load money onto their Amazon accounts through their phones. There are some indications Amazon might also branch into mortgage lending.

Amazon has some advantages in this area over other super platforms, such as Facebook and Google, which have been occasional players in financial inclusion, because storing user payment data is already integral to the purchasing process on Amazon. It’s clear that many millions of Amazon already trust it to handle their financial data. The next step may be for Amazon to trust its customers by providing them loans in milliseconds.
<h3>What an Amazon Foray into Financial Inclusion Could Mean</h3>
What benefits and what issues could instant Amazon-powered loans raise for a taco stand owner in Nicaragua or a farmer in Benin?

At the CFI <a href="http://financialinclusionweek.org/cfi10/">10th Anniversary Symposium</a> on November 1, we had attendees from diverse financial inclusion backgrounds and geographies to<a href="https://issuu.com/centerforfinancialinclusion/docs/world_cafe_summary"> jot down thoughts</a> about the impact of super platforms. Some were positive. One participant noted, “Super platforms have the best chance to close the usage gap and fulfill the promise of customer centricity...and blending financial services into other online behavior.” Another participant noted their last-mile connection power as an advantage.

Others were more circumspect. “There is a risk that competition will be purchased and dismantled,” wrote one. “There may be a race to the bottom…and the ability to arbitrarily exclude people,” stated another. Another attendee thinks, “Super platforms lead to a concentration of wealth and data and to destruction of local jobs.”

For many traditional banks, the concept of the Amazons of the world entering this space is enough to hasten a nervous quest for digital financial service excellence. Maybe just the thought of Amazon getting into financial inclusion can motivate financial institutions to invest more.

The Bain brief notes, “For retail banks, the key lesson is that their main competition consists not of traditional banks, but rather the large technology firms such as Amazon that have upended entire industries. Tech firms have already reset customer expectations for what a good experience feels like, and Amazon’s expected entry into core banking heightens the urgency of accelerating work to improve the customer experience, largely by making it simpler and more digital.” This attention to user experience detail should extend to the billions of underbanked, too.
<h3>How Team Bezos Could Directly Support Financial Inclusion</h3>
If Amazon is getting into financial inclusion, it hasn’t said so publicly.

A more logical foray into financial inclusion for the underserved could involve support for smaller fintechs to leverage Amazon Web Services to lower transaction costs in the developing world. Leveraging AWS on the backend could make it easier for developing country entrepreneurs in the global south to enter into the fintech space before major consolidation matures. This strategy wouldn’t stretch Amazon’s core strengths, which do not yet include a large ecommerce presence in in the developing world. Amazon could also offer similar services -- or collaborate with -- organizations like <a href="https://www.stellar.org/how-it-works/stellar-basics/">Stellar</a>, a network with which fintechs integrate to provide fast and inexpensive transactions.

Whether or not they enter the financial inclusion space, Amazon’s reach in finance is quietly spreading. It’s something to ponder when adding that present for Aunt Mildred to your cart this holiday season.

<em>What do you think? Join the conversation by leaving a comment below.</em>

Add to Cart…an Amazon Loan?

For the second part of our Financial Inclusion Week 2018 podcast series, Tess Johnson, research associate at the Center for Financial Inclusion at Accion, sat down with Accion in the U.S. CEO Gina Harman for a conversation highlighting the domestic U.S. perspective on getting inclusion right. Accion in the U.S. collaborates with all four Accion U.S.-based lending organizations to reach entrepreneurs on the ground and online with the latest innovations in mission-based small business lending.

Podcast: Getting Inclusion Right Podcast with Gina Harman

Financial Inclusion Week

Financial Health

Fintechs

Podcast

That question is at the crux of a different kind of emergency savings fund. A “f*ck off fund” is savings you can leverage when you need to break away from your current situation – say, when you need to leave a harmful relationship or a problematic job. The term was coined a few years ago and has become popular, in recognition of its distinctiveness from other types of savings and its importance especially among women.

In a survey of adult women in the United States, <a href="https://www.glamour.com/story/why-you-need-a-fuck-off-fund">71 percent</a> indicated they’ve stayed in a job because they couldn’t afford to leave, and 31 percent said they’ve been financially trapped in a relationship. A f*ck off fund, equivalent to roughly three-to-six months’ worth of living expenses, provides the financial means to leave any such situation and start again. This might apply if you’re unhappy with your current work or living situation. Perhaps you want to quit your job and take that internship to jumpstart your career in a different industry. Or, more importantly, if you have been sexually harassed, abused, or feel unsafe but otherwise wouldn’t have the financial means to remove yourself from a bad relationship. This sort of fund provides the financial power to leave a situation.

This kind of savings fund is in keeping with mainstream financial advice. In addition to insurance, it’s recommended to have the safety net of three-to-six months’ worth of savings. Of course, just because this is recommended doesn’t mean most of us have these sorts of savings. Additionally, there are a few characteristics that differentiate this sort of fund from other types of emergency savings. If you are in a long-term relationship and are sharing finances with your significant other, your emergency savings might be joint with that person. However, what happens if the reason you need these savings is to leave? A <em>personal</em> emergency fund would be advisable. If your work environment were problematic, would it be as easy for you to mobilize savings from your family and friends to leave this situation as it would be to mobilize savings for a medical expense? As with savings for education or housing, it is typically a good idea to have savings set aside exclusively for this purpose.

It’s been exhilarating and heartening recently to witness a watershed moment for action against sexual harassment and abuse in the United States. And in many of these cases, the harassers have considerable financial power over their victims.

We were tipped off on the concept of a f*ck off fund by an <a href="https://www.glamour.com/story/why-you-need-a-fuck-off-fund">article</a> in <em>Glamour</em>. <em>Glamour</em> surveyed over a thousand women in the United States and found that 72 percent of respondents did not have such a fund, and that 51 percent have less than $500 in their savings. A third of the respondents said paying down debt was their main financial goal, and half said they have gone negative on their bank balances at least once in the last year. The financial roadblock they cited most frequently was simple: they did not make enough money at their jobs. You can find the survey’s full results <a href="https://www.glamour.com/story/money-secrets-from-1000-real-women">here</a>.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2014/11/03/domestic-violence-and-microfinance-what-is-our-role-as-financial-service-providers/" target="_blank" rel="noopener">Domestic Violence and Microfinance: What Is Our Role As Financial Services Providers?</a>

<a href="https://cfi-blog.org/2016/07/15/the-heart-and-science-of-client-assessment/" target="_blank" rel="noopener">The Heart and Science of Client Assessment</a>

<a href="https://cfi-blog.org/2017/04/03/can-bank-accounts-save-womens-lives-violence-against-women-and-financial-inclusion/" target="_blank" rel="noopener">Can Bank Accounts Save Women's Lives? Violence Against Women and Financial Inclusion</a>

&nbsp;

&nbsp;

If You Suffered Domestic Abuse, Would You Be in a Financial Position to Leave?

Saving

Underserved Groups

Women

<a href="https://www.consumerfinance.gov/data-research/consumer-complaints/"><img class="wp-image-25519 alignright" src="https://centerforfinancialinclusionblog.files.wordpress.com/2018/05/cfpb1.png" alt="" width="615" height="379" /></a>Last week, Mick Mulvaney, interim director of the U.S. Consumer Financial Protection Bureau (CFPB) <a href="https://www.nytimes.com/2018/04/25/business/cfpb-complaints-database-mulvaney.html?rref=collection%2Fsectioncollection%2Fyour-money">said</a> in reference to the CFPB’s consumer complaints database, “I don’t see anything in [the Dodd-Frank Act] that says I have to run a Yelp for financial services sponsored by the federal government. I don’t see anything in here that says that I have to make all of those [complaints] public.”

Mulvaney’s comments refer to the complaints database CFPB has been running for several years, which allows anyone to view, sort, and filter complaints submitted by customers regarding their treatment by their financial service provider. Since the database was created, roughly <a href="https://www.regulations.gov/document?D=CFPB-2018-0014-0001">1.5 million complaints</a> have been logged. This database has functioned as a tremendous resource for prospective customers who want to check out financial institutions, for analysts of consumer risks in the U.S. financial system, and for financial institutions who want to see how they stack up against others. Its publication may also induce financial service providers to be more vigilant in avoiding bad practices and handling customer complaints well.

I share this because Mulvaney has put forth a <a href="https://www.regulations.gov/document?D=CFPB-2018-0014-0001">call for comments and information</a> from interested parties on how the CFPB handles consumer complaints. CFPB is required by law to collect, investigate, and respond to consumer complaints regarding financial products and services. But it isn’t legally required to make these comments public.

What do you think? Should the CFPB do away with the public side of the database? Mulvaney’s comment has sparked fierce debate in the country, including vehement opposition from consumer protection advocates.
<h3><strong>How the Consumer Complaints Database Works</strong></h3>
When a consumer lodges a complaint into the system, before the complaint is published, the CFPB verifies the relationship between the consumer and the financial service provider, and routes the complaint directly to the provider. The provider then has 15 days to respond to the complaint. The complaint is published once the provider responds, or after 15 days, whichever comes first. The consumer is invited to review and comment on the provider response and indicate whether their concern has been alleviated. This system is meant to allow both provider and customer to have a voice.

In addition to public uses of the database, CFPB uses it to identify patterns of bad behavior. It has prompted action against student loan services, debt collectors, mortgage lenders, and credit card companies, among others. For example, it <a href="https://www.politico.com/story/2018/04/30/mick-mulvaney-consumer-protection-507460">helped</a> the CFPB identify the systemic fraudulent activity of Wells Fargo employees opening bank accounts without consumer permission.

It’s estimated that <a href="http://www.post-gazette.com/opinion/2018/05/01/As-Others-See-It-Let-consumer-complaints-see-the-light-of-day/stories/201805010043">97 percent</a> of consumer complaints receive a timely response and 80 percent are resolved to the customer’s satisfaction. <a href="https://www.nytimes.com/2018/04/25/business/cfpb-complaints-database-mulvaney.html?rref=collection%2Fsectioncollection%2Fyour-money">Over 185,000 complaints</a> have resulted in some form of compensation or relief for the consumer complaint, including through monetary relief and the changing of the financial institution’s practices.

Use of the consumer complaints database is robust, with consumers submitting more than <a href="https://www.regulations.gov/document?D=CFPB-2018-0014-0001">320,000 complaints</a> in 2017. Each week CFPB sends <a href="https://www.consumerfinance.gov/data-research/consumer-complaints/">thousands of consumer complaints</a> about financial products and services to companies for response.
<h3><strong>The Case for Revoking Publication </strong></h3>
Opponents of publishing the database cite several concerns. The first question is whether the consumer complaints are substantiated. The CFPB might be able to verify that the consumer is a client of the institution, but it does not verify that the consumer’s complaint is valid before publishing. Even though the financial institution has the opportunity to respond before the complaint is published, publishing unsubstantiated complaints can create undeserved negative attention for the provider.

Another issue is that the database does not allow the frequency of complaints to be <a href="http://www.post-gazette.com/opinion/2018/05/01/As-Others-See-It-Let-consumer-complaints-see-the-light-of-day/stories/201805010043">adjusted for the size of the institution</a>. The biggest financial institutions in the country appear frequently in the database simply because they have so many more customers. It is not possible to determine the rate of complaints per customer.

Finally, some opponents question the need for complaint resolution channels beyond those financial services providers are already required to have. They argue that little is gained by using public funding for an additional level of complaints, and would prefer to see customers depend on privately managed online tools for consumers to rate financial institutions and products. Shouldn’t these be enough?
<h3><strong>The Case for Keeping It Public (Our View)</strong></h3>
“Daylight is a great disinfectant. And, you know, the American people have a right to know when tens of thousands of their fellow citizens are complaining about a financial institution,” <a href="https://www.politico.com/story/2018/04/30/mick-mulvaney-consumer-protection-507460">said</a> Karl Frisch of consumer advocacy group Allied Progress. Although it is not required by law, taking down the public database might reduce incentives for providers to behave fairly and respond adequately to complaints. Proponents of publication assert that the current approach helps to hold these institutions accountable.

Regulators around the world, as well as consumer protection organizations including <a href="http://smartcampaign.org/">the Smart Campaign</a>, generally create and support two tiers of grievance redressal, with primarily responsibility lying with providers, but appeals available from an independent ombudsman, either at a provider association level or at the regulatory level or both.

In regards to the concern about the proportionality of complaints to clients, this could be ameliorated with the inclusion on the platform of relevant ratios. Adding such information to the current site would not be difficult.

A <a href="https://www.documentcloud.org/documents/4449153-Breach-of-Trust-Equifax-Report.html">new report</a> by Senate Banking Committee members Elizabeth Warren, Robert Menendez, and Brian Schatz illustrated that complaints about Equifax to the CFPB nearly doubled after the data breach was announced in September. There were roughly 12,000 complaints in the six months preceding the company’s announcement, and in the six months thereafter the CFPB has received more than 7,000 complaints about Equifax’s improper use of credit reports, 7,000 complaints regarding incorrect information on credit reports, 3,000 complaints about Equifax’s measures taken to resolve issues related to the breach, and 1,500 complaints regarding Equifax’s identity theft protections. For example, we’re able to know that even though the CFPB has received over 20,000 complaints on the breach, it hasn’t yet taken public action against Equifax.

As to the argument that Yelp and other review sites are sufficient, we have reviewed the information on such sites, and we find often confusing and <a href="https://cfi-blog.org/2017/11/20/choosing-a-payday-lender-can-online-reviews-help/">disappointing</a>. Moreover, many of those sites are paid for by the very companies that are reviewed.

“Hiding this information from the public would directly harm consumers and allow financial institutions to shield even widespread scams from public view,” the three Senate Banking Committee members <a href="https://www.americanbanker.com/news/equifax-breach-shows-need-for-public-cfpb-complaints-dem-senators">assert</a>. We tend to agree.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2018/02/02/exchanging-cash-for-freedom-predatory-bail-bonds-in-the-u-s-criminal-justice-system/">Exchanging Cash for Freedom: Predatory Bail Bonds in the U.S. Criminal Justice System</a>

<a href="https://cfi-blog.org/2017/01/19/what-a-repeal-of-the-affordable-care-act-would-mean-for-financial-inclusion-in-the-u-s/">What a Repeal of the Affordable Care Act Would Mean for Financial Inclusion in the U.S.</a>

<a href="https://cfi-blog.org/2017/02/09/the-u-s-consumer-financial-protection-bureau-and-the-smart-campaign/">The U.S. Consumer Financial Protection Bureau and the Smart Campaign</a>

&nbsp;

Should the CFPB Run a Yelp for Financial Services Providers?

Regulators

Complaint Resolution

I walked past the International Monetary Fund on Pennsylvania Avenue on a sunny Saturday morning, a few blocks from the White House. Three large posters of international faces filled their windows, covered by the text <em>#EndPoverty</em>.

Across the street, two homeless men emerged from their tents.

More than 1 in 10 Americans – nearly 45 million people – are living below the poverty line. The United States has one of the highest poverty rates in the developed world, second only to Israel. A survey conducted by CareerBuilder estimated that <a href="http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey">78 percent</a> of Americans are living paycheck-to-paycheck – a number that has been steadily increasing each year. The U.S. consistently <a href="http://www.businessinsider.com/the-richest-countries-in-the-world-2017-3/#18-australia-gdp-per-capita-48806-39820-13">ranks</a> as one of the most affluent countries in the world, yet these statistics obscure the financial health of its population and how its wealth is distributed.

It is well known that profitably serving low-income clients can be a challenge. Earlier this year, Bank of America <a href="https://www.npr.org/sections/thetwo-way/2018/01/24/580324251/bank-of-america-ends-free-checking-option-a-bastion-for-low-income-customers">eliminated its free eBanking checking accounts</a>, which now require a $1,500 daily minimum balance or a $250 monthly deposit to avoid a $12 monthly “maintenance” fee. If Bank of America were a country, it would have the 8<sup>th</sup> highest GDP in the world, at <a href="http://www.annualreports.com/Company/bank-of-america-corporation">$2.2 trillion in assets</a>. It started in San Francisco as a bank for the common man. Surely it can follow the lead of many <a href="https://www.nerdwallet.com/blog/banking/best-free-checking-accounts/">other financial institutions</a> and offer a bank account that works for low-income people.

As we’ve written on the blog before, several of the day-to-day services that banked populations take for granted are costly and time-consuming for the unbanked. Cashing a check? Fee. Obtaining a pre-paid debit card? Fee. Transferring money? Fee. Money order to pay bills? Fee. Although these fees might seem small in dollar terms, they add up over time, and for Americans living paycheck-to-paycheck, every penny counts. According to consumer advocate Bill Bartmann, the 68 million financially underserved Americans spend an average of <a href="https://www.huffingtonpost.com/bill-bartmann/financial-exclusion-why-the-poor_b_7001914.html">$108 per month</a> per person on financial services.

Globally, financial inclusion is evolving and advancing. Where are we on progress in the United States?
<h3>Financial Access</h3>
Access to financial services in the United States is improving. Roughly <a href="https://obamawhitehouse.archives.gov/blog/2016/06/10/financial-inclusion-united-states">7 percent</a> of American households lack access to a bank account, and around 20 percent have a bank account but also use financial services associated with the financially excluded, like payday loans. By comparison, in 1989, 14 percent of U.S. households lacked a bank account. Improvements in services access were especially pronounced among those in the bottom income quintile and among minority households, which, over the period of 1989 to 2013, experienced an increase in access from <a href="https://obamawhitehouse.archives.gov/blog/2016/06/10/financial-inclusion-united-states">56 to 79 percent and from 65 to 87 percent</a>, respectively.
<h3>Financial Health</h3>
In terms of financial health, the Center for Financial Services Innovation (CFSI) finds that <a href="https://cfsinnovation.org/research/2017-financially-underserved-market-size-study/">57 percent</a> of American adults are struggling financially – with either large sums of debt, irregular income flows, and/or sporadic savings habits. The Federal Deposit Insurance Corporation (FDIC) estimates that approximately 91 million U.S. adults are credit-challenged, stemming either from being low-file or having a subprime credit score below 600.
<h3>Debt Levels</h3>
Last year saw the country reaching an all-time high in terms of total household debt, at roughly <a href="https://www.cnbc.com/2018/02/13/total-us-household-debt-soars-to-record-above-13-trillion.html">$13 trillion</a>, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data. This was the fifth rise, with increases across the credit card, auto, mortgage, and student loan categories.

Arguably the most dramatic rise has been in student loan debt. In 2008, student debt made up only <a href="https://www.nytimes.com/2017/05/17/business/dealbook/household-debt-united-states.html">5 percent</a> of total household debt, but by 2017 this had increased to 11 percent. As of 2017, student loan borrowers owe a total of $1.3 trillion. Moreover, roughly one in ten student loan borrowers are behind on repayments, which is the highest delinquency rate of any type of loan in the country.
<h3>Savings Levels</h3>
According to data from the U.S. Bureau of Economic Analysis, the personal savings rate in the United States is at roughly <a href="https://www.fool.com/saving/2016/10/03/heres-the-average-americans-savings-rate.aspx">5.7 percent</a>, meaning that for every $100 earned, $5.70 is saved for purposes including emergencies, retirement, and the proverbial rainy-day. While this figure is a substantial improvement over the 1.9 percent savings rate before the financial crisis in 2008, a recommended healthy savings habit would involve setting aside between 10 percent and 15 percent of income.

Like many other countries, retirement savings in the United States are a growing problem as more baby boomers reach retirement age. According to Census Bureau data, older Americans were the only demographic that experienced a <a href="https://www.theatlantic.com/business/archive/2018/02/pensions-safety-net-california/553970/">poverty rate increase</a> between 2015 and 2016. Across the country’s adult population, the Census Bureau finds that two-thirds of Americans don’t contribute any money to a 401(k) or other retirement account.
<h3>Industry Progress</h3>
Over the past decade, transformations in technology, products, and business models have pushed the U.S. to meet a growing demand for financial inclusion.

As of February 2016, there were over 2,000 U.S. fintech start-ups, and fintech venture capital is steadily growing. One the biggest fintech success stories in the United States is the peer-to-peer mobile-based payment service Venmo. Owned by PayPal, Venmo has exhibited staggering <a href="https://www.dailydot.com/debug/venmo-growth-chart/">growth</a>. In the first quarter of 2015, Venmo processed $1.3 billion in payments, while two and a half years later, in the third quarter of 2017, the figure was $9 billion. In an effort to compete with Venmo and other payment apps, commercial banks are expanding their financial service offerings. A consortium of banks that includes Wells Fargo, Bank of America, JP Morgan Chase and Capital One rolled out Zelle in 2017, which is based on a similar model and allows for free, instant transfers between accounts of registered users.

Nationwide, there are more than 800 <a href="https://www.forbes.com/sites/darden/2014/06/05/fighting-financial-exclusion-how-to-serve-88-million-americans-who-have-no-bank/#111284992a5c">Community Development Financial Institutions</a> (CDFIs), private organizations fighting financial exclusion in rural areas (often deemed “bank deserts”) and disadvantaged urban zones. For customers who want to make sure their money is used to benefit communities, Morgan Simon of the Candide Group <a href="https://nextbillion.net/avoiding-the-ick-factor-four-easy-steps-to-align-your-investments-with-your-values-in-2018/">suggests</a> breaking up with your bank in favor of more socially-minded financial institutions like CDFIs, credit unions and community-based commercial banks.

Despite the increasingly digital payment structure of the U.S. financial system, millions of Americans still prefer cash over card. While 80 percent and 75 percent of American adults have a debit or credit card, respectively, more than 99 percent <a href="https://www.bostonfed.org/publications/research-data-report/2017/the-2015-survey-of-consumer-payment-choice-summary-results.aspx">report</a> that they still use cash. Innovative companies that recognize the need for payment flexibility are starting to fill in the gaps. <a href="http://paynearme.com/en/">PayNearMe</a>, for instance, offers remote transactions at more than 28,000 locations, such as CVS and 7-Eleven. At these neighborhood retailers, payments can be made for bills, rent, tickets and even taxes to participating entities located elsewhere.

At a federal level, the U.S. has implemented several programs to expand financial inclusion. To help alleviate the issue of inadequate retirement savings, the Obama administration introduced <a href="https://myra.gov/">My Retirement Account</a> (myRA) for people without access to employer-sponsored retirement plans. While the program was not well-advertised and saw low usage during its three years of activity, it was a step in the right direction. The retirement accounts didn’t carry fees or minimum balance requirements, and any earnings or withdrawals were tax free. Unfortunately the program was <a href="https://www.forbes.com/sites/nextavenue/2017/07/28/r-i-p-myra-retirement-account-gone-too-soon/#3c8b88077885">dropped</a> by the current administration in December 2017.

Eradicating financial exclusion in the United States will require cooperation among all sectors, public and private. While there may not be a simple solution, everyone has something to gain from creating a solid financial foundation for low-income Americans.

<em>Featured image credit: Doug Focht via <a href="https://www.flickr.com/photos/99077624@N00/2272841875/">Flickr Creative Commons</a></em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2018/02/02/exchanging-cash-for-freedom-predatory-bail-bonds-in-the-u-s-criminal-justice-system/">Exchanging Cash for Freedom: Predatory Bail Bonds in the U.S. Criminal Justice System</a>

<a href="https://cfi-blog.org/2016/05/02/in-the-united-states-gender-gaps-in-financial-literacy-and-pay-persist/">In the United States, Gender Gaps in Financial Literacy and Pay Persist</a>

<a href="https://cfi-blog.org/2016/10/13/who-is-to-blame-for-global-de-risking-the-united-states/">Who Is to Blame for Global De-Risking? The United States?</a>

&nbsp;

Financial Inclusion in the U.S. – Are We Making Progress?

Access Usage Gap

<em><img class="wp-image-30678 size-full alignright" src="https://content.centerforfinancialinclusion.org/wp-content/uploads/sites/2/2017/10/US-Financial-Diaries-Book-Covers.jpg" alt="" width="768" height="433" />The following post was <a href="https://nextbillion.net/the-financial-lives-of-struggling-americans-the-financial-diaries-and-the-unbanking-of-america/">originally published</a> on NextBillion and has been re-published with permission.</em>

Two books published this year, <a href="https://www.amazon.com/Financial-Diaries-American-Families-Uncertainty/dp/0691172986" target="_blank" rel="noopener"><em>The Financial Diaries</em>, by Jonathan Morduch and Rachel Schneider</a>, and <a href="https://www.amazon.com/Unbanking-America-Middle-Class-Survives/dp/0544602315" target="_blank" rel="noopener"><em>The Unbanking of America</em>, by Lisa Servon</a>, take on the state of financial inclusion in the United States. Given the professional standing of their authors, we can expect that these books will contribute substantially to the body of knowledge on financial inclusion. What is perhaps more surprising is just how broadly important their messages are. Both books examine what is arguably the top economic challenge in America today – the crumbling of the economic foundation for many working-class and middle-class families – and they do so through the lens of financial services, a somewhat unusual but very revealing perspective.

<em>The Financial Diaries: How American Families Cope in a World of Uncertainty</em> focuses on the variability of income and expenses, which makes it hard for an increasing number of Americans to maintain a steady standard of living. The weekly and monthly extent of this volatility eluded most national statistics until the <em>Diaries</em> project, with its unique methodology, which was developed initially to study financial behavior in low-income countries. During a <em>Diaries</em> project, researchers record every financial transaction made by participating families each week for a year. This detailing yields intimate portraits of families’ financial lives at a level of magnification not previously available.

<em>Diaries </em>confirms that volatility is rising on the income side because employers are shifting away from offering full-time jobs with benefits. Many people work on commission, on variable schedules, or in the “gig” economy. We are introduced to the Moore family, whose main earner works full-time in an outdoor job. Since his pay is commission-based, it varies broadly by season, and weekly by weather conditions. The Moores resort to many small strategies to cope with this uncertainty, from coupon clipping to borrowing from family.

As for expense volatility, Morduch and Schneider point to health costs, especially for people whose more affordable health plans carry high deductibles. And expense volatility goes well beyond health. For families living on a financial knife-edge, even common problems like car or appliance repairs can disrupt household budgets. Families like the Moores often let recurring bills slide in order to get through the month, deferring payment until their tax refund arrives and they can square up. This is a sensible, though often costly, money management technique – as families work to make income and expense volatility match up.

<em>Diaries</em> offers suggestions about financial services to help families with volatile incomes. One of the most far-reaching is to upgrade American systems to real-time payments so that the check clearing lags that still complicate lives for so many can disappear. One of my favorite suggestions is a “sidecar” proposal – for automatic savings set-asides alongside automatic retirement contributions; the savings could be drawn down in emergencies without depleting retirement accounts.

The most important messages in <em>Diaries</em> go well beyond financial services. They speak to a need to shift risks increasingly borne by low-/moderate-income families back to employers and government – in the form of simpler government benefit programs and better-quality jobs. Given that the trend has moved in the reverse direction for decades, this may be a quixotic quest.

The entry point for <em>The Unbanking of America: How the Middle Class Survives</em> is financial services rather than families, but this book also reveals the financial insecurity in the lives of low- and moderate-income Americans. Reporting on stints she did as a teller in a check cashing company in New York and a payday lender in California, Servon explains that so many people use check cashers and payday lenders rather than traditional banks because these alternative services provide friendly, approachable services, and products tailored to the financial needs of the vulnerable. <em>Unbanking</em> documents the same economic stressors as <em>Diaries</em> – increasing volatility and costs (housing, child care, health care, education) that rise while job quality declines.

Servon’s chief interest is in critiquing banks. With frequently inflammatory language, she holds big banks out as the villains to blame for organizing themselves to profit from the challenges facing the vulnerable – for example, in the “gotcha” of slow check clearing and high overdraft fees. According to Servon, “Manipulation and deception, from opaque fees to unethical debt-collection practices, run through the entire consumer financial services system.” Along with tighter government oversight of bank behavior toward consumers, <em>Unbanking’s</em> most enthusiastic recommendations are to allow innovators and mission-oriented financial service providers to experiment with more responsive and responsible products.

Despite their dark messages, both of these books are a pleasure to read. The authors apply care and talent to bring their subjects to life. Readers come to know the Moores and other struggling families <em>Diaries</em> describes, and in <em>Unbanking</em> they are invited into the camaraderie among employees in check cashing and payday lending companies. Scholarly research on financial services generally appeals to a limited readership, but these books are so approachable and engaging, I even recommended one of them to my sister who saw me reading it at the beach.

The readability of these books is far from incidental. It is integral to their purposes. If these books are to have the impact their authors seek and their messages deserve, they must carry their stories well into the national dialogue. <em>Diaries</em> is the more sober and scholarly of the two. It is based on a clear and tested research methodology that brings new information to light. It should be read widely by policymakers and legislators involved with economic policy. <em>Unbanking</em> offers a popular and opinionated tour of the consumer financial services landscape, meant to rev up activists and propel a political movement.

It may seem that these books have arrived at an inopportune time, given the current U.S. administration’s stance on financial sector regulation and opposition to safety nets and social programs. However, as Jonathan Morduch reminded me, the appetite is growing at the state and local level and among socially minded entrepreneurs to test policies, programs and services that create greater stability for lower-income people. These books show how the vulnerable manage their money, and that knowledge can help steer such efforts toward productive results.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2015/01/29/book-review-stress-test-by-timothy-geithner/" target="_blank" rel="noopener">Book Review: 'Stress Test' by Timothy Geithner</a>

<a href="https://cfi-blog.org/2015/03/04/two-wars-one-on-cancer-another-on-poverty/">Two 'Wars' - One on Cancer, Another on Poverty</a>

<a href="https://cfi-blog.org/2011/08/23/five-great-books-about-microfinance-and-how-the-poor-use-money/" target="_blank" rel="noopener">5 Great Books about Microfinance and How the Poor Use Money</a>

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The Financial Lives of Struggling Americans: The Financial Diaries and The Unbanking of America

Brai Odion-Esene

Deborah Drake

Elisabeth Rhyne

Elizabeth Davidson

Ezra Mannix

Gina Harman

Jeffrey Riecke

Lizzy Bolze

Rachel Morpeth

Tess Johnson

Europe and Central Asia

India

South Asia

Banks

Challenges and Crises

Credit Provision

Financial Service Providers

Privacy

India is a global leader in financial inclusion. For over a decade, Accion has worked with and learned from India’s innovators, investors, and policymakers to expand economic opportunity for its people and businesses.

The recent <a href="https://www.nbcnews.com/tech/security/massive-equifax-data-breach-could-impact-half-u-s-population-n799686">security breach of credit reporting agency Equifax</a> exposed birth dates, social security numbers and credit card information of up to 143 million consumers. The hackers will likely sell this personal information which could result in financial and medical identity left, and fraudulent credit card activity and tax reporting, along with a slew of other activities. Earlier this week <a href="https://www.nytimes.com/2017/09/26/business/equifax-ceo.html?mcubz=3">Equifax announced</a> their CEO, Richard Smith will be retiring and could walk away with $18 million in pension benefits. The Massachusetts Attorney General, Maura Healey <a href="http://www.npr.org/2017/09/14/550949718/after-equifax-data-breach-consumers-are-largely-on-their-own">called it</a> “the most brazen failure to protect consumer data we have ever seen.” As a result, the Federal Trade Commission, members of Congress and multiple states’ authorities are looking into criminal investigations. However, the burden of this breach will fall primarily on individual consumers to ensure they are protected, and only <a href="https://qz.com/1079138/whats-the-worst-that-can-happen-with-the-equifax-breach-a-lot-especially-if-youre-poor/">10 percent</a> of the potential 143 million affected have even checked the Equifax site to see if their information was compromised. (You can check to see if you may have been impacted <a href="https://www.equifaxsecurity2017.com/am-i-impacted/">here</a>.)

The precautionary recommendations put forth have been to: 1. Check your credit score regularly (which can only be done for free once a year); 2. Freeze your credit; and 3. Purchase credit monitoring services. (Freezing your credit means establishing a “lock” that prevents opening new forms of credit in your name, while monitoring your credit is the process of periodically reviewing your credit reports for accuracy and changes that might be the result of fraudulent activity.) The irony of these suggestions is that you have to rely on the three major credit bureaus (Equifax, Experian and TransUnion) to perform these consumer protection activities. How can we know we are safe from fraud when our recourse requires trusting the entities that have been compromised? What’s more, why should we pay additional fees to correct the credit bureau’s mistake?

The Equifax breach affects consumers at all levels of the socioeconomic landscape, and unfortunately those with fewer financial resources and capability will be affected the most. Correcting identity theft can be a time consuming and financially burdensome endeavor. For many it is challenging to come up with emergency cash to cover legal fees to prove identity theft or restore credit, recover stolen assets and pay for additional credit monitoring services. And sadly, we haven’t seen strong consumer protection support on behalf of the credit bureaus and formal financial service providers in the wake of this breach -- support like educating the public about monitoring credit, providing more than one free credit report annually or offering free/discounted credit monitoring for more than one year. Thomas Hinton, CEO of the consumer advocacy non-profit American Consumer Council, <a href="https://qz.com/1079138/whats-the-worst-that-can-happen-with-the-equifax-breach-a-lot-especially-if-youre-poor/">said</a> he “is deeply concerned that Equifax – and all credit reporting companies – are not doing enough in a timely manner to protect under-served consumers who have been victimized by this data breach and stand to suffer the most.”

Such massive security breaches erode the public’s trust in the financial system, particularly among the unbanked already skeptical of entering the formal financial fold. The <a href="http://www.usfinancialdiaries.org/issue">U.S. Financial Dairies</a> showed that many Americans don’t trust the financial system because of unexpected bank fees – like overdraft fees – and because banks provide little or no social support, which many people get with informal group lending and savings options.

This isn’t the first major data breach in U.S. history and it won’t be the last. Last year when Yahoo was in negotiations to be bought by Verizon, it came out that <a href="https://www.csoonline.com/article/2130877/data-breach/the-16-biggest-data-breaches-of-the-21st-century.html">1.5 billion</a> user accounts were compromised between 2013 and 2014. And we can’t forget the 2013 Target breach that compromised credit/debit card and contact information of up to <a href="https://www.csoonline.com/article/2130877/data-breach/the-16-biggest-data-breaches-of-the-21st-century.html">110 million</a> customers.

So, what can be done? How can anyone feel comfortable about the protection of personal information?

Financial service providers are looking to biometric data as a secure identification source for financial services. Over the past seven years, <a href="https://uidai.gov.in/about-uidai/about-uidai.html">the Unique Identification Authority of India (UIDAI)</a> has issued over <a href="https://uidai.gov.in/about-uidai/about-uidai.html">one billion</a> Unique Identification Numbers (UID), also known as Aadhaar numbers, which are verified and authenticated with biometric data via finger prints or iris scans. This identification system is a part of <a href="http://indiastack.org/about/">India Stack</a> that uses four distinct technology layers – including simplified payments addressing and interoperability – to provide digital financial services across governments and businesses in India.

The technology already exists to use finger print and facial scans to unlock our phones or log into personal banking apps, and there is even the potential of using <a href="https://www.wired.com/2016/03/biometrics-coming-along-serious-security-concerns/">ear scans and heart beat identification</a> as biometric identification sources. But so far biometric identification is fairly unregulated, some consider the security to not yet be airtight and there are additional privacy concerns with using bodily identifiers. Hackers are already finding ways to spoof biometric identification. Recently, the security firm Vkansee was able to <a href="https://www.wired.com/2016/03/biometrics-coming-along-serious-security-concerns/">break into Apple’s Touch ID system</a> with a small piece of play doh. But we will see rapid improvements in Apple’s security, particularly with the new iPhone X Face ID technology.

In the case of India’s Aadhaar scheme, there is robust opposition to the program, with concerns including the perceived ease of forging fingerprints, the program’s potentially inadequate digital security, and its ubiquity. Some opponents of the program believe that if the Aadhaar numbers are widely integrated and linked between previously-siloed databases, it expands the opportunity for citizen profiling and surveillance. In August, India’s Supreme Court <a href="https://www.theatlantic.com/technology/archive/2017/09/aadhaar-worlds-largest-biometric-database/538845/">issued a ruling</a> enshrining the fundamental right to privacy. The anti-Aadhaar movement in the country celebrated the ruling, asserting that the program is in conflict with this fundamental right. Soon the Supreme Court will indeed assess if Aadhaar does violate Indian citizen’s privacy rights.

Regardless of how our information is authenticated, it is becoming increasingly important for consumers to protect and regularly track their financial information. Consumers should be concerned about the potential threats and take appropriate action by checking their credit score and monitoring credit card activity. But we can also realize that, at least as of now, security breaches are mostly out of our hands.

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/05/01/how-secure-is-data-used-in-digital-credit/">How Secure Is Data Used in Digital Credit?</a>

<a href="https://cfi-blog.org/2017/05/05/demonetization-brought-out-the-best-in-indian-microfinance-clients/">Demonetization Brought Out the Best in Indian Microfinance Clients</a>

<a href="https://cfi-blog.org/2017/06/28/why-do-privacy-policies-matter-for-digital-credit/">Why Do Privacy Policies Matter for Digital Credit?</a>

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In the Wake of the Equifax Breach, Are Biometrics the Answer?

<a href="https://www.centerforfinancialinclusion.org/offshore-financial-centers-for-financial-inclusion"><img class="alignright wp-image-23798" src="https://centerforfinancialinclusionblog.files.wordpress.com/2017/07/offshore.png" alt="" width="300" height="384" /></a>In the aftermath of the Panama Papers, the words “offshore” and “tax-haven” are often taboo rhetoric within the investment industry. Perhaps even more so in the impact investing space, where fund managers have both fiduciary and social responsibilities. The <a href="http://fiecouncil.com/">Financial Inclusion Equity Council</a> (FIEC; of which CFI is the secretariat) recently published the report <em><a href="https://www.centerforfinancialinclusion.org/offshore-financial-centers-for-financial-inclusion">Offshore Financial Centers for Financial Inclusion: A Marriage of Convenience</a></em> to better understand attitudes and practices when it comes to how equity impact investors use offshore financial centers (OFCs). To dive into this topic, CFI and consultants Daniel Rozas and Sam Mendelson interviewed FIEC members from the U.S. and Europe. Conversations resulted in varying opinions on the practice of using OFCs, with three key considerations for doing so: administrative efficiency, tax liabilities, and transparency and ethics.

Among all FIEC members interviewed,<strong> administrative efficiency</strong> was unanimously a primary driver in making the decision about where to domicile funds. Fund managers cited the importance of understanding local regulatory requirements, the presence of embassies, bank relationships, management facilities, remittance corridors, and convenience of location as important considerations in their decision. The reality is many low income offshore countries lack the infrastructure and capacity for supporting the administrative requirements of investments. Additionally, there are increasingly stringent AML/KYC requirements that disproportionately affect lower-income countries creating administrative burdens. The new CFI report states: “…this is at least one of the goals of using OFCs – not to avoid the regulators, but to outsource some of the reporting burden to entities that specialize in this service that have relationships to do it efficiently.”

When discussing OFCs, it’s impossible to not talk about <strong>tax liabilities</strong>, which is where opinions of North American and European FIEC investors were strikingly different. It comes down to a difference in philosophy on paying taxes. Most European investors interviewed emphasized the positive impact of taxes paid to support local infrastructure and economy. While across the Atlantic, the U.S. investor’s perspective is more focused on the investor and investee. Taxes are seen as burdensome that get in the way of “the primary objective – social investments to benefit the end-client.” The view is that tax treaties are in place for a reason and investors have a fiduciary responsibility to their investors. Doing otherwise would reduce funds available to their investees.

While OFCs might seem unethical as a means to reduce tax, all investors interviewed were aligned on the <strong>importance of transparency.</strong> There is no interest in hiding operations. This includes transparency to the target country, to the source country and to their public reputation. Efforts have been made in recent years to disincentivize countries from offering unclear banking services. Industry associations like the Organization for Economic Co-Operation and Development (OECD) work with governments to promote policies that improve economic and social standards through transparency.

A few weeks ago FIEC members met in Copenhagen for an annual meeting to discuss topics like this and other questions challenging the impact investing space. The group conversation about offshore incorporation was less polarizing than the previously-received feedback of individual interviews with members, who felt the Atlantic divide about tax justification was overstated in the paper.

Everyone agreed this is an area that is misunderstood, and that investors should aim for a structure that supports paying an appropriate amount of taxes. This means avoiding double taxation, while responsibly paying the fair share. There was less importance attributed in the conversation to deciding where to domicile and more emphasis on assessing the character of who to invest with.

Debates about OFCs and taxes will become increasingly interesting as more impact funds exit their investments and consider how to do so responsibly, a topic CFI has <a href="https://cfi-blog.org/2014/02/05/the-art-of-the-responsible-exit-in-microfinance-equity-sales/">already explored</a> and will continue to dig into this year.

<em>For more, read <a href="https://www.centerforfinancialinclusion.org/offshore-financial-centers-for-financial-inclusion">Offshore Financial Centers for Financial Inclusion</a>.</em>

<strong>Have you read?</strong>

<a href="https://cfi-blog.org/2017/05/11/fintech-in-microfinance-in-search-of-the-high-tech-high-touch-unicorn/">Fintech in Microfinance: In Search of the High-Tech High-Touch Unicorn?</a>

<a href="https://cfi-blog.org/2017/03/17/whats-responsible-about-impact-investing-exits/">What's "Responsible" about Impact Investing Exits?
</a>

<a href="https://cfi-blog.org/2017/01/26/a-tale-of-four-ipos-is-public-investment-in-microfinance-becoming-ok-again/">A Tale of Four IPOs: Is Public Investment in Microfinance Becoming OK Again?</a>

Offshore Financial Centers for Financial Inclusion: An Aligned Industry or Oceans Apart?

Financial Inclusion Equity Council

<em>&gt; Posted by Elizabeth Davidson, Financial Inclusion 2020 Consultant</em>

<i><i><i><i><a href="http://cfi-blog.org/category/financial-inclusion-2020/" target="_blank" rel="noopener"><img class="alignright" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2012/12/blogseries.jpg?w=300&amp;h=66" alt="" width="300" height="66" /></a></i></i></i>The </i><a href="http://www.centerforfinancialinclusion.org/programs-a-projects/financial-inclusion-2020" target="_blank" rel="noopener"><i>Financial Inclusion 2020</i></a><i> campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. Accordingly, this blog series will spotlight financial inclusion efforts around the globe, share insights coming out of the creation of a roadmap to full financial inclusion, and highlight findings from research on the “invisible market.”</i>

Does Walmart pose a threat to banks? Some bankers are apparently worried the retailer indeed does. As <a href="http://www.bloomberg.com/news/2013-05-08/wal-mart-prepaid-card-plan-needs-oversight-bankers-said.html" target="_blank" rel="noopener">Bloomberg recently uncovered</a>, a group of bankers that advises the Federal Reserve asked U.S. regulators to keep Walmart out of the financial services business, or at least strictly limit and regulate their financial services-related products, including its established prepaid card business. Offered in partnership with American Express, the prepaid cards, known as <a href="https://www.bluebird.com/" target="_blank" rel="noopener">Bluebird</a>, are even marketed as a “checking and debit alternative.” The bankers’ group, called the <a href="http://www.federalreserve.gov/aboutthefed/fac.htm" target="_blank" rel="noopener">Federal Advisory Council</a>, thinks they are not just an alternative to traditional financial services, but a bona fide financial service in a “shadow banking” system that enjoys less regulation than traditional commercial banks.

So, is Walmart a real threat to the traditional sector? Maybe, but it and other big retailers could have the potential to reach those excluded from or underserved by traditional commercial financial services.

Consider the example of <a href="http://www.bancoazteca.com.mx/" target="_blank" rel="noopener">Banco Azteca</a> in Mexico.

Banco Azteca, which CFI’s Elisabeth Rhyne called a “<a href="http://discussion.guardian.co.uk/comment-permalink/23404424" target="_blank" rel="noopener">mega-success story</a>” in terms of its reach and to whom the Inter-American Development Bank recently awarded its “equalBanking” prize for support of diversity and gender equality through financial services to the base of the pyramid, has a much different beginning than most banks: it grew out of one of Mexico’s largest consumer goods retailers, Grupo Elektra. After almost 50 years of experience offering consumer financing to its working class customers, the retail chain opened Banco Azteca branches—notably, after receiving a banking license—in all of its existing stores, establishing Mexico’s second largest network of bank branches almost overnight.

From the start, Banco Azteca catered to low and middle-income groups that were largely excluded from mainstream commercial banking, benefiting from Grupo Elektra’s deep understanding of this market. With low documentation requirements and travelling loan officers that visit customer’s homes, Banco Azteca lowered several barriers that excluded these groups. It also benefited from Grupo Elektra’s sophisticated client data technology, databases, and collection systems, along with the company’s established reputation among low- and middle-income consumers. While its poor client protection practices have often been criticized, and its interest rates are higher than traditional banks (but similar to or better than major Mexican MFIs), Banco Azteca offers fewer documentation requirements than traditional banks and accepts non-traditional forms of collateral. For many informal business owners without the proof of income required by other banks, Banco Azteca is one of few options.

<a href="http://www.forbes.com/sites/arjanschutte/2012/11/25/bluebird-vs-greendot-prepaid-wins/" target="_blank" rel="attachment noopener wp-att-11329"><img class="alignright wp-image-11329" style="border: 0" src="http://centerforfinancialinclusionblog.files.wordpress.com/2013/05/bluebird.jpg" alt="" width="205" /></a>Today, Banco Azteca is one of the largest banks in Mexico and has expanded to Peru, Guatemala, Honduras, El Salvador, Panama, and Brazil. World Bank researchers even found that Banco Azteca branch openings led to an increase in income levels by about seven percent on average over two years and a 1.4 percent reduction in unemployment over two years in the municipalities where branches opened. Surprisingly (to some), municipalities where Banco Azteca opened showed rapid growth in savings, not just loans, showing the great unmet demand for accounts for lower-income individuals.

So, should banks be worried? Maybe not. Another researcher found that (controlling for other differences) in municipalities where Banco Azteca opened, individuals were three times more likely to use bank credit and almost half as likely to use pawn shop credit in the years following the bank’s opening. Thus, the opening of Banco Azteca discouraged the use of much more costly, informal financial services such as those loans provided by pawn shops (which typically charged interest rates double that of Banco Azteca) by providing a more formal, lower-cost alternative—showing that Azteca was filling a much-needed gap in providing formal financial services to lower income individuals who could not use the larger commercial banks. Azteca could also be serving as a “gateway” to larger, more traditional financial institutions for those without the necessary credit histories by using a reputable brand among those with lower incomes to establish greater trust in formal financial services.

Just as Banco Azteca addressed a gap in the Mexican market that it was uniquely positioned to fill, so too can Walmart in advancing financial inclusion. In fact, in addition to its financial services expansion in the United States, Walmart also received a banking license in Mexico—where it is trying to go head-to-head with Azteca. One of the recommendations that has emerged from the <a href="http://www.financialinclusion2020.org/" target="_blank" rel="noopener">Financial Inclusion 2020</a> Roadmap to Financial Inclusion is the need for non-bank financial service providers—including retailers and mobile banking platforms— to be allowed into the financial services space given their huge potential (and recent successes) in accelerating financial inclusion. However, these providers should also be subject to financial regulation and supervision to ensure clients are protected. The Roadmap recommends that regulations be put in place according to specific financial service risk rather than category of service provider.

Perhaps Walmart won’t become the next Banco Azteca, but the latter’s example shows the potential for Walmart and other retailers to reach many financially excluded or underserved populations. Smart regulation can promote—rather than restrict—a healthy, competitive marketplace for more inclusive financial services.

<em>For more information on Financial Inclusion 2020, <a href="http://bit.ly/FI2020signup" target="_blank" rel="noopener">sign up for campaign updates</a>.</em>

<em>Image credit: <a href="http://www.forbes.com/sites/arjanschutte/2012/11/25/bluebird-vs-greendot-prepaid-wins/" target="_blank" rel="noopener">Forbes</a><a href="http://www.poverty-action.org/financialcapability/projects" target="_blank" rel="noopener">
</a></em>

<strong>Have you read?</strong>

<a href="http://cfi-blog.org/2012/11/28/our-woman-in-milan-observations-on-the-intersection-of-mobile-money-and-regulation/" target="_blank" rel="noopener">Our Woman in Milan: Observations on the Intersection of Mobile Money and Regulation</a>

<a href="http://cfi-blog.org/2013/05/17/gabriel-davel-proposes-tests-for-credit-bubbles/" target="_blank" rel="noopener">Gabriel Davel Proposes Tests for Credit Bubbles</a>

<a href="http://cfi-blog.org/2013/04/24/what-technology-can-and-cant-do-for-financial-inclusion/" target="_blank" rel="noopener">What Technology Can (and Can't) Do for Financial Inclusion</a>

Your Neighborhood Bank, Walmart?

Investors

Financial Inclusion 2020