Consumer Finance

The Truth About the Underbanked

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The low-income consumer has been an elusive market for financial institutions. Despite all the initiatives to lure them into the banking mainstream-prepaid debit cards, peer-to-peer lending groups, savings accounts with matching funds-more than two-thirds of Americans making less than $30,000 remain unbanked.

The dearth of relationships with customers in this segment has perpetuated a key problem for banks trying to develop products relevant to the demographic: a shortage of insight into how low-income consumer manage their finances.

Enter the U.S. Financial Diaries. The new project will track the financial behavior of 300 families in four cities, through biweekly interviews conducted over the course of 15 months. The findings will be published next year in a series of reports accessible to anyone.

"What we most want to get out of the Financial Diaries is to bridge the gap between what we think underbanked consumers want and what they really do," says Rachel Schneider, vice president of innovation and research at the Center for Financial Services Innovation, one of three main partners in the initiative.

CFSI, based in Chicago, worked with New York University's Financial Access Initiative and the consulting firm Bankable Frontier Associates to launch the project this spring. The group is hiring researchers and lining up subjects in four areas around the country-San Jose, Calif., eastern Mississippi, Cincinnati and the New York boroughs of Queens and Brooklyn. The hope is for researchers to start their training in August, and for the first interviews with families selected for the study to take place in November.

The project aims to uncover behavior in a way that will be useful in academic, public policy and banking circles. No one involved in the project is predicting what kind of information might come to light.

"We do not want to come with preconceived ideas," says Jonathan Morduch, an NYU economics professor and managing director of the school's Financial Access Initiative. "This is much more about learning what low-income families are dealing with and making sense of their financial situations."

When similar financial diaries projects were conducted in India, Bangladesh and South Africa, interviews revealed that low-income families were extremely focused on trying to save, going against traditional notions of how the poor think about their finances. These results prompted the Bill and Melinda Gates Foundation to earmark $500 million for improving global access to savings and payment products.

The research also became the basis of a book, Portfolios of the Poor, which Morduch co-authored.

The overseas initiatives, which took place between 1999 and 2004, spurred efforts to organize a similar project in the United States. Citigroup's Citi Foundation became interested in the idea and, along with the Ford Foundation, put up a $3 million grant to get the project going.

Financial diaries projects also are starting in Mexico, Columbia, Kenya and Papua New Guinea.

Schneider says the typical path for developing financial products in the United States is one where banks start with a hypotheses, followed by targeted research with small groups of customers.

The Financial Diaries project would turn this approach on its head.

"This will give us a qualitative understanding of what people do and why," Schneider says. "We'll be able to extrapolate from there to imagine new products and services, or new marketing approaches, and in ways that are informed by deep insights about why people do what they do."

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