Job loss and bills to pay? There could soon be an app for that.
A virtual innovation lab — which is being run by the Center for Financial Services Innovation with support from JPMorgan Chase — is looking to vet ideas for mobile apps that help people recover financially from a sudden setback such as back surgery or a layoff.
The contest winners will get a total of $3 million and at least eight months of help on developing their apps.
There are apps that help consumers better manage their money or access quick cash when they need it. But the goal for this initiative is more complex — to create apps that help people improve their financial resilience, perhaps with the right combination of savings, credit and insurance.
Among the ideas being floated is a holistic financial health app that makes recommendations on how to build a stronger safety net. Another is an app that would help people get insurance for covering emergency expenses.
Apps for those who are financially stressed are not a new idea, but there's fresh investment and energy behind this type of work lately, said Josh Wright, executive director of ideas42, a consultancy that deals in behavioral insights. (Both ideas42 and IDEO.org are helping operate the innovation lab with JPMorgan.)
"Financial shocks happen and people don't have savings," Wright said. "The problem is people are going to find other ways to meet those credit needs, like going to loan sharks. There's a recognition you have to find some middle ground, and tech could help find us find the middle ground," with an outcome that is good for consumers and financial institutions alike.
Many households struggle to deal with unexpected expenses. About 60% of Americans experienced a financial shock in the past year, and 41% of households do not have enough cash to cover a $2,000 unexpected expense, a recent CFSI survey found.
"Unexpected major expenses interrupt household consumption on a regular basis, and it might be some of those big things we think of, like death, divorce, and health issues," said Janis Bowdler, head of community development and small-business initiatives at JPMorgan Chase. "But it could also be a car breaking down, a loss in income, a water heater breaking in the house."
Wright — whose ideas42 researches behavioral insights — said that when a financial shock happens, it creates a financial burden as well as a cognitive burden.
"The cognitive burden is, 'I have to figure out how to get my car repaired or get a new job,' " Wright said.
The tendency is to do something expedient in the short term that could be harmful in the long term. "They might decide to solve the immediate problem by taking out a loan," he said. "But the reality is if you take out a payday loan, you have to pay that back in two weeks, and usually people aren't back on their feet in that time. So that just kicks the can down the road for two weeks."
The financial burden can be survived with the help of an adequate stash of savings, quick access to credit or the right kind of insurance product. A mobile app could help with all of those.
What's Out There Now
There are already apps out there designed to help people save, partly to be ready for a sudden stroke of bad luck.
Digit, for instance, analyzes users' spending habits and every few days quietly moves a few dollars from checking accounts to savings if it thinks they can afford to do so. Another app called Qapital applies behavioral science theorems to come up with a personalized savings plan. Rize helps consumers save for the long term. APA Save helps consumers stay on top of bills and more quickly pay off debt.
On the credit side, apps like LendUp let people borrow small amounts of money in a pinch. Active Hours and FlexWage give consumers early access to their paychecks when needed.
Some of these app-accessible lenders have been criticized for having rates almost as high as payday loans.
"This is a big challenge for the industry and advocates," Wright acknowledged. "Lending money to a riskier population is going to have a higher rate than lending to someone who has a lot of money and is much less risky."
He suggests that there's a middle ground between the 300% to 400% annual percentage rates some payday lenders charge and the moderate rates banks charge for normal consumer loans.
"The higher-double-digit APRs do work for financial institutions to make money, and people are much better off," he said.
A mobile app also could help users maintain the insurance to weather a financial storm.
"A lot of unexpected shocks are actually quite expectable, for lack of a better word," said Ryan Falvey, managing director of the CFSI. For example, every car eventually breaks down. "How come we don't have insurance products or more accessible savings and credit instruments that anticipate unexpected shocks?"
Private disability insurance, job-interruption products and even conventional insurance could meet this need, he said. One product, called Simple Disability, makes it easy for consumers to sign up for disability insurance and income replacement services.
"These are all products where one could imagine a technological solution, and one where solutions exist," Falvey said.
The best and most affordable financial shock app, in Wright's view, would be structured around a person's entire financial life.
"The only way it's going to be profitable for a financial institution to handle low-income customers without fleecing the customer is to offer a highly integrated product that provides credit, savings and debit together," he said.
This way, the bank makes money on the credit it extends, and at the same time it gains a view of the customer's income and spending patterns. That leads to reduced risk on the loan side and the ability to make recommendations that help customers limit their discretionary spending, which also lowers loan risk.
And an app tied to savings, checking and a debit card is far more useful to the consumer than an app that helps manage money in theory but requires going elsewhere to execute the plan.
"It's too much of a hurdle to do that without being integrated with the actual [financial] products," Wright said.
Wright has talked to some banks about this holistic app idea, and his organization published a paper with Oliver Wyman about the underlying economics of it.
Shalu Umapathy, co-lead of the San Francisco Studio at IDEO.org, the nonprofit arm of design firm IDEO, also believes a "financial shock" app must be useful beyond emergencies.
"If you design an app that's relevant for just one moment, a crisis, let's say, then it's going to be forgotten and erased on a person's phone," she said. "When you think about designing a digital financial service, you're looking to make something that really integrates with people's lives and understands other touch points that can help prevent or pad the next financial shock."
Just as a medical patient needs not just an emergency room, but also the rest of the hospital, medicine, exercise and all the factors that contribute to good health. "By thinking about holistic care, preventative services, and services that help you weather a financial shock, you arrive at programs that drive toward overall financial well-being," she said.
It's All in the Design
One hurdle is getting people to want to use such an app. Sometimes people with money troubles are reluctant to use a money-management tool.
"Human-centered design" can help here, Umapathy said.
"Imagine if the person was referred to the app through a trusted channel, like a financial coach, and the product's tone and experience met people where they were, so that starting to more actively manage their finances didn't feel like a leap in behavior," she said. "Good design can take the intimidation factor out of the experience."
Falvey agrees that removing the stress of managing money will make these apps palatable.
"That's Digit's approach," he said. "You just make it so simple that people don't have to think. In addition, many of these products take a prophylactic approach. They try to engage customers early in their life cycle. Some literally help children save. By being engaged early, they may be able to change behavior."
Wright said it's a myth that people with money troubles are uninterested in or bad at managing their money. They just don't happen to have much of it.
"The reason upper-income people end up saving is not because they're super diligent or want to spend a lot of time on their finances, but because they have things like 401(k) plans automatically making deductions from their checking account and a financial advisor who calls them to suggest investments they should make," he said.
Low-income people can be very good at managing their money. They tend to have to think in terms of trade-offs, he said. "They've done studies asking people leaving a supermarket how much they paid for any item, like toothpaste, and they know exactly how much they paid, and probably took advantage of a discount," Wright said. "With a higher-income person, you don't see that. If you asked me what I paid for toothpaste when I leave CVS, I would have no idea."
A problem with some apps, he said, is that they require a lot of data entry that no one wants to do. "You have to make the app as user-friendly as possible," he said. "How do you use technology to simplify things for people? Ask for a minimal amount of information."
Learning Experience for Chase
For JPMorgan Chase, this initiative with CFSI is philanthropic. The bank is spending $30 million over five years to fund the Financial Solutions Lab, which provides prize money and mentorship to the winners. It says it will share everything it learns with the industry and the public at large. This is not an in-house incubator, nor will the bank get Community Reinvestment Act credit for it.
The financial shock idea came from a consumer financial health survey CFSI conducted that found that 65% of the U.S. population had suffered an upset like a job downgrade, job loss, or medical emergency in the past year that made it hard to make ends meet.
JPMorgan Chase already has products aimed at low- to-moderate income individuals, such as its Liquid prepaid card. "It's primarily been marketed toward those who haven't previously had a bank account and it's brought people into the financial mainstream," Bowdler said.
Down the road, the bank might work with some of the startups who apply for the lab. "I think it's a little early — some of these are in the proof of concept phase — to know which are going to be the ones that really move the needle on financial health, and the bank's always thinking about that," Bowdler said. "I wouldn't want to try to predict which of the lab participants will have those kinds of relationships."
Last year, 300 fintech startups applied for the contest. This year, Bowdler hopes for more. (Finalists will pitch their ideas at CFSI's Emerge conference in June and a panel of judges will select the winners.)
In the end, how will these apps get into the hands of people who need them?
Some will go viral, Falvey said. Others may work closely with partners like large employers or banks. Still others may rely on conventional marketing and advertising campaigns. Perhaps a lucky few will make it onto the radar of a daytime talk show host.