Lessons from “No Slack: The Financial Lives of Low-Income Americans”

In 2005, a group of researchers at the University of Michigan set out to understand how people in low- and moderate-income households think about and use financial services. The Detroit Area Household Financial Services (DAHFS) study, headed by law professor and two-time Treasury official Michael Barr, included interviews with more than 1,000 randomly sampled residents of the Detroit metro area. No Slack: The Financial Lives of Low-Income Americans presents data and analysis from that study. Topics range from bank accounts to bankruptcy, from credit cards to tax refunds. Here are four brief—but important—take-aways.

1. Social ecosystem matters. In recent years, it’s become all the rage to add insights from psychology to economic models of how people make decisions—but social context matters, too. In the DAHFS survey sample, whether or not a person’s landlord accepts checks strongly correlates with whether or not that person has a bank account. Sixty-five percent of renters with bank accounts have landlords who accept checks, while just 38% of renters without bank accounts do. If banks are useless for paying for housing—most families’ largest single budget item—that’s one less reason to have an account. Furthermore, data show that people with and without bank accounts are equally as likely to use domestic wire transfers, which the researchers take as evidence that the bank-account status of the person receiving payment is what’s driving use of the service.

2. “Banked” households pay more for financial services. Conventional wisdom holds that people without bank accounts pay more for financial services by more frequently turning to outfits such as check cashers and pawn shops. In the DAHFS sample, the opposite is true. Households with bank accounts spend a median $101 a year on transactional services, while households without bank accounts spend just $83. For credit services, households with bank accounts spend a median $57 per year, while those without spend a median $0. Looking at cost per transaction, households with bank accounts still spend more because of a series of relatively large one-time fees, associated with services such bank accounts and tax preparation. Even as a share of annual income, households with bank accounts pay more for financial services—2.7% of income versus 1.0% for folks without bank accounts.

3. Account features trump cost and proximity. Even though most households don’t spend a large percentage of income on financial services, some households pay significant “nonpecuniary costs” in obtaining and using banking services. People will, for instance, spend meaningful amounts of time traveling to pay bills in person in order to avoid payment fees. When researchers asked what would change one’s use of financial services, respondents cited convenience and speed more often than cost. That said, proximity isn’t a magic fix. Researchers observed little to no relationship between living close to a bank branch and having a bank account, writing that “policies to encourage bank-account ownership should also focus on expanding the range of products offered by depository institutions.”

4. Firms matter, too. While No Slack largely tells a story from the household point of view, DAHFS survey data also shed light on how financial firms shape consumer preferences and behavior. In a chapter on mortgages, researchers find that even after controlling for a range of individual characteristics, racial minorities and people who use a mortgage broker wind up with different (generally less favorable) loan terms—a discrepancy the researchers find “most consistent with supply-driven origins.” In the book’s epilogue, Barr writes that from a policymaking perspective, it is important to distinguish between times when firms have incentives to exacerbate consumers’ cognitive biases—by, say, making fees less salient—and times when they don’t. Creating markets in which both firms and consumers benefit is a difficult task, but a necessary one.

Though that’s not to say the punch line is all about smarter laws. To better address the financial needs of low- and moderate-income households, Barr suggests a “three-legged stool” of financial education, access, and consumer protection. Barr had a major hand in post-financial-crisis re-regulation, but No Slack provides plenty of insight for industry players, non-profits, and even individuals, as well.