The Taylors overdraft their checking account every two weeks, on purpose.
As described in a recent issue brief published by the U.S. Financial Diaries, the Taylor family’s income level varies significantly from month to month. Sometimes it’s not enough to cover all of their expenses. So, they opened an account at a bank with a simple overdraft fee structure: One $35 charge per overdraft, no daily fees, and an allowance of up to $500 at a time. Since the Taylors typically make only one large cash withdrawal per paycheck – the entire amount of pay – this bank would charge them at most one $35 overdraft fee each cycle, if they happen to need more cash than the amount of that week’s direct deposit.
The Taylors use overdrafts as another household might swipe a credit card or take out a payday loan. Since their credit history eliminates the card option and they are already tied up with a payday lender, over-drafting becomes another logical – and probably more convenient – place for them to turn to stay on top of their bills. It’s clear that the family responded to and relies on their new bank's transparent behavior. They saw its fee policy, understood how they could manage it, and became a customer . . .
Read More“Wow, the consumer knows about that?”
This was essentially how a banker responded when I told him the story of a woman I interviewed for the US Financial Diaries study. The participant – we’ll call her Jenna – was charged four $32 overdraft fees in the same day ($128 total, if you’re counting). Jenna explained to me that if her bank had processed her transactions in the order she had made them, there would only have been one charge. Instead, the bank posted her largest purchase first, which was enough to take her account balance below $0. That triggered the initial $32 fee, and then three smaller debit card swipes she’d made earlier in the day each prompted fees as well . . .
Read MoreImagine you enter a shoe store that is having a sale – buy any pair of shoes, get a second pair for free. Sounds like a great deal, right? Now imagine that same store had an offer to take 50% off any two pairs of shoes. Even though you are spending the exact same amount for the same two products, perhaps you react differently to the two offers. Perhaps there is something about removing “free” from the offer that might make you feel like you’re not getting as good of a deal. And how would you pay for these shoes – with cash? Credit card? Mobile wallet balance? Does it even matter? Research shows that people perceive $1 in mobile money differently than $1 in cash, and that these different perceptions DO influence spending habits.
The process of mentally separating different forms of money and assigning value to them, keeping track of potential costs and benefits to transactions, and categorizing expenses into buckets like “food” and “healthcare” is called mental accounting . . .
Read MoreMy month-long experiment of surviving on cash only is at an end. One question I had hoped to answer was whether switching to purely cash transactions would cause me to spend less. To find out, I took three months of transaction data from last summer from Mint.com. After removing spending anomalies like an unusually large student loan payment and an airplane ticket, I averaged the expenses for this time period in a number of categories like “entertainment” and “groceries.” I compared the three-month averages with my one month of cash spending during Sorry, Cash Only.
I suspected that the numbers would reveal that I spent less during my cash month. Existing research shows that convenience, reduction of barriers to spending, and even perception of credit all contribute to higher spending with credit cards. However, I wasn’t prepared for how much less I spent . . .
Read MoreHow would you describe a savings account where your money is occasionally stolen, eaten by mice, or washed away by floods? Merchants in Dharavi, the largest slum in Asia, describe it as “safe.”
That’s what Deepti KC and Mudita Tiwari found when they interviewed sellers, suppliers and buyers in Dharavi, home to 5,000 informal businesses that create goods worth more than 600 million dollars a year, in the heart of Mumbai.
Far from being poor peddlers of trinkets, the sellers of Dharavi—particularly those who make relatively expensive leather goods—routinely move thousands of dollars in a single day. They have sophisticated financial lives, often including formal bank accounts, and many have smart phones. KC and Tiwari—like many researchers studying financial inclusion in the developing world—posit that increasing take up of digital transactions “is essential to achieving inclusive financial growth in India” . . .
Read MoreOne of the issues we follow closely at FAI is the rapidly expanding use of mobile money in the developing world. As Jean Lee recently noted, a growing body of research on mobile money has a lot to say about its potential to smooth risks and facilitate transfer programs.
In the interest of keeping a finger on the pulse of the latest results from the field, FAI's Managing Director Timothy Ogden and Deputy Managing Director Laura Freschi recently attended IMTFI's Fifth Annual Conference for Funded Researchers . . .
Read MoreAt a recent Microfinance Club of New York event with Michael Joseph, the former CEO of Safaricom in Kenya and now the Director of Mobile Money for Vodafone, Joseph cited regulatory barriers as the principal reason that mobile money has not taken off in India, the largest market in the world and his current project. A new paper from Eva Gutierrez and Sandeep Singh at the World Bank confirms his intuition, finding evidence for the importance of regulation for mobile money usage by combining the World Bank’s Global Findex database with cross-country variation in regulatory regimes.
The authors argue that both regulatory certainty — stability in regulation — and regulatory openness — policies that favor the introduction of new technologies — are necessary for mobile money adoption. They construct an index of regulatory favorability towards mobile money and look at the relationship between their index and actual end user behavior using the Global Findex to track outcomes for 35 countries, finding that overall, regulation is a significant factor in explaining mobile money usage among both the banked and unbanked . . .
Read MoreMost of NYU’s development economists are on leave this year (Raquel, Debraj, and Hunt: your colleagues miss you). The regular doctoral sequence and development seminar are on hold for the year. Students walk the halls unsure who to ask about the right way to parameterize intra-village treatment heterogeneity when doing power calculations. Bill Easterly and Yaw Nyarko are holding the fort, though, and they pulled off a standing-room-only annual Development Research Institute conference on Friday, November 15. It was a reminder of what makes NYU such an interesting place to study development.
Takeaways: The history of European settlement made more difference than we thought to global patterns of growth (and still does) . . .
Read MoreLast Friday marked the halfway mark in my experiment to only use cash for 30 days. I still have a few weeks to go but I wanted to reflect on some of the major insights I’ve gained so far.
Increased Anxiety and Insecurity – Going into this month, I expected to feel an increased sense of worry around personal theft. However, I live in a relatively safe neighborhood, the cash under my proverbial mattress is decently secure, and never carry huge sums of cash on me so the threat of theft is not what has been causing anxiety. What has is the realization that dealing in cash means operating without a safety net. Having multiple payment options is not only convenient but functions as a form of personal insurance. If there is an emergency, if I do not correctly plan my financial day, if I forget cash at home, I am out of luck. (Of course, I realize that these feelings would be amplified if I also had the additional pressure of low income, which is one of the biggest distinctions between this project and the realities of the unbanked.)
Read MoreLast week was a big one for those hoping to reach “full financial inclusion” by 2020. The President of the World Bank has signed on to the cause, and the Center for Financial Inclusion just rallied the troops in London at the Financial Inclusion 2020 Global Forum.
As with most really big global goals, success requires making strides in China. China is the last huge, untapped market for microfinance, but there are signs that that’s changing. The focus of microfinance in China is on credit, and the numbers of providers has been growing fast, with a big jump since 2010. At the end of 2010, the China Association of Microfinance had 2,614 formal members in 31 provinces and cities. The early members were mainly public-interest microfinance institutions focused on poverty reduction . . .
Read MoreA growing body of research on mobile money has a lot to say about its potential to smooth risks and facilitate transfer programs, but a definitive experimental study on what it means for the financial lives of the poor remains undone – a gap we would like to fill with our future work at the Financial Access Initiative.
In recent years, mobile technologies have rapidly expanded in the developing world, bringing information and other transformative services with them to the previously isolated and the poor (Aker and Mbiti, 2010; Aker, 2010; Jensen, 2007). Rapidly adopted in most developing country contexts, mobile technologies have the potential to serve as a broad-distribution platform for other services and products. For example, a growing literature looks at the potential for mobile technologies to serve as a vehicle for the delivery of information and reminders in a variety of contexts, including for loan repayment and health . . .
Read MoreIn the grand tradition of Morgan Spurlock’s Super Size Me, I’ve decided to do a 30 day experiment. I’m putting away the plastic, denying my debit card, and avoiding the ATM. I’m going unbanked for a month.
In work at FAI, I am constantly reading research on increasing financial inclusion. Recently, I read The Fletcher School’s Cost of Cash report that said it is more expensive for low-income, unbanked populations to use cash but paradoxically, they rely on cash the most! This (and many other influences including Lisa Servon’s recent investigative work on cash checking services) got me thinking. What would my life be like if I couldn’t use any of my banking services? What is it like to operate purely in cash, especially in a hyper-connected, fast-paced city like New York? I hope to gain some insight into those questions and others over the next month . . .
Read MoreAs a field researcher collecting data for the US Financial Diaries project in Cincinnati, I interviewed 30 low-income families about the details of their household finances over 16 months. One question was always in my mind: What’s the difference between their financial lives and mine? And how might this comparison help design financial products for people who are struggling to make ends meet? One of the most important distinctions I identified was our vastly different abilities to save. For me, an unexpected $300 car repair might be a pain in the butt, sure – but I’m able to deal with it by dipping into my savings account. For USFD families, that same bill could throw the household into a mire of debt, stress, and embarrassment (not to mention lack of transportation).
My experience in the field lines up with data on the dismal savings rate in the US compared to other parts of the world. It speaks to the difficulty of putting aside money when very little is coming into a household in the first place, and it highlights the dearth of financial products offering effective carrots or sticks to boost Americans’ savings . . .
Read MoreIn his recently published paper, “Accounting for the Poor,” MIT Economist Robert Townsend uses an impressive dataset to make the case for “accounting” for the economic contributions of the poor. Most interesting to me is how he analyzes this data to show the lifecycle and consumption needs of both the rural and urban poor – and shows that urban and rural lives are more intertwined than I had assumed . . .
Read MoreBuried at the bottom of Shaila Dewan's recent New York Times article on "Microcredit for Americans" is an idea that deserves much more attention:
Grameen helps its clients in another way that many experts say is more important than increasing income — it establishes good credit scores. Many poverty alleviation groups have shifted their focus from saving to credit building, because people with poor or no credit must leave large deposits for basic needs like utilities, have trouble renting decent housing, pay much higher interest rates and have a harder time finding jobs.
Nayrobi Gonzalez de Quiroz, 26, recently received her first Grameen loan but decided not to follow through with her plan to buy handbags for resale. After using about $200 to pay off a debt, she said, she decided it was safer to leave the money in the bank and make the payments from her earnings as a manicurist.
“Here, you have to have good credit,” she said. “I have a young son and I have to think about his future.
The choice by Nayrobi Gonzalez de Quiroz to not put her money in a business is familiar from other studies of how people use microcredit around the world, so it's not surprising to see it in the U.S. The more surprising idea is that microcredit may matter not because of anything having to do with any given loan and the possible returns on investment. The path of impact could run through impacts on credit scores. This is a phenomenon that is particular to the U.S. and other places where credit scores are part of the backbone of retail banking. One impact comes through the way that a better credit score makes access to banks easier, but credit scores are also used by employers in making hiring decisions, and landlords in making housing decisions. Having a better credit score is a big deal . . .
Read MoreAs microfinance expands beyond loans to include products like microinsurance and commitment saving accounts, study after study show that simply offering something new is not enough to expand financial inclusion –the design of the product matters. But how do financial institutions and practitioners start the process of creating products that are both profitable and meet the needs of the poor?
One method is human-centered design (HCD). HCD and “design thinking” were made famous by Ideo, the international design firm responsible for Apple’s first mouse. Ideo defines HDC as a “process [that] begins by examining the needs, dreams, and behaviors of the people we want to affect with our solutions.” These solutions emerge at the intersection of what people desire, is technologically feasible, and financially viable. The process has three main phases – researching, creating prototypes, and testing those prototypes (and possibly revising them based on user feedback). . .
Read MoreThe U.S. Financial Diaries is a research project tracking more than 200 low- and moderate-income households over the course of a year, collecting highly detailed data on household financial activity. New York University’s Financial Access Initiative(FAI), CFSI, and Bankable Frontier Associates (BFA) recently released the Household Profiles. This series provides an intimate look into the financial lives of six households, exploring the ways these families are making ends meet . . .
Read MoreFAI Video: Economist Dean Karlan and Timothy Ogden Discuss Microfinance and Reaching the Ultra-Poor (Transcript)
Timothy Ogden : So, Dean one of the innovations in microfinance is trying to figure out a way to reach further down the poverty ladder—with programs generally referred to it as graduation or targeting the ultra-poor.
Would you tell us something about what those programs are and the process of figuring out how they work?
Dean Karlan: Sure. So, the first thing I think that’s important to note is the broad scope of the goals . . .
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