Transcription:
Penny Crosman (00:04):
Welcome to the American Banker Podcast. I'm Penny Crosman. What is the state of American's financial health and what could fintechs and banks be doing to improve it? Jennifer Tescher founded the Financial Health Network 20 years ago, and she's with us today to reflect on what's changed over the past two decades, where progress has been made and what banks and fintechs could be doing differently. Welcome, Jennifer.
Jennifer Tescher (00:27):
Thanks for having me. Penny. It's good to talk to you.
Penny Crosman (00:29):
Sure. Thanks for coming. So when you founded the Financial Health Network, what was your original mission?
Jennifer Tescher (00:38):
So this would've been 2004, which was the year that Google went public actually. And it was the year that Mark Zuckerberg invented Facebook in his dorm room and the iPhone didn't yet exist. People were still focused on this thing called the internet, and I realized that the internet and other connected technologies were going to enable the financial services industry to reach and serve lower income people, people who had been outside the mainstream system in more cost effective ways and really reach them where they were at. So the question that we set out to answer by launching what was then the Center for Financial Services Innovation was how can technological changes in financial services benefit those who need it most?
Penny Crosman (01:36):
And from a really broad uber point of view, not Uber the company, but just from the big picture, do you feel technology like the smartphone has brought better inclusivity and access to disadvantaged people?
Jennifer Tescher (01:58):
I think the picture's mixed. I think at the most fundamental level when we think purely about access, there's no doubt that globally speaking, technology in the form of the internet plus the smartphone has unlocked access for billions, literally, of people around the world to a basic bank account or a way to receive a payment from the government. When the iPhone was released in 2007, I remember thinking at the time, oh, this is going to solve many of the access problems that we thought we were establishing ourselves to try to work on. I don't think that's true for credit access, but just basic access to being able to participate in the financial system, I think technology has been an absolute game changer. But I also think that technology in and of itself is just a tool. It can be used for good, it can be used for ill, and not all fintech is automatically good for people and nor has all fintech dramatically improved people's financial health, nor would we expect it to. But I think it's important to say that because there have been times in fintech history where the industry and companies in particular have wrapped themselves in this inclusion or financial health flag, and it's just important to recognize where there have been some successes and where frankly the needle hasn't moved sufficiently.
Penny Crosman (03:38):
Absolutely. So what are some ways that you think fintech has made a difference? Are there specific companies you would point to or you feel like they have improved access, they have improved people's financial health through some of their innovation and some of their efforts?
Jennifer Tescher (03:58):
I tend to think of it more in terms of themes. So one theme I think a lot about is saving. Savings is never something that banks used to market. That's not like the big revenue driver for most institutions, but because of technology making it really easy to enable micro savings, you saw companies like Digit who went through our accelerator probably a decade ago now, come out with an app to help people essentially gather up the loose change in their couch, really the loose change in their bank account, if you will, and move it over to savings in a very fun and automated way. And we've seen lots of fintechs try to develop different apps to encourage savings in different ways, and you've then seen banks follow suit. You see banks talking about savings and emergency savings now in ways you would never have seen them talk about it before. So I think that's a really good example. I think another example would be a company that we supported also 10 years ago called Even was really inspired by our U.S. Financial Diaries work and this notion that the real issue for people day-to-day was cashflow. And their goal was originally to help smooth cashflow for folks whose paychecks were of varying amounts over time.
(05:47):
The technology frankly wasn't there to enable them to do that effectively, and they essentially created what is today earned wage access. Earned wage access I think is a mixed bag in terms of its benefits for consumers, but again, that was something that technology enabled. And now here we are 10 years later, there's a cottage industry of folks helping to smooth cashflow for cash strapped workers.
Penny Crosman (06:20):
Yeah, I totally agree. I do give Digit a lot of credit for starting that idea of automated savings that then banks felt like I think they had to do something similar. And also I agree with the early wage access or advanced wage access that it has been a mixed bag. What do you see as the biggest issues with earned wage access?
Jennifer Tescher (06:46):
Well, actually my colleague David Silberman and I recently published
Penny Crosman (08:27):
I think you're absolutely right about that. And something that sometimes comes up with early wage access or earned wage access is the idea of tipping, which is also something that some of the challenger banks do as well. And the providers will say, well, these are small tips and they're voluntary. And then regulators will sometimes say, well, a hundred percent of your customers are tipping, so it doesn't look that voluntary to us. And they'll also say, if we calculate that tip that somebody is paying as an annual percentage rate, it's really high. What do you think of the idea of tipping?
Jennifer Tescher (09:17):
So our research, we've done quite a bit of research on early wage access, and we've actually engaged directly with users of varying models, I should say. And in general, there's a lot that they like about these products and services, but tipping is not one of them. They find tipping confusing, they don't really understand it, they're not sure how much to tip. And so it doesn't strike me as being particularly useful consumer anything. It just sort of relies on that information in as symmetry that the provider knows how much it costs. The individual has no idea what it costs, and a tip is historically meant to be for good service, not to just pay for something, pay what you want. So I think people find it very confusing, and I think there are better ways to structure payment on products like this.
Penny Crosman (10:28):
I think a lot of people would agree with you. I think the National Consumer Law Center has said you have to just state this more explicitly as either a fee or an interest rate or something. You can't just leave it this amorphous tip situation.
Jennifer Tescher (10:46):
Yeah. On the other hand though, I would also say that in general, I don't find APR to be a very useful benchmark for loans that are of very short duration. It becomes meaningless. And so I'm not convinced that's the right approach for every credit product, either, especially one where at least in the employer version, this isn't a loan, you're just taking money that you've already earned. You're just getting it before the company is going to actually put it in your paycheck. So I think it's worth thinking about what is a loan and what isn't a loan. I also think that this entire category is going to ultimately go away because it's just going to be part of payroll processing and it's just going to become an option. I think the biggest issue is really that employers don't want to fund wages early.
(12:00):
And some of the companies that are offering these products are actually taking some risk. And it would make a lot more sense if employers would simply be willing to pay people what they are owed when they are owed it, as opposed to earning the float for a couple of weeks before having to put someone's money in a paycheck. I mean, it used to be that people got paid daily all the time before there was a more standardized system. And I'm not suggesting that getting paid daily is necessarily the best thing for everybody, but I do think that legally speaking, people have earned this money, and if employers would simply make it available real time, much of the fees that we're talking about would go away.
Penny Crosman (12:52):
It's an interesting idea because I wonder from a financial health and psychological point of view, is there some merit to getting paid every two weeks in the sense that you can't spend the money immediately, it's almost a little bit of enforced savings or enforced discipline that you have to wait and not overspend. What do you think?
Jennifer Tescher (13:21):
So I think more research is needed to answer that question. I think that's absolutely a possibility, but I also think that it's not how real life works for most people. I was at a meeting recently and a colleague and I were talking about this issue and he said to me, well, I use one of those early wage access products, and I was surprised. And I said, really? Can you tell me why? And he was explaining that his rent is due at the beginning of the month and it doesn't line up with when he's paid, and it would cause a real cashflow crunch for him. In fact, he wouldn't really have any money to spend for the next two weeks following his rental payment. And this is a middle class, middle America person. So I think we take it for granted, those of us who are privileged enough to have significant cushion in our bank accounts, we don't have to think twice about paying our bills and worrying that we're not going to have enough money to do the basic things like buy groceries or get our kids what they need for school.
Penny Crosman (14:35):
Yes, and that's a good point. I was going to ask you about the state of financial health in America today. I haven't looked at any numbers really recently, but as far as what I've seen over the last several years, the number of people or the percentage of people living paycheck to paycheck seems to keep going up. And I keep seeing articles about people living out of their cars, and I'm not able to get a definite number on that, but more and more cities are having to set up safe parking areas where people can actually sleep in their car and not get a parking ticket or not get robbed or things like that. I mean, it just seems like the ranks of people who struggle the way you were just describing just keeps increasing. Is that what you're seeing?
Jennifer Tescher (15:24):
Yeah. And on that point of folks sleeping in their cars, and I read an article about that also recently, and most of those people are working. It's important to note these are not people who are unemployed. Sometimes they are, but most of the time these are folks who are working and they simply cannot afford rent. And we're in an interest rate environment where even if they had the savings, they probably couldn't afford to get a mortgage. So I'm glad you raised that because it's so hard to believe in a country as wealthy as this one that that's the plight of many, many Americans as it relates to financial health writ large. We've now been measuring the state of financial health in America for about seven years now. Part of our sample is longitudinal, so we can actually see year on year, not just how it's changing at the macro level, but also how individual households are faring and how their financial health is changing over time.
(16:30):
I think what we've learned is that at the macro level, the percentage of people who are financially healthy versus coping versus vulnerable doesn't change dramatically. It changes in small bits over time. So right now, roughly a third of people are financially healthy and roughly 50%, 55% are coping and the remainder, so about 17% are financially vulnerable. A few years ago, the vulnerable number was as low as 14% as an example. So they change a few percentage points up or down. The macro numbers are also heavily driven by broader conditions in the economy that are beyond any individual's ability to control. And if you think about what's happened in the economy over the last 10 years, we had a financial crisis, we had a great recession. It took us a long time to come back out of it, then things seemed better. Then we had covid, then the government pumped in massive amounts of money to provide a safety net for families.
(17:48):
Families were doing better during covid than they had in some time. People actually were able to amass savings. They were doing pretty well, and then covid ended and the rug got pulled back out from under them. And so people are on a roller coaster ride, and you see that in the state of their financial health. It's not at the individual level. It changes year on year depending on, are you working? What wages are you being paid? Did you have a health issue to deal with? All kinds of life circumstances that are happening to all of us all the time. And so that's why I feel like it's important to remember that financial health isn't a destination, it's a journey, and there's not one product or one strategy or one solution. It's really about providing people with the experiences that they need to be able to manage their lives day to day.
Penny Crosman (18:52):
What you just described gives banks and fintechs limited power to help people. They need bigger paychecks and to not have these emergencies, health emergencies and such that destroy their financial picture. But is there more that banks and fintechs could be doing to help all of this, the two thirds of people who are financially unhealthy? Are there things that you're seeing or things that the companies could be doing to help people more?
Jennifer Tescher (19:34):
Absolutely. You're right that it's important I think, to identify that there are structural and systemic challenges in our economy and our society that have created a very bifurcated society in terms of income. In terms of wealth. It hasn't looked like this since the gilded age a century ago or two centuries ago, but here we are, and unless we're making sure there's an adequate safety net, making sure that health insurance and healthcare costs are affordable, that employers are paying a living wage, it's really hard for financial services companies to be able to solve the problem on their own. And in fact, it's why we've started doing a lot of work with employers around the financial health of their workers because we think we know actually that the workplace is such a significant moment for people: where they get paid, where they get a lot of their benefits, et cetera.
(20:45):
Having said all of that, though, I think that the more that banks, credit unions, fintechs understand that they're in the financial health business, that that's what their customers and their members and their users want from them, the better job they'll be able to do at creating an experience that provides people with the products and the supports that they need along the way. So yes, a fintech or a bank can't help someone avoid that health crisis that they might've had or the accident, but when they do and they have a financial challenge, they need to be there, not drop them because they can no longer afford a bank account or they're having some credit challenges, but help them get back to health. And when they're not facing a medical challenge, they need to help people prepare for that next shock that is going to come, whether it's a health issue, whether it's climate related. So the notion that helping people have even a modicum of savings that they can tap into that they have a cushion for that next shock along the way, I think is another really important part of what financial services companies need to be doing.
Penny Crosman (22:13):
There's a whole category of fintechs that I think of as online lenders where they offer people help in those times of medical emergency or you need new tires for your car and you just don't have the money for it in the moment. And they offer loans to people who may have a low FICO score or no credit history for a variety of reasons, but they also charge more, so they provide quick access to credit to people who can't get it otherwise. But some people would say they charge too much and it becomes usurious. What do you think of that whole category?
Jennifer Tescher (23:03):
Yeah, I've learned to never paint with a broad brush in this topic in particular. And so if we had been doing this conversation Penny 10 years ago, you probably would've just called them payday lenders. But now they've morphed and there's lots of different subcategories of online lenders with products that look different or structured differently, and so I can't speak to them as a monolith. I do think that this broader societal issue of who deserves credit and when is age old, and it's not going to go away. As I said earlier, I don't find APR to be a useful benchmark for short-term loans. But on the other hand, just because people need money doesn't mean we should always give it to them. And in fact, making someone a loan when they are illiquid is quite different than making someone a loan when they're insolvent.
(24:16):
And often these kinds of lenders are making loans to people who have zero ability to repay, and that's actually not helping them. That's hurting them in the long run. It gets back to what I was saying earlier about the government safety net that we've got to be thinking about broader federal policy as well and what role the government plays. Because when the government doesn't provide a significant enough social safety net, these are lenders of last resort, and then we end up in this exact argument, well, it's the only option they have. And in a country like this, it can't be the only option they have. We shouldn't let it be.
Penny Crosman (25:05):
Good point. And you're right, it is a complicated landscape with many different players, so you can't lump everybody in one bucket. That's a point well taken. Well, Jennifer Tescher, thanks so much for joining us today and to all of you, thank you for listening to the American Banker podcast. I produced this episode with audio production by Adnan Khan. Special thanks this week to Jennifer Tescher at the Financial Health Network. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.