THE SEARCH FOR QUALITY
The most important question may not be who is best positioned to serve the underserved, but what products are they selling, and are they any good? The financial crisis was a crisis of quality. While some categories of providers behaved better than others, financial services providers of all kinds behaved badly. They sold harmful products in deceptive ways to unqualified borrowers, in many cases pushing households and communities off a financial cliff.
We now have an access problem, especially for credit, but we still are not clear about what high-quality financial products and services look like. Financial services providers are largely waiting for guidance from their regulators, fearful that any misstep will be seized on by both the media and consumer advocates. Regulators do not have a unified definition of high-quality financial products, and the Consumer Financial Protection Bureau, which has the greatest responsibility for figuring out the answer, will need to move more slowly and piecemeal than is ideal given its nascence and the nature of the rule-writing process. Consumer advocates are clear on the specific practices they think are harmful, but they generally lack a holistic perspective on what would be both beneficial for consumers and financially sustainable for providers.
Frustrated by this state of affairs and determined to continue moving the market forward, my organization, the Center for Financial Services Innovation, published a framing document in 2012 describing our vision of quality financial services and articulating a set of Compass Principles to guide product design and delivery: embrace inclusion to responsibly expand access; build trust to develop mutually beneficial products that deliver clear and consistent value; promote success to drive positive consumer behavior through smart design and communication; and create opportunity to provide options for upward mobility.
The principles are grounded in a broader view of how to make markets work. Financial services offerings must be profitable and scalable from a business standpoint if they are to offer lasting solutions for consumers. They must be based on knowledge of consumer needs and demand, as well as the desire to meet those needs safely and responsibly over the long term. No single provider can meet all consumer needs; there is value to variation and choice in the marketplace. Finally, providers and consumers must both act responsibly for healthy financial relationships to flourish.
Regulation is critical, but not sufficient, for restoring credibility to the idea that financial services can be a force for good in people’s lives. Banks must demonstrate that they can self-regulate their worst impulses if they are to regain the trust of consumers and policymakers. Nonbank providers have long suffered from the perception that they are either second-class institutions or predators, or both. Some indeed are, but many represent potentially positive alternatives. They, too, need a way to demonstrate a commitment to quality products and practices if they are to be viewed as trustworthy. Technology-led providers may be today’s darlings, but they are the most lightly regulated in the financial services marketplace, and they have lost points over their recent handling of customer privacy and security issues.
Trust is essential for positive innovation to flourish. We need innovation to replace the corroded pipes of the financial services system with an infrastructure that is modern, high quality, and inclusive. Only then will underserved consumers have the tools they need to shore up their own finances.
- For a discussion about the constructs thought to be important aspects of institutions designed to promote saving and asset accumulation, see Michael S. Barr and Michael W. Sherraden, “Institutions and Inclusion in Saving Policy.” In Building Assets, Building Wealth; Creating Wealth In Low-Income Communities, edited by N. Retsinas and E. Belsky (Washington, DC: Brookings Institution Press, 2005).
- Federal Deposit Insurance Corporation, “National Survey of Unbanked and Underbanked Households” (Washington, DC: FDIC, December 2009).
- Center for Financial Services Innovation, “CFSI Underbanked Consumer Study” (Chicago: CFSI, June 2008).
- KPMG, “Serving the Underserved Market” (New York: KPMG, 2011).
- FDIC, “National Survey.”
- My thinking has been heavily influenced by the Household Financial Stability Project, a new effort led by Ray Boshara, senior advisor at the Federal Reserve Bank of St. Louis, to better understand and improve household balance sheets.
- Annamaria Lusardi, Daniel Schneider, and Peter Tufano, “Financially Fragile Households: Evidence and Implications.” Working paper no. 17072 (Cambridge, MA: National Bureau of Economic Research, May 2011).
- Annie E. Casey Foundation, “Double Jeopardy: AdvoCacey Explores The High Cost of Being Poor” (Baltimore, MD: AECF, 2005).
- FDIC, “National Survey.”
- Pew Internet and American Life Project, “Tracking Survey,” available at http://pewinternet.org/Shared-Content/Data-Sets/2000/March-2000-Survey-Data.aspx (March 2000). Also see, Pew Internet and American Life Project, “Demographics of Internet Users,” available at http://pewinternet.org/Static-Pages/Trend-Data/Whos-Online.aspx.
- Board of Governors of the Federal Reserve System, “Consumers and Mobile Financial Services” (Washington, DC: Board of Governors of the Federal Reserve System, March 2012).