Nine financial technology startups and nonprofits have just completed the inaugural Financial Solutions Lab – a $30 million initiative to develop tools to help America’s 100 million workers who struggle with volatile income. What features must fintech tools have to serve this market well? Innovators share their insights.
Seventy-seven million Americans – about half the workforce – work jobs that are paid by the hour. By and large, these are not teenagers working for extra cash. They are hardworking adults trying to raise families on full-time wages that can be as low as $15,000 per year.
On February 4, the Stanford Social Innovation Review hosted the second of a two-part webinar series, The Hidden Financial Lives of America’s Poor and Middle Class, a discussion with US Financial Diaries and other researchers about the income volatility that effects, by some estimates, 100 million Americans – the majority of whom are hourly workers.
Many low-wage workers earn an annual income that exceeds their expenses, researchers found, but there are major variations during the year. In households the US Financial Diaries studied, monthly income fluctuated by 25 percent more than five months out of the year.
Because income varies but bills stay static, these families use costly tools to cover short-term gaps, such as payday loans. These expenses reduce the amount available to build a savings cushion to cover those shortfalls.
The Center for Financial Services Innovation is working to change that.
“People are spending about $38.5 billion a year on services that are fixing these problems for them right now – but often not particularly effectively,” said Ryan Falvey, director of CFSI’s Financial Solutions Lab.
The Financial Solutions Lab (FinLab) is a virtual laboratory to accelerate cutting-edge technology tools that improve low-income consumer financial health. A $30 million, five-year initiative managed by CFSI and founding partner JPMorgan Chase, the FinLab invests $250,000 each in an annual cohort of nonprofits and financial technology startups, which participate in nine months of work with industry mentors.
Now finishing its inaugural year, the FinLab will announce its second annual application round on February 11.
“We seed innovators to scale tools that serve those 100 million consumers,” said Falvey. “It’s a small part of the fintech universe right now, but financial health is a powerful way of thinking about how to leverage technology to create new products and new approaches that have a real impact on consumers’ finances.”
We spoke with the FinLab companies to discover insights about the critical features that products should have in order to address the problems of people with low wages and volatile income.
Automation is a proven tool to build up savings more easily: it removes the need to decide to save and take action. Low-wage workers with volatile income, however, are cut off from this strategy.
“Hourly workers are generally not putting bills and savings transfers on autopay,” said Eric Cantor, vice president of product development at Neighborhood Trust, the nonprofit that created FinLab participant PayGoal. PayGoal is a mobile financial coach that helps people allocate their paycheck towards financial goals. “Payday timing and amounts are so dynamic and move around so much, they just can’t automate.”
Workers might be scheduled for 50 hours one week but only 30 the next, Cantor explained. If payday is every other Friday, that means the date of each income deposit changes – but the due dates for bills stay the same. There is little room for error in calculating how much to withdraw for expenses and how much to set aside for savings.
Digit, part of the FinLab, provides a solution. Linked to a client’s bank account, it monitors deposit and debit patterns to notice when there’s spare money to transfer to a savings account, then does so automatically. Users get the benefit of savings that build up effortlessly, with a transfer method that refrains from withdrawing cash when funds are predicted to be low.
“People expect technology to anticipate when they’re going to want something before they need it,” said Falvey. “We want to see more products that go beyond simply someone knowing they want and going to get it, to proactively offering the consumer the solution that’s appropriate for where they are in their own financial health journey.”
Prism is a mobile money management and bill payment tool that provides an at-a-glance view of available cash and upcoming bills, giving the user the control to make up-to-date decisions about which bills to pay in which order – vital information when living paycheck-to-paycheck.
“Automation works, but people also want control,” said Falvey. “Prism initially tested fully automated bill-pay elements, but iteration created this tool that users love. People want the control of spending their money; they want the control of saying, ‘Actually, I don’t want to pay that bill today.’”
That’s important, Cantor said. “You have to be looking at what’s available right now, so you don’t set yourself back by putting aside savings that then cause an overdraft with a $35 fee.”
PayGoal’s technology scales Neighborhood Trust’s workplace financial coaching services. The SMS-based communications helps users identify financial goals, like saving for childcare fees or paying down debt. When a paycheck arrives, it helps them make decisions about how to allocate those funds to reach their goals – flexibly.
“It’s a tool to grab onto that helps them through the cashflow battle that they fight every week or two weeks with more success,” he said. “Ending up less stressed, paying less fees, or not being quite as indebted or just broken down by the journey itself.”
An Immediate Safety Net
When income and expenses aren’t aligned week to week, people can’t use that money as efficiently as possible. Tools that provide an immediate safety net help low-wage workers get ahead.
Even eliminates income volatility from hourly workers’ financial lives. Its algorithm predicts users’ average earnings, and deposits that average paycheck into the client’s bank account each payday. When they earn more, Even sets it aside as savings; when they earn less, Even tops up the paycheck interest-free and fee-free, using the accumulated savings to pay itself back. Users can access their savings at any time.
They’re finding that removing volatility from the income side of cash flow saves users a significant amount of money.
“To solve the same problem – topping up a low-wage week – a traditional short-term liquidity provider has to provide an average $375 loan,” said Jon Schlossberg, Even’s co-founder and CEO. “To solve that same problem, we provide the equivalent of a $103 loan.”
FinLab company Puddle enables people to quickly borrow five times the amount they deposit on the platform; members create a trust network of people with whom they share contributions.
“Lyft drivers trusting other Lyft drivers is one of the most popular examples we see,” Puddle co-founder and chief executive Skylar Woodward told Inclusion Hub in November. “You use that peer knowledge to inform your understanding of whether adding this person to your trust network is a good credit decision.”
A typical loan might be $200-$300 to cover a non-recurring expense like repairs to keep the Lyft car on the road, earning income.
Eight million low-wage working Americans miss out on an average of $125 a month in income: they qualify for temporary cash assistance for food (food stamps), but don’t apply to get it. Propel removes a barrier to boosting household cash flow by streamlining the food stamp application process.
It’s an approach shown to have a big impact. A prominent 2013 study found that making it simpler to fill out university financial aid application forms increased enrollment of low-income students by 30 percent.
“It’s intimidating for a first-time applicant to wade through a 27-page form or a daunting website,” said Jimmy Chen, co-founder and chief executive of Propel. “We help people get over that hurdle of knowing whether you qualify, and getting your application in the door.”
Because of income volatility, 76 million Americans qualify for food stamps at some point during the year, but only 55 million qualify in any given month — mimicking what researchers have found about the prevalence of spikes and dips in cash flow. Being able to apply quickly to receive food stamps benefits the first month they qualify helps working families smooth those dips and avoid costly debt.
Take Trust Seriously
“Trust is the most important thing we’ll ever build,” said Schlossberg. “We’re dealing with a market with very unique challenges, full of people who have been burned before repeatedly: that makes them extremely – and rightfully so – wary of new products, and that includes us.”
The best way to build trust, Schlossberg said, is serious investment in understanding your customers’ lives – exactly what the Financial Solutions Lab aims to create.
This post was produced by News Deeply for the Inclusion Hub.
Link to the article from MasterCard Center for Inclusive Growth