Banking the Poor: Policies to Bring Low- and Moderate-Income Households in the United States into the Financial Mainstream

9.5 Conclusion

Low- and moderate-income households who use alternative financial service providers pay a high price to convert their income into cash, pay their bills, and obtain credit, and they lack a regular means to save. The high cost of alternative financial services undermines key income redistribution policies for the poor, including the EITC. Existing banking products are often not well designed to meet the needs of the poor, and few banks compete with alternative financial services providers for low-income customers, particularly in low-income neighborhoods. The cost to individual financial institutions of research, product development, account administration, staff training, marketing and financial education with respect to new financial products for the poor, relative to their expected financial return, means that the market is unlikely to change quickly on its own. In addition, network externalities in electronic payments systems and distribution networks suggest that net social benefit could be obtained through further expansion.

Financial and technological innovation has been a hallmark of U.S. financial markets. Financial institutions can harness that innovation to meet the needs of low-income Americans. Governmental incentives appear to be important to catalyze private sector efforts to use financial and technological progress to expand access to financial services for low- and moderate-income families. By helping these families to enter the financial services mainstream, the policies outlined here can help to transform financial services for low-income persons. Such a transformation is a key to promoting greater economic opportunities for low-income households.

This paper was originally published in an extended format as “Banking the Poor” in the Yale Journal on Regulation, vol. 21:121 (2004), © 2004, Yale Journal on Regulation, and was published in approximately its current form as Banking the Poor: Policies to Bring Low-Income Americans into the Financial Mainstream, Brookings Institution Metropolitan Policy Program Policy Brief (September 2004). The article is reproduced and adapted here with permission. For full citations please see Yale Journal on Regulation. The issues raised here are further explored in a new survey the author has just completed of low-and moderate-income households, the “Detroit Area Household Financial Services Study,” see http://www-personal.umich.edu/~msbarr/.