Posted on July 19, 2016

Posted by: Rebecca Marx, Capital Advisory Analyst

When I was 19 the cashier at the Gap told me I would get 20% off my full $60 purchase if I signed up for a Gap credit card. Being a cash-strapped college student, I said, “sure!” and “paid” my $48. Several months later I took notice of an email telling me I still owed $48 plus $80 in late fees. My discounted transaction turned in to a $128 transaction—more than double the initial value. My money-saving scheme had backfired, which was enough for me to swear off having a credit card, at least until I knew I was prepared to stay on top of it and avoid financial decisions that ultimately did not serve my interests.

When I was 24, still scared of credit cards, I moved in to a new apartment and, over the course of a few weeks, paid a security deposit, the first month’s rent, a student loan payment, bought a bed, and purchased a flight for a college reunion leaving me with little money left for the next month’s rent. As a result, I  spent a large portion of my reunion weekend debating when exactly I should mail my rent check to ensure that it would technically be on time but also impossible for my landlord to cash before my next salary installment arrived. In the end, I called my Dad to have him transfer a little “buffer money” that I’d return as soon as my paycheck appeared in my account.

A few similar experiences made me realize it would be helpful to have more tools to manage my cash flow. So, I consulted NerdWallet, a company that offers free, unbiased comparisons of financial products, which I learned about when conducting research for a recent Enclude publication. Once I was informed about my options, I applied for a credit card, signing up to take on the next level of personal financial management.

This is all to say it took me a full five years to decide that I was “financially capable” of managing my spending on credit. A financially capable person is able to combat the natural human behaviors previously alluded to (carelessness, forgetfulness, ignorance, lack of restraint), and manage difficult, uncontrollable financial circumstances (emergencies, lumpiness of income) through appropriate knowledge and responsible use of tools and products at their disposal.

Considering the words from a recent blog published by The Center for Financial Inclusion (CFI), “forgetfulness is a universal human phenomenon”, I try to translate what financial management must be like for those living in poorer communities or emerging economies who have little to no disposable income and no margin for error, no Dad to call up when in a pinch and, to top it off, loads more stress than I deal with on a day-to-day basis. If it’s a struggle in my privileged life to be financially healthy, how are others coping?

Achieving financial health—the ultimate end goal beyond inclusion and capability—is easier said than done, especially in an environment that sometimes seems to be working against us. When I reflect back on my own hesitance to sign up for a credit card, I recall thinking that credit card providers were trying to trick me. And indeed, this can happen. For example, there have been many articles recently discussing issues such as a lack of fee transparency, disproportionally high fees, and oppressive terms of loan products such as payday loans.

An April 2016 article in the New York Times discussed the vulnerability of those managing their finances independently for the first time to overdraft charges (usually $35 fees on an average overdraft of $24, amounting to a reported $11.16 billion of revenue for the 628 biggest banks in 2015). While the article specifically mentions the prevalence of overdraft charges among college students, these students are not so different than the people Enclude serves in developing countries who are suddenly financially “included”, but also ripe for exploitation.

Daniel B. Kline commented in his blog, “Having to pay $35 or so because you don’t have enough money to cover a check you wrote is like having life hand you lemons — and then squirt lemon juice in your eye”. Likewise, an analysis by the Center for Responsible Lending discusses the spiraling effect that an initial fee can have on an already vulnerable individual’s financial standing.

Luckily there are financial services providers that are leveraging insights into human behavior to address the issues of exploitation and poor understanding of financial concepts and consequences.  Some are providing consumers with innovative products, tools, and knowledge they need to avoid, combat or mitigate bad financial services provider practices. These “financial capability-focused businesses” work to provide a link between mere inclusion and a borrower’s ability to attain financial health.

One example is Vancity, a values-based financial co‑operative  based in Vancouver Canada serving the needs of its more than 519,000 member-owners, which has developed the Vancity Fair & Fast Loan to bridge the gap between a payday loan (notoriously exploitive) and a traditional loan.  Vancity’s loan features flexible payback schedules, lower interest rates, and quick approvals.

In other cases, the financial capability feature comes in the form of the little things financial institutions do to make banking more convenient for their customers, and their finances more organized. I, for instance, am able to keep banking with the Credit Union where I grew up because of its online and mobile banking offerings. When I receive a check in the mail, I simply have to take a picture of each side of it, enter the amount written on the check, and it transfers directly to my account. Similarly, my credit card provider makes management of my finances easier by automatically breaking my spending down into categories like entertainment, transportation etc. to help me take a more objective look at my spending habits and adjust my personal budget as needed. We refer to models where the financial institution incorporates product terms and services that promote the financial capability of their consumers directly into their business models as “embedded financial capability-focused models”.

While I still approach financial offers with cautious skepticism, I have confidence in the financial capability-focused businesses that are taking a stand by offering alternative solutions to some of the exploitative practices in the financial services market place. It is now up to us as consumers and investors to differentiate between the providers who have our long-term interests in mind versus those who are narrowly pursuing their own short-term profits. Arguably, it is the customer-centered, financial capability-focused businesses that will succeed in the long run. To read Enclude’s take on how we may look at investments through a financial capability lens, based on interviews with over 20 leading stakeholders, follow the link to our April 2016 report, “Beyond Inclusion: A Strategic Approach to Investing in Financial Capability”.

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