While many outside of the US might think of the US as one of the richest countries in the world, the reality is that financial inequality has produced a land of opportunities where a large percentage of the population have serious day-to-day financial challenges, least of all getting access to day-to-day financial services.
Much has been said about inequality in terms of wealth in the US, but the day to day impact of this means low and middle-income (LMI) families face financial challenges more affluent Americans can’t even imagine. Can you afford $400 in case of a family emergency? Two years ago, the Federal Reserve published a study that almost half (46%) of Americans would struggle to meet emergency expenses of just $400.
The Financial Diaries draws on research from the U.S. Financial Diaries (USFD), a joint study commissioned by NYU Wagner’s Financial Access Initiative (FAI) and CFSI, on the financial well-being of 235 low and middle-income families as they navigate through a year.
In our segment, Rachel shared how the USFD came out of research that began not in the US, but in the developing world. In the early 2000s, a new methodology was used to study the poor by interviewing small families in South Africa, Bangladesh, and India. Researchers collected reams and reams of data by studying hundreds of households every two weeks over the course of a year. Throughout these series of interviews, families shared their financial transactions, spending habits, and lifestyles.
“It’s interesting because of a lot of what we learn is globally applicable – people struggle with the same kinds of issues globally around the world,” said Rachel Schneider, SVP at CFSI.
For the USFD study, the main goal was to give a diverse picture of the American experience. Field researchers worked with 20-30 families in 10 different locations in the US, meeting with households every few weeks gathering data on their financial lives, such as what was borrowed, spent, saved, earned, and gifted.
“The one criteria is that every family had to have at least one working person,” Rachel said. About a quarter were roughly middle-class, a quarter was near the poverty line, and the other half in between. “It’s really an attempt to show what financial life is like in America today from a lot of different perspectives.”
In her book, The Financial Diaries: How American Families Cope in a World of Uncertainty, Rachel shares with readers an authentic glimpse into the financial lives of Americans from all across the US. Schneider’s conclusion in the book is clear. Income volatility is a massive issue in the US. Each family’s monthly income was found to fluctuate around 20% for five months out of the year.
The book opens with the story of a typical lower-middle-income American family, Becky and Jeremy, who struggle with extreme income volatility. Jeremy works on 16 long haul trucks and gets paid on commission. During the summer and winter months, there’s a lot of work but in the spring and fall, their income is much lower so Becky stockpiles consumables.
“It’s a lot easier for them to do this workaround rather than using a savings account. So these workarounds reflect some gap in our financial services. There’s something about a savings account that didn’t give her the kind of discipline she knew she needed. She said it’s just too easy to spend the money,” said Rachel.
The difference between Financial Inclusion and Being “Banked”.
It’s clear that while being “banked” seems like a laudable goal for an economy like the US, the idea that access to the banking system will suddenly resolve the issues LMI face, is clearly not realistic. It turns out, that despite being one of the wealthiest countries in the world, the bottom half of the population appear to be more like citizens who are living in a developed nation, with respect to their financial health. This is a staggering conclusion.
The book and it’s underlying research shines a light on the multitudes of ways people struggle to deal with their finances. Data analytics, machine learning, and artificial intelligence will continue to better personalize financial services and improve the lives of those who need help the most. Access to real-time earning and payments will go a long way in the future.
A version of this article first appeared in Breaking Banks.
Special thanks to Katie Shultz for her guest contribution.
Brett King is a widely recognised top 5 FinTech influencer. He is a futurist, an Amazon bestselling author, an award winning speaker, hosts a globally recognized radio show (Breaking Banks), is the CEO of Moven, and in his spare time enjoys flying as an IFR pilot, scuba diving, motor racing, gaming (mostly FPS) and Sci-Fi. He advised the Obama administration on the Future of Banking, and has spoken on the future in 50 countries in the last 3 years.
Breaking Banks, #1 show onVoiceAmerica Business, is the leading global fintech podcast with more than 5.5 million listens from 172 countries. Breaking Banks broadcasts, are live every Thursday at 3pm EST in NYC on 1160AM WVNJ Radio and globally via VoiceAmerica’s Business Channel.
His latest book Bank 4.0: Banking everywhere, never at a bank is available on Amazon.
Brett King is a futurist, best selling author, award winning speaker and host of a globally recognized radio show. He is also co-founder and CEO of Moven, a New York-based $200m mobile banking startup with over a million users. He is widely regarded as one of the top 5 global influencers in financial services, and his book Augmented was cited by China's President Xi Jinping as recommended reading on artificial intelligence. He advised the Obama administration on the Future of Banking, and has spoken on the future in 50 countries in the last 3 years. Brett focuses on how technology is disrupting business, changing behaviour and influencing society. He has fronted TED conferences, given opening keynotes for Wired, Singularity University’s Exponential Finance, The Economist, SIBOS and many more. He appears as a commentator on CNBC and has appeared regularly on the likes of BBC, ABC, FOX, Bloomberg and more. His radio show, Breaking Banks, began in May 2013. It was the first global show and podcast on FinTech, and has grown to be the most popular with an audience in 140 countries/ 3.6 million listeners.