Three Myths About the Underbanked, Part One: What Is a “Rainy Day” When It’s Always Drizzling?

Feb 17, 2016 | By Katy Davis & Nicki Cohen in Blog


Why we’re wrong about lower income consumers, a three-part series

Products and services that help low- and moderate-income (LMI) consumers manage their day-to-day finances and improve their long-term financial health are a clear need that hasn’t yet been solved by mainstream or alternative financial providers. Why haven’t the needs of LMI consumers been met by the market? The latest research uncovers three pernicious myths that discourage innovation for the low- to moderate-income segment: that lower income consumers don’t want to save, are bad at managing their finances, and don’t have the money to pay for financial services.

In this series, a companion to our recent white paper, Reimagining Financial Inclusion, we’ll tackle each of these three myths in turn.

Part One

At any income level, saving money can be hard because of basic human psychological realities. There’s no real deadline forcing us to start – we can always push it off for another day. We don’t have reliable social benchmarks to see how much others are saving, so we may not realize that we’re not saving enough. And our current needs always feel the most pressing, making it difficult to trade off spending less now to have more later on.

But saving money can be especially hard for low- and moderate-income (LMI) families. In a telling anecdote from It’s Not Like I’m Poor, when friends advised a lower-income woman that she should save for a “rainy day”, she asked, “What is a rainy day when you’re poor?” While national statistics on savings paint a scary picture for the majority of Americans – 55% of US households have less than one month of liquid income on hand, and nearly half spend more than they earn – LMI households, unsurprisingly, have the smallest savings buffers (less than two weeks’ worth).

Looking at these statistics, it’s tempting to reason that because households with less earning power don’t have much in savings, they must not want to save. But research suggests that LMI households do very much want to save, and in fact manage to save much more than standard ‘point-in-time’ savings measurements reveal.

MYTH #1: Lower income consumers don’t want to save.

FACT: These consumers want to save and actually do save much more in the short-term than end-of-year balances suggest.

  • 83% of Americans worry about their savings, suggesting a large majority of consumers do want to save even if they aren’t able to at the moment.
  • The U.S. Financial Diaries project shows that while saving for the long-term is challenging, households do “save for sooner” with an average of five times as much money deposited into savings accounts compared to the total balance at the end of the year.

Or, as the authors of It’s Not Like I’m Poor put it, “For most families, the following cycle is repeated: modest savings accumulate, only to be undone by a loss of earnings, a jump in expenses, or the month-to-month reality of bills that exceed the cash on hand.”

We know that operating under the view that these consumers have a ‘lack of desire to save’ is one of the three dangerous myths surrounding LMI consumers that discourage innovation in designing products for them. How do we move forward? In order to achieve financial stability, LMI households need products and services that meet the full spectrum of their needs and address the behavioral barriers preventing them from fulfilling their desire to improve their financial stability– both by setting aside savings when cash flows are high and providing affordable credit to meet obligations when cash flows are low. Integrating savings and credit into one streamlined product on the part of financial providers could potentially represent a pathway to overcoming the barriers to action on the part of consumers.

For more about new ideas for better financial solutions aimed at improving the financial stability of LMI consumers, check out our report produced with Oliver Wyman, Reimagining Financial Inclusion.

Stay tuned to the ideas42 blog for an in-depth look at two more dangerous myths about LMI consumers.