NEW YORK, NY, November 9, 2015 – With nearly a third of all Americans considered unbanked or under-banked, Oliver Wyman, a leading global management consultancy, and non-profit behavioral design lab, ideas42, today published a new report which outlines surprising statistics and innovative solutions to break the vicious cycle that these less affluent consumers are often caught up in.
According to the report – “Reimagining Financial Inclusion” – there are solutions with the potential to both improve financial stability for millions of Americans and provide healthy profitability for the mainstream financial services providers that have traditionally struggled to make adequate returns from low- and moderate-income (LMI) consumers.
These consumers are increasingly pushed out of the mainstream banking system due to ill-fitting products and high costs for providers. As a result, they often turn to even costlier alternative financial services. To tackle this problem, the report combines behavioral principles and microeconomic analysis to move beyond traditional financial access solutions. It explores the economic factors that drive existing financial products and why the status quo fails to meet the financial needs of lower-income consumers facing scarce resources and unstable cash flows.
Serving as both a call-to-action and a distinct framework for banking product design, this innovative approach has the potential to positively impact the financial services landscape for underbanked consumers while remaining sustainable for financial providers.
“Instead of trying to squeeze lower income consumers into existing financial products, we propose a solution that integrates deposits and credit to meet their cash management needs as well as the needs of financial providers,” said Josh Wright, ideas42 Executive Director and co-author of the report. “People living paycheck- to-paycheck need banking solutions designed specifically to help them manage the reality of volatile income and expenses. Because this reality includes unpredictable spikes and dips, reaching financial stability requires a product that will intervene in good times as well as in bad.”
Building a new product blueprint begins with three principles introduced in the report: integrating transactions, savings and credit into a single product for the consumer, automating budgeting and saving, and offering affordable credit. Diving deeper into these three principles, the report lays out concrete recommendations that range from creating small behavioral nudges within existing product features, such as sending consumers periodic informal ‘check-in’ messages via SMS to build a relationship, to the complete overhaul of product structures and delivery. These principles can be tailored to fit the needs (and bottom lines) of a wide range of financial service providers. In addition to positively impacting the lives of lower-income consumers, the solution set could represent a new source of significant sustainable earnings for banks as well.
“Despite the best efforts of consumer advocates, policymakers, and financial institutions, low-and- moderate income consumers are inadequately served by today’s mainstream financial markets,” said Aaron Fine, report contributor and Oliver Wyman partner. “The reason for this is simple – it’s a hard business problem to solve, one that requires innovation. As this consumer segment can benefit from banking services and generate attractive returns for banks, our report is intended to help start that process.”
In addition, the report debunks three key myths about LMI consumers and personal finance: that these Americans don’t want to save (they do); that they don’t have money to pay for financial services (they actually pay more than the average consumer); and that they are bad at managing their finances (they are actually more aware of their personal finances than higher-income individuals).
The full text of the report may be found here.
ideas42 has a clear mission: to use our unique experience as a nonprofit at the forefront of behavioral science to change millions of lives. We create innovative solutions to tough problems in economic mobility, health, education, consumer finance, energy efficiency, criminal justice and international development. Our approach is based on a deep understanding of human behavior and why people make the decisions they do. Working closely with our partners from government, foundations, NGOs and companies, we have more than 50 active projects in the United States and around the world. Visit our website at ideas42.org or follow us on Twitter @ideas42 for more.
About Oliver Wyman
Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 26 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm’s 3,700 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.