Sarah Bloom Raskin: Economic and financial inclusion in 2011 - what it
means for Americans and our economic recovery
Speech by Ms Sarah Bloom Raskin, Member of the Board of Governors of the Federal
Reserve System, at the New America Foundation Forum, Washington DC, 29 June 2011.
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The original speech, which contains various links to the documents mentioned, can be found on the US Federal
Reserve System's website.
I wish to thank the New America Foundation, the Center for Financial Security, and the
Congressional Savings and Ownership Caucus for the invitation to speak at this important
conference addressing the savings and credit needs of Americans as our economy recovers.
It is a pleasure to be here with you today.
As the mother of three teenagers who are struggling toward adulthood - always two steps
forward and one step back, or perhaps a couple steps sideways - I inevitably think about
economic inclusion from the standpoint of young people entering the workforce and the adult
economy. And so I ask myself: What does it mean for them to be included in the economy?
Well, obviously I want them to be able to find satisfying, meaningful, and decently
compensated work. Surely this is as much a marker of the transition to adulthood in our
society as registering to vote or earning the all-important driver's license. We might say that
we are not truly included in the economy until we draw our first paycheck. One of the
tragedies of our current lingering recession is that so many young Americans have not been
able to experience the thrilling rite of passage that comes with finding a stable and
decent-paying job. And, of course, even beyond the young, there are millions of Americans
stuck in unemployment lines desperate to find a way back into the productive economy.
The question of employment is not our focus today, but we should pause to underscore the
promotion-of-maximum-employment imperative of the Federal Reserve's dual mandate. I
believe that this imperative has broad importance in American social and economic life.
But economic inclusion also implies a kind of belonging and membership in the economy that
goes beyond employment. In the financial and regulatory world, "economic inclusion" refers
to efforts to expand public access to, and participation in, mainstream financial services. This
effective inclusion in the financial marketplace depends upon a strong regulatory framework,
active market participation, and an expansion in public financial literacy. For the sake of
clarity, I will call this meaning "financial inclusion," and proceed on the assumption that it is
indispensably important to effective navigation of the twists and turns of life in the American
economy. Imagine what it would be like, even with a job, if you had no access to banking or
credit; if you did not understand how mortgages or credit cards work; or if you had no way to
save a portion of your earnings. Sadly, there are millions of Americans lingering in these
margins.
In my remarks today, I will share my perspective on why broad inclusion matters to our
economic recovery, the challenges that current economic conditions present to the efforts of
lower-income Americans to participate in the economy, and the risks we face as a country if
we understate or misunderstand these challenges.
Who is being excluded?
Let's first try to scope who is at risk of being economically excluded. We start with the
unemployed. The latest employment report issued by the Bureau of Labor Statistics was
bleak.1 U.S. employers in May added only 54,000 non-farm jobs, down from 232,000 jobs
added in April. The headline unemployment rate was 9.1 percent in May, representing about
13.9 million Americans out of work.
Unfortunately, the headline unemployment numbers don't fully capture the true scope of the
unemployment problem. There are an additional 8.5 million workers who are
"part-time-of-necessity" or "underemployed" because their hours have been cut back or they
are unable to find a full-time job; there are also 1.4 million workers who are "marginally
attached" to the labor force because, while wanting a job, they have not searched for one in
the past four weeks; and there are 822,000 "discouraged" workers who have given up
searching for employment because they do not believe any jobs are available for them.2
So it is not just those who are currently collecting unemployment insurance payments who
are excluded. The underemployed, the marginally attached, and the discouraged, all of
whom are primarily concerned about the security of their jobs, wage growth, housing, and the
rising cost of living, are also suffering from exclusion from the economy of work.
But most of these people searching for a way back into the employed economy are doubly
challenged by their ability to access reasonably priced financial products with safe features
that encourage savings. Americans have several core financial needs. They need a safe,
accessible, and affordable method to deposit or cash checks, receive deposits, pay bills, and
accrue savings. They also need access to credit to tide them over before their next cash
infusion arrives. They may be coming up short paying their rent, their mortgage payment, an
emergency medical expense, or an unexpected car repair. They may want access to a
savings vehicle that, down the road, will help them pay for these items and for education or
further training, or to start a business. And many want some form of non-cash payment
method, such as a credit or debit card, to conduct transactions that are difficult or impossible
to conduct using cash.
Products and services that serve these core financial needs are not consistently available at
affordable rates to all Americans. Those with low and moderate incomes may have
insufficient income or assets to meet the relatively high requirements of banks. Americans
without jobs, or with jobs that have slow wage growth, have little, if any, opportunity to
establish a credit history that facilitates access to financial services. Others, especially in the
wake of a recession that put many people out of work and homes, may have dents on their
credit records that inhibit their ability to borrow on affordable terms.
How the recession undermined financial inclusion
The economic crisis has undermined financial inclusion for many Americans. Low- and
moderate-income families entered the recession with little financial buffer against the
adverse effects of wage cuts, job loss, and drops in home values. According to the 2007
Survey of Consumer Finances (SCF), home equity accounted for 75 percent of total assets
for low- and moderate-income families, which made them extremely vulnerable to the
eventual housing market collapse. Sure enough, families in the bottom fifth of the income
distribution saw an 18 percent drop in median net worth between 2007 and 2009, going from
$8,100 in 2007 to $6,600 by 2009.3,4 Families in the middle of the income distribution fared
even worse, experiencing a 21 percent decline in the value of their assets, the highest of any
group during the same period. Combined with widespread unemployment, housing and stock
price declines, and increasing rates of mortgage defaults, foreclosures, and bankruptcies, the
assets of many American families have been significantly eroded.
In addition to losing the value of their savings and assets, a significant number of low- and
moderate-income families have become financially marginalized as a result of the economic
crisis. The percentage of families earning $15,000 per year or less who reported that they
have no bank account increased between 2007 and 2009 such that more than one out of
four families were unbanked.5 Families slightly further up the income distribution earning
between $15,000 and $30,000 per year are also financially marginalized: 13 percent report
being unbanked and almost 24 percent report being underbanked.
This combination of economic insecurity and financial marginalization has placed more
low- and moderate-income families right at the well-lit front doorsteps of payday lenders and
other alternative financial service providers to try to meet their financial needs.
Alternative financial services: convenience vs. cost
While alternative financial services may serve the access needs of many consumers, they
often come at a much higher cost than traditional financial services. For example, the typical
payday lender may charge $15 to $20 per $100 borrowed for a two-week period, translating
into annual percentage rates often exceeding 390 percent. Similarly, check cashers generally
charge customers 2 to 3 percent of the amount of a check, even for those issued by the
government. It is not hard to see how such fees can add up to several hundred dollars per
year - real money for any consumer, but as a percentage of income, much more costly for
those with limited disposable incomes.6
For some consumers, these services may be seen as more convenient or customer-friendly
than those offered by traditional banks. But this convenience comes with a hard price: it
further exacerbates the precarious financial state of many families and, in many cases, locks
them into a downward cycle of deteriorating finances.
This is not to say that mainstream financial services are inexpensive. Free checking
accounts are quickly disappearing, replaced by accounts with rising fees. Overdraft fees on
checking accounts can also be pricy, ranging from $10 to $38 with a median fee of
$27. These fees are not insignificant, particularly when applied to small dollar transactions.7
In sum, the financial crisis has left many lower- and moderate-income Americans in danger.
With fewer assets to rely upon and deteriorating credit, many people find it harder to enter, or
stay in, the financial mainstream. In analyzing the state of economic and financial inclusion,
the crisis both expanded the number of Americans excluded from the economy and
dramatically raised the barriers to enter it.
Why does financial inclusion matter?
Broad financial inclusion is essential because it bolsters American consumption and savings,
which drives macroeconomic growth. In order to promote efficient economic growth and
stability, Americans must have safe and affordable access to the tools necessary to function
in the modern economy. Congress created the Federal Reserve with a view that it should
focus on economic growth, so the Federal Reserve has a clear interest in promoting a
meaningful, broad recovery that is conducted in a safe and viable manner. Affordable,
transparently priced, and safe financial products and services promote positive outcomes for
individual consumers, which in turn supports the growth and stability of the overall financial
system.
From the standpoint of the individual, financial inclusion serves as a mild counterweight to
the growing income and asset inequality in the United States that has deepened since the
onset of the economic crisis. While the exact level of inequality is a matter of academic
debate, the trend across various measures definitely suggests that economic disparity has
increased over the past 30 years and has accelerated in the past decade.
This phenomenon appears to be driven primarily by the rapid growth in income and assets
for those in the top 1 percent of the distribution, while most everyone else has experienced
stagnation.8 This inequality is destabilizing and undermines the ability of the economy to
grow sustainably and efficiently. It is associated with increases in crime, profound strains on
households, lower savings rates, poorer health outcomes, and diminished levels of trust in
people and institutions.9 All of these forces drag down maximum economic growth and are
anathema to the social progress that is part and parcel of such growth. These forces also
bring people closer to being "scammed" or becoming vulnerable to financial schemes that
promise quick and easy fixes. Finding ways to help more Americans safely grow their
incomes and net worth in real terms arguably diminishes the destructive influence of income
inequality by giving everyone a more secure footing in the economy and the same kind of
flexibility and choice available to the more affluent.
Understanding the impediments to inclusion
Understanding the impediments to inclusion for Americans will help policymakers to craft
effective responses for expanding access to financial services. As just described, first and
foremost, people need jobs with compensation that can support them and their families and
that provide a source of savings and wealth accumulation. In other words, they need to be
economically included. Second, we should examine barriers that individual consumers may
face.
For example, a Federal Reserve analysis of the SCF suggests that the primary reason
individuals do not have a transaction account is a simple lack of trust in financial
institutions.10 This may originate from negative personal experiences with financial
institutions since more than half of the unbanked previously held checking accounts. For
some immigrants, it may also be due to a more general distrust of financial institutions in
their country of origin that translates to distrust of U.S. institutions.
Opportunities for innovation
In addition to considering the barriers to accessing transaction, savings, and credit products,
the discussion of expanding financial inclusion should consider new opportunities that have
the potential to make financial services more broadly available. New technology, such as
recent advancements in mobile financial services and the prepaid card industry, are spurring
financial product and service innovation in the private sector. For example, mobile tools
promoting ways to improve the financial capabilities of, and providing new products and
services for, the underbanked are being developed.
At the same time, there is interest in the use of prepaid cards that offer the payment ability of
a debit card, combined with the functions of a checking account, to go along with an optional
savings feature, as a new product that provides expanded options for consumers without
traditional bank accounts. New features, incentives, and discounts are beginning to flourish
as the prepaid market expands and more competitors enter the marketplace. In fact, at least
one prepaid card option encourages timely bill payment and savings by providing a discount
coupon for prepaying a bill. For instance, a consumer with a $20 utility bill would get a
$2 discount for paying the bill early, with the $2 going into a savings account.
Partnerships are another strategy for delivering financial services at a low cost. For instance,
the Bank On initiatives being launched throughout the country are an example of how
partnerships between banks, credit unions, local governments, and non-profits can lead to
the development and deployment of low-cost products that are designed to meet the needs
of low-income consumers. Bank On campaigns seek to provide pathways to safe, affordable
financial products, such as low- and no-cost checking accounts that are offered by
participating financial institutions.
In addition to the wide range of work engaged in by the Federal Reserve System that is
designed to foster and promote financial inclusion, the System's Community Development
function conducts outreach and acts to foster partnerships and provides research and
analysis necessary to understand the challenges confronting low- and moderate-income
individuals and households. By leveraging our strengths as a research institution through the
network of Community Development staff in the 12 Reserve Banks, their 24 branches, and
the Board of Governors, the Federal Reserve System is able to monitor and respond to
changes in the financial services industry while positively influencing policy that impacts
low- and moderate-income consumers.
Changing demographics
Our collective work in the realm of financial inclusion is occurring within a landscape for
financial services and consumer credit that is changing quickly. Racial and ethnic
diversification of the country presents opportunities for financial service providers that are
attentive to the changing financial needs and preferences of consumers. Rising immigration
from developing countries, and the associated diversity of experience with formal financial
services providers, will challenge the financial services industry to be more flexible and
creative in reaching consumers.11
To return to where we began - with teenagers - those of us that are privileged to share our
days with them know how technology is absolutely central to their lives. Their familiarity and
comfort with online interaction, combined with their expectation of immediate, continuous,
and universally accessible service, will likely inspire changes to traditional models of financial
service delivery. Traditional financial service providers that fail to keep pace with the latest
technological innovations risk losing market share to innovators in this area. Signs that
younger Americans are more tenuously attached to the traditional financial system are
already apparent and it is important for policymakers to understand the implications of this
trend for the financial futures of the next generation.12
It may, in fact, turn out to be that the innovations in financial services outside the traditional
banking system will best address the needs of lower-income Americans. However, it is
incumbent upon regulators to ensure that these products and services are safe, affordable,
transparent, and easy to understand, regardless of the provider. In some cases, regulators
may need to ban products that are inherently unfair or deceptive. In all cases, regulators
must ensure that consumers are afforded meaningful protections with respect to any
products that are offered in the financial marketplace. Finally, regulators must also actively
monitor the consumer financial market to guard against developments that might threaten the
stability of the overall economy.
Conclusion
To conclude, the financial crisis has created new challenges in ongoing efforts to expand
economic and financial inclusion. The large numbers of unemployed and underemployed
Americans are at great risk of being unable to access fair, sustainable, and affordable
financial services. It is necessary for the strength of our nation's recovery that low- and
moderate-income Americans be able to more fully participate in the economy, and both
policymakers and financial innovators should remain committed to the imperative of building
upon the progress that has been made. We need to be prepared to foster further innovation
and outreach. Our overall economic stability relies ultimately on the collective financial health
of all American households, so these are issues in which we all have a stake. One of the
positive commitments that can emerge from this period of terrible economic distress is the
determination that all Americans, regardless of income, have access to reasonably priced
financial products and services so that they may fully participate in our nation's economy and
safely build assets for their futures.
Thank you.