That morning I participated in a conference call hosted by the NYC Office of Financial Empowerment (OFE) that presented the results of a “Neighborhood Financial Services Study.” The study, launched by Mayor Bloomberg in December 2006, was the first local government initiative in the nation exclusively dedicated to the financial empowerment of low-income residents. The study explored the supply and demand of financial products and services in low-income communities. It specifically looked at banking, savings, credit, and financial education in
To collect data, OFE partnered with two community-based organizations that administered 640 in-person surveys in English and Spanish to residents. It also worked with other organizations to conduct an initial supply-side analysis and to gather relevant community and city data. The two communities of
The findings of the study showed that:
- A fundamental mismatch exists between current financial product and service offerings and the needs of households in low-income communities.
- This mismatch plays a more prominent role than bank branch proximity in determining why residents remain “unbanked” and why fringe financial services are so widely used in these neighborhoods.
The following graph displays the responses that polled individuals gave as to why they were unbanked:
As a result of the disparity between supply and demand in the formal financial sector, many
The use of fringe financial services is closely linked to financial instability. Respondents with fringe debt have more than twice the odds of experiencing financial instability – 40% of them could not pay rent in the last year.
So what’s to be done? What can policymakers and members of the formal and informal financial sectors do to rectify this fundamental mismatch between products and needs? What measures can be taken to improve the overall financial well-being of low-income individuals?
Well, one answer seems to be to render financial services more amenable to the wants and needs of low-income communities. The OFE study names several target groups and proposes corresponding products that could attract target members to mainstream banking. Among other things, these new products would include: starter accounts, enhanced checking, short-term loans and automated savings mechanisms.
The OFE study also reveals that financial education is strongly associated with positive financial behavior. While many (71%) of
Simply increasing the number of bank branches in a given area will not improve the financial lives of the unbanked and the partially banked. More fundamental measures that truly get at the heart of the problem must be taken. The gap between formal financial products and the needs of low-income individuals must be closed. Residents of low-income communities must be given the opportunity to learn correct financial behaviors through the availability of financial education. Only once these basic measures have been taken will the unbanked and partially banked residents of