As a capitalist society we have a seemingly endless array of products to choose from, such as clothes, food, and many other consumer products. With so many choices and providers competing for our dollars this should lower the overall cost to consumers, right? Unfortunately, this is not apparent in financial services.
Segmentation and exclusion based on assets is the norm in financial services. This means low-wealth individuals don’t benefit from the lowest prices, fairest credit options or even the most appropriate products. Compounding this problem is a lack of awareness in how to evaluate financial products and why so many low-wealth individuals are caught in products and services that don’t improve their financial wellness.
We can’t criticize all providers of financial services. There are innovative traditional and fintech companies that are enlightened and value the balance between profits and purpose. However, we still see a wide gap in product and service offerings between those with wealth, and those without. There is room for improvement by ensuring products or services available to low-wealth communities can improve their ability to save, access credit and build wealth — and still earn providers a reasonable profit.
At Community Financial Resources, we’ve partnered with financial institutions for over 20 years to co-design products for low-wealth communities, with a focus on communities of color. Numerous studies have shown that people of color pay more for financial services, have less access to fair credit (or none at all), pay higher interest on loans, and are hamstrung on achieving financial stability.
Here are examples of what we advocate are most important for low-wealth communities:
Many take for granted the ease of going to a local bank to open a basic checking or savings account. Low-wealth individuals with Social Security Numbers (SSN) can open bank accounts, but often low balances mean additional fees that can really impact someone earning a minimum wage. Those who can’t obtain an SSN usually have an ITIN (Individual Tax Identification Number). Banking for ITINs is possible, but often comes with barriers to entry such as which government issued ID is accepted. That’s why we created the CFR Focus Card with a free optional savings account — affording all low-wealth individuals access to an inexpensive pre-paid card for direct deposit with a free savings feature.
The Consumer Financial Protection Bureau estimated that 26 million adults (one out of 10) are considered "credit invisible” — they have no credit history, no credit cards, loans, and other lines of credit — and about 15% are Black and Hispanic Americans. They are excluded from credit products for a variety of reasons, including low FICO scores, high APRs, high minimum balances, annual fees and inflexible rules that don’t adapt to changes in financial situations. We created credit products that build or re-establish credit without FICO scores, high minimum balances, or annual fees — with the added flexibility to change terms without negatively impacting one’s credit.
Most debt consolidation products available to low-wealth individuals have high APR’s due to lower FICO scores. The key problem is cash flow. An individual with lower cash flow in a debt product with a high APR will likely forever stay in the debt cycle. This won’t reduce their debt as available cash will go toward paying interest. We’re developing a debt consolidation product that will consider the individual’s ability to pay -- not just the FICO score – to consolidate unsecured debts (credit card and auto) into one loan, with a fair APR and better terms that will actually help people climb out of debt.
We understand the pressures of maintaining high-margin products and services, particularly for public companies responsible to shareholders. However, we advocate for a higher standard when considering what is offered to low-wealth individuals. Lower cost products with fair terms can be achieved, still be profitable, and more importantly, improve financial wellness to ensure low-wealth individuals and their families become customers for life.