By: AIF Staff
Washington, DC – This week at the American Enterprise Institute, former Speaker of the House Paul Ryan led a panel discussion with entrepreneurs and policy experts focused on how innovations in the financial services industry can expand economic opportunities for more Americans. With inflation at its highest rate in decades, low-income families and households desperately need tools that provide them greater financial flexibility making it a timely discussion.
Conversing with the Brookings Institution’s Aaron Klein, CEO and Founder of Earnin Ram Palaniappan, and Ida Rademacher of the Aspen Institute, Ryan solicited ideas on how the American banking system could be modernized using 21st century technology to improve the economic well-being of low-income families. The panel detailed how government and the private sector can work in tandem to develop products and policies that provide Americans with more financial security as they grapple with rising costs.
Video of the panel discussion is accessible here and some notable excerpts follow.
“Working Americans are facing a time of sustained and rising inflation. Energy costs, food costs, and just everyday life has gotten more expensive. While workers are all-to-often seeing their paychecks lag behind, businesses are also facing a difficult time hiring.
“As we enter into this time of economic hardship, we know that households will face financial hardship. And we also know that reducing that hardship will require policymakers, for-profit organizations, and non-profits to explore new and innovative ways to improve access to financial institutions….
“Too often, when individuals run short of money, they either have nowhere to turn, or the places they do turn end up costing them more than they can afford. As policymakers look towards reducing costs for Americans looking to access financial services, we know that new financial technologies can be helpful in this goal.”
Aaron Klein on how the financial system holds low-income earners back:
“40% to 50% of Americans are living paycheck to paycheck at some level. We’ve designed a [banking] system that assumes you always have money and you don’t care when the money comes in. And that assumption works great for the half of Americans who always have $1,000 in their accounts, who get free checking, and who have all these other benefits. Who is paying for that system are the people living paycheck to paycheck, who are paying overdrafts.
“One out of every 11 Americans has used a pay-day lender or paid overdraft fees. They’re the ones subsidizing free checking accounts… By my calculations over $100 billion of wealth has been transferred from people living paycheck to paycheck who use payday lenders and check-cashing operations….
“The private sector has developed some alternatives for wage access, real-time payment networks and other things, but we made a critical mistake when we put the Federal Reserve in charge of regulating the nation’s payment system [and determining] how fast that check clears when that money comes into your account. They’re also in charge of operating their own system called the automatic clearing house (ACH) system. So, they’re the operator and regulator.
“You wouldn’t put Blockbuster in charge of developing streaming. We have Netflix. That’s the mistake we’ve made [with the Federal Reserve’s role in our banking system] and the people that have suffered have been the people living paycheck to paycheck and the people that have prospered have been the banks regulated by the Federal Reserve, those who charge overdraft fees, check cashers, and payday lenders.
“Ultimately, I don’t think we’re going to get to a workable solution without a regulatory regime that puts people first and that is reordered. We have a financial system where the less money you have, the more money it costs you to access your own money.”
Ram Palaniappan on how Earnin is increasing financial well-being through innovation:
“The way Earnin started was quite by chance. I was running another company and I found out that some of my employees were getting overdraft fees and payday loans and it didn’t make any sense to me because I thought I was paying them well.
I spoke with one of them and the problem she had was she needed money the next day. She couldn’t wait until the following Friday. It was Wednesday, so I said I will pay you for the days you’ve already worked. I tried to get our payroll system to do that and the payroll system couldn’t do it.
So, out of frustration, I said I’ll give you the money for the days you’ve already worked and when the payroll system finally does its thing, then you can pay me back. And it started out with me doing that for a handful of my employees and it was always in person when they would see me in the office and then this would happen.
Then, I moved to Cincinnati and they wanted to know if I would continue doing this for them and I didn’t mind doing it because I knew how these systems worked and I could tell if they were working or not. So, I continued to do it for them and initially it was done over Messenger and that’s not the most convenient way because I’d be with someone and keep getting messages, so I built a really crude web function that said if you need money, you can fill out this form.
When I had this webpage up, people really started to use it and what I realized is that if you give somebody access to their money when they need it, their life is so much simpler. They’re paying their bills on time. No more late fees on bills. No more overdraft fees. No more payday loans. This is when I realized that if I didn’t try to scale this product to help more people, I’d always feel bad about myself.”
Ida Rademacher on the need for a Commission on Financial Inclusion:
“There are lots of people getting at understanding what it really takes to deliver well-being for households [and what it takes] to give them dignity and agency and choice but there’s still not a bird’s eye view of how all the different pieces connect because people’s financial lives aren’t siloed in payment pieces and savings pieces and what’s going on day-to-day and week-to-week is still not connected. So, we ended up supporting a call to action with what I like to call a National Financial Inclusion Commission and we wanted to see how much support was out there for what really is this idea of a north star for financial well-being for all households and what is the financial infrastructure that can deliver on that.
It certainly felt like this was needed during COVID when all of the payments to households and businesses encountering some of these “last mile” problems, and to our delight, over 110 companies and civil rights organizations from every industry, association, and finance sector signed on in support of the idea of a comprehensive, coordinated, government-quarterbacked Commission to help think about financial inclusion as a foundational piece of inclusive growth in this country. We think it’s the right time. There certainly seems to be public and private sector will to do this.”
“The whole vision for a Commission is that there is an ongoing, measured, structured place to have this conversation with rigor, and informing that conversation with data to come out with the answers to your question. We can’t fix financial inclusion, meaning helping with outcomes, unless we actually know what is the finance system is going to look like 10 years from now. Where does this disruption come from? What is going to mean for households, and let’s do that evaluation rigorously. I certainly don’t mean to imply that, you know, managing systemic risk is not a core piece of it but increasingly, if that is at odds with how the finance system facilitates people’s financial lives, we are not doing our jobs.”