The following piece originally appeared on TheHill.com:
Low-income households can pay ten times more than affluent households for the most basic bank services, like cashing a paycheck, paying a bill or sending money to family. In contrast, if you are well-to-do, you likely get free checking, cheap credit, and rich rewards points. Policymakers have long struggled to correct this perverse inequity, but one of the best solutions may already be in our pockets – smartphones. Specifically, the mobile internet is enabling a host of innovative apps and faster payment methods that may finally give financially underserved consumers the access and control they need to improve their own financial health.
Consider the grim reality for the seven percent of American households without a bank account. According to a recent analysis by the White House Council of Economic Advisors, these “unbanked” families scrape by earning $22,000 a year on average. Up to five percent of your money goes straight to a check cashing service because you need fast access to funds as you struggle to pay for immediate, basic living costs, like rent or utilities. That is over $1,100 a year just to access your money. Or worse, life’s emergencies leave you no other option than predatory payday or auto-title loans, which may cost $10 to $30 in extra costs per $100 borrowed.
Alarmingly, an additional 20 percent of America’s families are considered “underbanked,” meaning they actually do have bank accounts but still turn to these same high-cost financial alternatives.
Why does over one quarter of America have such challenges with traditional bank services? A recent FDIC survey found that financially underserved consumers feel that traditional financial institutions are not convenient because of limited operating hours or locations, or do not offer enough control over finances or fast access to funds. The survey also showed that these consumers are confused by lack of clarity when posting transactions and updating account information. These frustrations are familiar to all of us, but according to the Council of Economic Advisors, they have a disproportionately higher impact on households with lower education, lower income, minorities or young Americans.
How can a smartphone help? Quite simply, it helps money move at internet speed, like sending a text message or email. Faster payments help consumers pay bills on time and avoid late fees. Imagine paying the landlord via text message or getting paid instantly when you need to put food on the table. For the half of Americans who live paycheck to paycheck, the speed and accessibility of money matters.
The financially underserved are also disproportionately more likely to access banking services via a smartphone. For nearly one-in-five Americans, smartphones now serve as an essential, sometimes only, connection to the online world. According to a 2015 survey by the Federal Reserve Board of Governors, 53 percent of smartphone owners with a bank account had used mobile banking in the past year, and 40 percent of the unbanked and 70 percent of the underbanked, respectively, had a smartphone.
Mobile financial technologies, such as digital wallets, peer-to-peer payments and account management apps help improve financial health precisely because they enable instant access to money. These tools can enhance financial capability and make traditional bank accounts more manageable, hopefully avoiding high-cost alternatives.
And faster payments on smartphones are vastly more secure than cash, plastic cards or paper checks. Mobile technologies enable a wide variety of better security techniques, including multi-factor authentication, tokenization, device identification, biometrics and advanced encryption. Mobile security is dynamic – upgrades merely require a quick download, rather than reissuing old plastic cards…in the mail.
Despite these tech advances, our money still moves at stagecoach speeds, usually taking two to five business days to clear between accounts. The Federal Reserve is currently shepherding a constructive industry-led Task Force to facilitate faster payments. Congress should watch this process closely to ensure that faster payments become widely accessible and affordable to all consumers.
Beyond faster payments, the emerging financial technology industry includes an estimated 2,000 startups seeking to reimagine every aspect of banking. Importantly, the genesis of these services is consumer driven. They are more user-friendly and easier to understand; they address significant pain points consumers have in managing their finances; they help meet savings goals and avoid fees and penalties; and they typically offer lower prices.
As Congress and regulators pay more attention to this technological transformation they are looking to ensure adequate consumer protection and economic safety. Policymakers should focus on leveling playing field for underserved consumers. They can do that by aggressively promoting mobile technology and competition as some of the best solutions to this intractable challenge.
Brian Peters is the Executive Director of Financial Innovation Now and a partner at the Franklin Square Group.