In today’s financial services marketplace, there is a dramatic mismatch between the consumer needs of low wage immigrant unbanked and underbanked populations and existing financial products and vendor strategies. Drawing upon both consumer and vendor data, this paper will explore the mismatch and detail the promise and challenges of a new strategy for delivering financial services on a prepaid debit card platform.
Despite their low incomes, immigrant workers in the United States today are managing to save and send money home at remarkable rates. In a survey of 480 workers recently conducted by the Center for Community Change and Community Financial Resources, while we found the median annual income to be just $15,600, the median monthly remittance was $293, and savings (after paying bills and sending money home) was $289. In effect, low wage immigrant workers are managing to set aside more than a third of their annual income. Yet, close to half of respondents were unbanked entirely, despite many being in possession of identification (birth certificates and matriculas) that could qualify them to open some type of bank account. In addition, many of those with bank accounts still regularly used check-cashing services and money orders. Clearly, mainstream financial institutions are not meeting the needs of low wage immigrants: they are not offering the right type of products, their services are perceived as too expensive, they are not convenient, and they are not culturally attuned.
In recent years, several papers–see in particular Clarida, Gali, and Gertler (2000) and Lubik and Schorfheide (2004)–have documented marked changes in the conduct of U.S. monetary policy over the post-WWII era. Specifically, the reaction function of the U.S. monetary authority is estimated to have been passive, and destabilising, before Volcker, and active and stabilising since then.
A second group of studies see, e.g., Kim and Nelson (1999), McConnell and Perez-Quiros (2000), Kim, Nelson, and Piger (2003), and Stock and Watson (2002)–has documented a marked increase in U.S. economic stability over (roughly) the last two decades, with the volatility of reduced-form innovations to both inflation and output growth being estimated to have drastically fallen compared to previous years.
Since the 2007-2008 financial turmoil originated in the market for subprime mortgage-backed securities, much attention has been recently at the flaws of the securitization process and particularly at the failures of the rating agencies (CRAs), which played a key role in this process (see for instance the Financial Stability Forum Report, 2008, and International Monetary Fund, 2008). Two issues fare prominently in this respect.
First, since 2007 even very highly-rated structured debt products have performed very poorly: the value of AAA-rated mortgage-backed securities (as measured by the corresponding credit default swaps prices) fell by 70 percent between January 2007 and December 2008. This suggests that their initial ratings greatly understated the risk of structured debt securities. Such “ratings inflation” is central to the understanding of the crisis: insofar as many investors naively based their investment in these securities mainly or solely on inflated credit ratings, these led to a massive mispricing of risk, whose correction later detonated the crisis.
