Payments Innovations in Serving Low- and Moderate-Income Households: Evidence from a New Survey

1. Payments Innovations in Serving Low- and Moderate-Income Households: Evidence from a New Survey Access to Finance: Building Inclusive Financial Systems World Bank, Washington DC May 30, 2006 Michael S. Barr University of Michigan & Brookings Institution (Joint Work with Ed Bachelder & Jane Dokko) Provisional Data. Do not cite or quote for any purpose.

2. Banking and Payment Cards • What types of bank account features and payment cards do different types of low- and moderate-income households find attractive? • Detroit Area Study & Conjoint Analysis • Main Findings • Many unbanked HH would like a bank account & payment cards • LMI HH’s value low monthly cost & federal protection • Policy Implications Provisional Data. Do not cite or quote for any purpose.

3. Detroit Area Household Financial Services Survey: Overview • Survey of 1,003 households in Detroit metro area (Wayne, Oakland, and Macomb counties) • Random, stratified sample. HH area median = 49,000 (census definitions) • 0-60% of area median (up to $29,000) • 61-80% of area median ($29,000-$39,000) • 81-120% of area median ($39,000-59,000) • Oversample low-income census tracts • Ask randomly selected individual from household about own & household’s financial service use • In-person, computer assisted. Average interview length 76 minutes. Production hrs/interview: 8.8 • 65% response rate Provisional Data. Do not cite or quote for any purpose.

4. Demographics of Sample • Unweighted. Provisional Data. • Sample is more socio-economically disadvantaged than average US household • Mostly black, 2/3 female, mostly unmarried • $18,000 median household income • 34% live below the federal poverty line • 1/3 have less than a HS Diploma or GED • 50% currently employed • 27% do not have a bank account Provisional Data. Do not cite or quote for any purpose.

5. Unbanked • Younger, less educated, less employed, poorer than banked individuals • 71% previously banked • 69% closed it b/c moved, high fees, NSF • 31% bank closed b/c overdrafts • 76% want to open a bank account • 69% have looked into opening an account • 19% report that a bank has denied an application to open a bank account Provisional Data. Do not cite or quote for any purpose.

6. Unbanked & Account Features • 30% lower fees • 20% convenient hours/locations • 14% less confusing fees • 13% lower minimum balances • 11% get funds faster Provisional Data. Do not cite or quote for any purpose.

7. Conjoint Analysis: Overview • Conjoint analysis measures customer trade-offs among product attributes in complex purchasing decision. • 9 product features, up to 4 levels • 12 cards, 3 versions • Option to choose “none” • Measure the ‘utility’ consumers derive from specific product features • Quantify the relative importance of each element to the consumer • Projection of market choice. • Preferences modeled for each customer segment. • Take-rate estimated for product bundles. Provisional Data. Do not cite or quote for any purpose.

8. Conjoint Analysis — Card Features Provisional Data. Do not cite or quote for any purpose.

9. Provisional Data. Do not cite or quote for any purpose.

10. Relative Importance of Attributeson Choice of Product Monthly Cost is #1; Federal Protection is #2 Relative Importance of Card Account Attributes Provisional Data. Do not cite or quote for any purpose.

11. CBC Analysis — Monthly Fees • Monthly fees are the most important consideration. • Banked and those with credit cards are more sensitive to monthly fees than unbanked & those without credit cards. Monthly Fees by Credit Card Status Monthly Fees by Banked Status Provisional Data. Do not cite or quote for any purpose.

12. CBC Analysis — Federal Protection • All groups valued federal protection. • Banked & credit card holders value federal protection more than unbanked Protection by Banked Status Protection by Credit Card Status Provisional Data. Do not cite or quote for any purpose.

13. CBC Analysis — Funding Method • All groups value Direct Deposit overcashing check & loading value for a fee. • Banked strongly prefer Direct Deposit • Credit Card holders not very different Funding Method by Banked Status Funding Method by Credit Card Status Provisional Data. Do not cite or quote for any purpose.

14. CBC Analysis — Card Type • Unbanked & those without credit cards negatively value ATM & Payroll Cards but like branded prepaid cards. Card Type by Bank Status Card Type By Credit Card Holders Provisional Data. Do not cite or quote for any purpose.

15. CBC Analysis — Automatic Savings • All groups value automatic savings plan. • Banked prefer automatic savings slightly more than unbanked Savings by Banked Status Savings by Credit Card Status Provisional Data. Do not cite or quote for any purpose.

16. CBC Analysis — Credit Check • Unbanked & those without credit cards prefer no credit check requirement. Credit Check Requirement By Credit Card Status Credit Check Requirement by Bank Status Provisional Data. Do not cite or quote for any purpose.

17. CBC Analysis — Bill Payment • Bill Payment had minimal appeal. • Banked & credit card holders slightly value telephone and internet payment capabilities Bill Payment by Banked Status Bill Payment by Credit Card Status Provisional Data. Do not cite or quote for any purpose.

18. Discrete Choice Model • Consumer response to each product feature combination can be estimated using multinomial logistical regression to generate ‘take-rates’ (Buy vs. No-Buy). Logistic Response Curve Provisional Data. Do not cite or quote for any purpose.

19. Preference by Age • Take-rates for all feature bundles decrease with age, while increasing with Federal Protection & product features. Provisional Data. Do not cite or quote for any purpose.

20. Preference by Income of Census Tract • Take-rates for all feature bundles decrease with income of census tract. Provisional Data. Do not cite or quote for any purpose.

21. Preference by Banked Status • Unbanked prefer even the lowest value cards, which Federal Protection makes twice as attractive. Provisional Data. Do not cite or quote for any purpose.

22. Policy Implications? • Using interactive market model to guide private sector initiatives to serve the unbanked • Prepaid debit • Bank ATM • Payroll cards • Refining government strategies • Federal ETA, First Account, new initiatives • State EBT programs • Improving & simplifying consumer protection across card-based products • FDIC Deposit & Federal Reserve Regulation E revisions • Legislation needed to unify payments protections Provisional Data. Do not cite or quote for any purpose.

23. Funders & Advisory Board of the Detroit Area Household Financial Services Study • Funders • Ford Foundation • Fannie Mae Foundation • MacArthur Foundation • Mott Foundation • Casey Foundation • Community Foundation of Southeast Michigan • National Poverty Center • CLOSUP • University of Michigan Provost, OVPR, Law School • Advisory Board • James Carr (Fannie Mae Foundation), John Caskey (Swarthmore), Phoebe Ellsworth (Michigan), Reynolds Farley (ISR), Jeane Hogarth (Federal Reserve Board), Rochelle Lento (Michigan), Sherrie Rhine (Federal Reserve Board), Bob Schoeni (ISR), & Michael Stegman (University of North Carolina, Chapel Hill). • For further information • see http://www-personal.umich.edu/~msbarr/ and click on “Detroit Area Study” Provisional Data. Do not cite or quote for any purpose.