Early in the fall 2017 semester, Punit Shah, MBA ’18, did something out of the ordinary for the average Stanford Graduate School of Business student: He walked into a check-cashing store to cash a payroll check.
“It was the first time I’d ever walked into a check-cashing store,” Shah remembers. “You can read all about these alternative financial services, but when you’re there and seeing it on the ground, you gain a much deeper understanding.”
The experience, part of Kenneth J. Singleton’s new MBA elective Innovating for Financial Inclusion, was eye-opening by design. Through a collaboration with the Center for Financial Services Innovation, the Adams Distinguished Professor of Management sent teams of students out into communities near Silicon Valley to experience firsthand the everyday challenges faced by families that do not have access to traditional financial services, either by choice or owing to their financial circumstances.
Singleton provided each team with a payroll check and a personal check totaling about $100, and a checklist of tasks. After cashing those checks, the students were to buy a prepaid card in one location and make a purchase with it in another. Other tasks included attempting to wire money from one team member to another, purchasing a money order with which to pay a bill from a theoretical utility company, and getting a quote on the terms for a payday loan. Finally, if there was a pawn shop nearby, they were to ask how much money they could get for a watch or a piece of jewelry.
For the many people who do not use mainstream financial services, these can be routine events, says Singleton.
According to the 2015 FDIC National Survey of Unbanked and Underbanked Households, approximately 9 million U.S. households that year were “unbanked,” without access to a checking or savings account, while another 24.5 million were “underbanked,” relying on some financial services and products outside of the banking system. In addition, Singleton points out, “there is a much, much broader segment of society that isn’t financially healthy; about half of U.S. households have subprime credit and are not prepared for financial setbacks.” These households, too, sometimes turn to alternative financial services, facing barriers to usage and relatively high fees.
The Higher Cost of Living
Singleton says his students were shocked at how expensive financial life can be for those who lack access to services from insured banking institutions.
Shah learned how pricey it is to use a “general-purpose reloadable” prepaid card. “It cost $3 to buy the card, and there were fees charged every time it was used, although it wasn’t obvious how much we would be charged,” he says.
There can be additional challenges for people who lack Social Security numbers, or who are hesitant to share them because of privacy concerns. Shah and his team, for instance, were unable to reload their prepaid card as assigned when they chose not to provide a Social Security number.
As it turns out, handing over the right information may not be the only way to smooth the path for such transactions. Those providing alternative financial services were often mindful of students’ perceived economic circumstances.
“A few of the students hadn’t really thought through how they present themselves to the community,” Singleton says. “They showed up in their Stanford sweatshirts, and discovered that this precipitated special treatment. For instance, one manager said, ‘We wouldn’t normally do this, but … ,’ and made an exception.
“It left some students uncomfortable with getting treatment that the person behind them in line likely wouldn’t receive,” he adds.
Singleton brings a deeply personal perspective to the problem of households with limited financial capacity. He is a co-founder of 1 Grain to 1000 Grains, a nonprofit that aims to revitalize communities through the interlinked goals of eating healthfully and building financial stability.
“The notion of addressing financial capacity is a passion of mine,” he says. “Experiences I’ve had with aspiring families in lower-income communities on the San Francisco Peninsula have certainly influenced my thinking about what financial technology can do to address their challenges.”
Opportunities for Problem-Solvers
A class like Singleton’s can make a difference in alerting the business community to consumer needs and the vast opportunity they present, says Arjan Schütte. He is the founder and managing partner of Core Innovation Capital, a venture capital firm that invests in companies serving underbanked consumers.
“Every business school has a perfunctory class in fintech. I really admire Ken for following his nose on teaching this through a values lens,” he says. “The power of fintech should be, at its root, about the inclusivity and democratization of financial services.”
After assessing the current state of alternative financial services out in the field, Singleton’s students took the next step: exploring how fintech is helping to strengthen the financial capacities of households.
The students examined the “frictions” that keep households from using traditional banking services and drive them toward check cashers and payday lenders, and also the ways in which fintech startups are mitigating those frictions. Visiting executives explained how Oportun helps customers with little or no credit history to get loans and establish credit, and how investment specialist Acorns allows individuals to round up the prices of purchases and automatically invest the change in diversified equity portfolios. The business leaders also shared candid reflections about their failed attempts.
“The new generation of financial-inclusion solutions can scale, and solve for big problems,” says Schütte.
Singleton’s class studies not only financial struggles and solutions in the United States, but also parallel systems and frictions in European countries, India, and China. “This allows us to build a comparison internationally around how regulators respond to fintech differently in other regions,” he says.
Shah found that the class went beyond exposing him to the financial challenges faced by one segment of society. It also introduced him to a whole new market concept: having the fintech sector tackle issues of equity and capacity so that financial wellness is possible for everyone, regardless of background or circumstances.
“People tend to develop products for people who are like them,” Shah says. “But the biggest need lies with consumers who look different from the median student in this class.”
— Nancy Davis Kho