Family Financial Security Symposium

Last month I attended the 2010 Family Financial Security Symposium, the inaugural event of the Center for Financial Security at the University of Wisconsin-Madison. Summarizing the papers presented and paraphrasing the impressive panelists is too tall an order, so below, I wanted to highlight some key findings from select presentations and make a few general observations.

Jenifer Romich of the University of Washington-Seattle presented learnings from a small study of general-purpose reloadable prepaid card users, co-authored with CFSI’s Sarah Gordon. Two points stood out for me. First, clients reported that the opportunity to build a credit score with data from regular payments made via their prepaid card was actually “not that salient.” Second, the cardholders using the savings account portion of their card found the “linked” or automatic deposits to be a helpful reinforcement or commitment to save.

Those kinds of features are precisely the innovations that asset builders applaud in smart products. They not only enhance the product’s use beyond transactions (and probably increase customer retention, too), but having a credit score increases a person’s chance of having access to more reasonably priced credit options (making it cheaper to borrow). With the exception of the card used in the CFSI research, the ability to set aside savings on a prepaid card is extremely limited in today’s marketplace. If these general purpose cards are indeed acquiring depository account-like functions and protections, I would also hope to see more products adopt the asset-building features, and more customer interest in these tools. I wonder whether generating consumer demand for these kind of features is a matter best handled by financial education (i.e. teaching that it’s REALLY important to have a buffer stock of savings, and that even regular, small deposits can help towards goals like a home down payment) or consumer marketing (i.e. “Use our great product because we give you a place to save!”)?

Later in the day, Federal Reserve Board staff Jeanne Hogarth and Ellen Merry presented truly fascinating consumer testing research and discussed its current and future real-world applications. 

Testing disclosures in a controlled setting, the authors observed that form design influenced a consumer’s comprehension and their subsequent actions. (If your credit card statements are a little easier to read, it’s because this kind of important work validated the idea that improving a disclosure’s design can improve how a consumer comprehends the information). While the authors acknowledge that financial decisions are complex, influenced by context and the behavior of others, their findings imply that more can be done to empower consumers and enable them to make good choices.

Movement in this direction is very exciting. It’s great to see the government engaging in a multi-agency, collaborative effort to identify in earnest, where, when, and how adjustments to policies can improve consumers abilities to make informed financial decisions. Related mortgage research is worthy of a read and their conference paper, too. Without giving away the whole disclosure story, here are just a few of their implications for consumer protections: effective online strategies are often not the same as print strategies; plain language is necessary, but not sufficient; and improving disclosures are not a magic bullet—policy change and consumer education are also needed.
 
Another research highlight was provided by Carolina Reid of the Federal Reserve Bank of San Francisco, who discussed one stage of her research in which she develops case studies for two communities documenting how homebuyers acquired their mortgages.

New America’s Ellen Seidman gave a superb analysis of the second panel and delivered the highlight lines of the conference, saying: “We need to teach people what to be skeptical about” and “Credit is not a substitute for income.”

So where are we now? 

We know that being impatient (Meier), mis-judging your own knowledge (Lusardi), or naively mis-estimating the value of your worth (Agarwal) can lead to vastly inferior financial outcomes. We know that today’s consumers, particularly those relying on both informal and formal financial services, lack the specific capacities to make sound financial decisions. This is a function of low consumer financial literacy, but also a function of confusing products and information, that make rules of thumb such as how to comparison shop, ever so difficult.

A pragmatic approach to restoring consumers’ confidence in their wealth building potential requires improvement to financial education (building cognitive skills and common principles for consumer decision making) and adjustments to the entire financial services system (including the product and the process).

We are clearly on the precipice of learning a great deal about the formation of a family’s economic decisions. Thanks to the forward thinking research presented, policymakers will soon have at their fingertips information on what kinds of changes help consumers make better decisions, and what kinds of design complicate their decision processes.