payments innovations in serving low- and moderate-income households: evidence from a new survey

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 Do not cite or quote for any purpose.

Payments Innovations in Serving Low- and Moderate-

Income Households: Evidence from a New Survey

Access to Finance: Building Inclusive Financial Systems

World Bank, Washington DCMay 30, 2006

Michael S. BarrUniversity of Michigan & Brookings Institution(Joint Work with Ed Bachelder & Jane Dokko)


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


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


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


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


Unbanked & Account Features 30% lower fees 20% convenient hours/locations 14% less confusing fees 13% lower minimum balances 11% get funds faster


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.


Attributes Levels A 1 Credit Check

B

No Credit Check Favorable Credit Report

A B

2 Card Type

C

ATM Card Payroll Card MasterCard Prepaid Debit Card

A 3 Protections B

Federal Protection No Protection

A B

4 Funding

C

Direct Deposit Employer Load Cash and load for $2.95

5 Savings A B

Automatic Savings Plan No Automatic Savings Plan

A B

6 Bill Payment

C D

Buy Money Orders with Card Automatic Bill payment Available Pay bills in person with Card Pay Bills by Phone or Internet with Card

7 Cash Access A B

ATMs, Bank Tellers and Stores Cash at ATMS, and Stores

A 8 Cash Access Fees BC

4 free at the cards issuers; then $2 each $1.50 per Withdrawal $2.50 per Withdrawal

9 Monthly Cost A B C D

No Monthly Fees with Direct Deposit $2.95 per month fee $5.95 per month fee $9.95 per month fee

Conjoint Analysis — Card Features


Monthly Cost is #1; Federal Protection is #2

Relative Importance of Card Account Attributes

Relative Importance of Attributeson Choice of Product

0.6%

1.8%

4.4%

4.5%

8.2%

8.7%

17.7%

21.1%

33.2%

0% 10% 20% 30% 40%

Cash Access

Bill Payment

Credit Check

Cash W/ D Fee

Savings Plan

Card Type

Funding Method

Federal Protection

Monthly Cost

Attribute Importance


Monthly Fees by Banked StatusMonthly Fees by

Credit Card Status

- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

N o M o n t h lyF e e s w it h

D ir e c tD e p o s it

$ 2 . 9 5 p e rm o n t h F e e

$ 5 . 9 5 p e rm o n t h F e e

$ 9 . 9 5 p e rm o n t h F e e

Ze

ro-C

en

tere

d D

iffe

ren

ces

H a v e C r e d i t C a r d

N o C r e d i t C a r d

- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

N o M o n t h lyF e e s w it h

D ir e c tD e p o s it

$ 2 . 9 5 p e rm o n t h F e e

$ 5 . 9 5 p e rm o n t h F e e

$ 9 . 9 5 p e rm o n t h F e e

Ze

ro-C

en

tere

d

Co

ffici

en

ts

U n b a n k e d

B a n k e d

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.


Protection by Banked Status

Protection by Credit Card Status

- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

F e d e r a l P r o t e c t i o n N o P r o t e c t i o n

Ze

ro-C

en

tere

d D

iffe

ren

ces



- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

F e d e r a l P r o t e c t i o n N o P r o t e c t i o n

Ze

ro-C

en

tere

d

Diff

ere

nce

s

U n b a n k e d

B a n k e d

CBC Analysis — Federal Protection All groups valued federal protection.

Banked & credit card holders value federal protection more than unbanked


Funding Method by Banked Status Funding Method by Credit Card Status

- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

D i r e c tD e p o s i t

E m p l o y e rL o a d s

C a s h C h e c ka n d P a y

$ 2 . 9 5 f e e

Ze

ro-C

en

tere

d C

oe

ffici

en

ts



- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

D i r e c tD e p o s i t

E m p l o y e rL o a d s

C a s h C h e c ka n d L o a df o r $ 2 . 9 5

Ze

ro-C

en

tere

d

Co

effi

cie

nts

U n b a n k e d

B a n k e d

CBC Analysis — Funding Method All groups value Direct Deposit over

cashing check & loading value for a fee. Banked strongly prefer Direct Deposit Credit Card holders not very different


Card Type by Bank Status

Card Type By Credit Card Holders

- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

D e b i t ( A T M )C a r d

P a y r o l l C a r d P r e p a i dM a s t e r C a r d

Ze

ro-C

en

tere

d C

oe

ffici

en

ts



- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

D e b i t ( A T M )C a r d

P a y r o l l c a r d P r e p a i dM a s t e r C a r d

Ze

ro-C

en

tere

d

Co

effi

cie

nts

U n b a n k e d

B a n k e d

CBC Analysis — Card Type Unbanked & those without credit cards

negatively value ATM & Payroll Cards but like branded prepaid cards.


Savings by Banked Status Savings by Credit Card Status

- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

A u t o m a t i cS a v i n g s P l a n

N o S a v i n g s P l a n

Ze

ro-C

en

tere

d D

iffe

ren

ces



- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

A u t o m a t i cS a v i n g s

N o S a v i n g s P l a n

Ze

ro-C

en

tere

d

Co

effi

eic

nts

U n b a n k e d

B a n k e d

CBC Analysis — Automatic Savings All groups value automatic savings plan.

Banked prefer automatic savings slightly more than unbanked


Credit Check Requirement by Bank Status

Credit Check Requirement By Credit Card Status

- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

N o C r e d i t C h e c k F a v o r a b l e C h e c kR e q u i r e d

Ze

ro-C

en

tere

d D

iffe

ren

ce

s



- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

N o C r e d i t C h e c k F a v o r a b l e C r e d i tC h e c k

Ze

ro-C

en

tere

d

Diff

ere

nce

s

U n b a n k e d

B a n k e d

CBC Analysis — Credit Check

Unbanked & those without credit cards prefer no credit check requirement.


Bill Payment by Banked Status Bill Payment by Credit Card Status

- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

B u y M o n e yO r d e r s

w it h C a r d

A u t o m a t icB ill

P a y m e n tA v a ila b le

P a y B ills inp e r s o n

w it h C a r d

P a y B ills b yp h o n e a n d

I n t e r n e tw it h C a r d

Ze

ro-C

en

tere

d D

iffe

ren

ces



- 7 5

- 5 0

- 2 5

0

2 5

5 0

7 5

B u y M o n e yO r d e r s

w it h C a r d

A u t o m a t icB ill

P a y m e n tA v a ila b le

P a y B ills inp e r s o n

w it h C a r d

P a y b ills b yp h o n e o rin t e r n e t

w it h C a r d

Ze

ro-C

en

tere

d

Co

effi

cie

nts

\

U n b a n k e d

B a n k e d

CBC Analysis — Bill Payment Bill Payment had minimal appeal.

Banked & credit card holders slightly value telephone and internet payment capabilities


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).

0

1

Resp

onse

Utility

1 Take-Rate 0-100%

= (1+ e-(a + b(I ) + c(C) + d(P) + e(B)

+ f(S) + g(A)+ h(C)+ i(M) ) Where: I = Credit Check

C = Card Type P = Protection S = Savings Plan B = Bill Payment Capabilities A = Cash Access C = Cash Access Fees M = Monthly Fees

Logistic Response Curve


Preference by Age Take-rates for all feature bundles decrease

with age, while increasing with Federal Protection & product features.

0

10

20

30

40

50

60

70

Take-r

ate

Perc

enta

ge

Low Loww/Federal

Protect

Best w/oFederal

Protection

Best w/Federal

Protection

Age 61 & up

Age 25-60

Age 18-24

Age 61 & upAge 25-60Age 18-24


Preference by Income of Census Tract Take-rates for all feature bundles decrease

with income of census tract.

0

10

20

30

40

50

60

Take-r

ate

P

erc

enta

ge

Low Loww/Federal

Protect

Best w/oFederal

Protection

Best w/Federal

Protection

81-120% area median

61-80% area median

0-60% area median

81-120% area median61-80% area median0-60% area median


Preference by Banked Status Unbanked prefer even the lowest value

cards, which Federal Protection makes twice as attractive.

0

10

20

30

40

50

60

Take-r

ate

Perc

enta

ge

Low Loww/Federal

Protect

Best w/oFederal

Protection

Best w/Federal

Protection

Banked

Unbanked

BankedUnbanked


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


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”

payments innovations in serving low- and moderate-income households: evidence from a new survey

Documents

bank accountprovisional

hh area median

funds fasterprovisional

response rateprovisional

bank closed bc overdrafts76

moderateincome households

detroit metro area wayne

median household income34