Understanding mistrust and financial exclusion
At the start of the coronavirus pandemic, as much needed federal and state stimulus funds were distributed, in cities across the country the same scene kept playing out: long lines of weary people waiting outside banks, credit unions, and ATMs. Some were waiting to access unemployment payments. Others, without direct deposit set up with the IRS, waited to access relief payments on prepaid debit cards. Still others lined up at public libraries to print out e-check payments; without bank accounts, they were forced to bring them to check cashing outlets, which often charge excessivefees. Of course, e-checks are meant to be deposited online, but without a bank account this is not possible. Like so many aspects of American life, COVID-19 laid bare longstanding divides in financial services.
As the pandemic wore on and relief payments dried up, many began to turn to alternatives, both in the physical world and online. Among these alternatives, “buy now, pay later” (BNPL) services and cryptocurrency came to the forefront of the financial landscape.
- “Buy Now, Pay Later”: 2021 saw an explosion of so-called BNPL services, which the Federal Reserve Bank of Atlanta billed “the payments phenomena of the year.” Consumers spent an estimated $100 billion on BNPL retail purchases in 2021, and, as of March 2021, 55% of all U.S. consumers had used a BNPL service (up from 37% in 2020).
- Cryptocurrency: Similarly, cryptocurrency ownership has more than tripled since 2020. The number of households that now own cryptocurrency surpasses those that own certificates of deposit. This surge may have been driven in part by targeted digital advertising. With many physical banking branches closed, and mixed messages around cash and card handling spreading, many first-time users logged on to apps like Venmo and PayPal. Once there, they began to receive targeted digital advertising for crypto and retail investment platforms like Robinhood. While those who are financially secure might look past such ads, for people who are economically precarious these products may have appeared more compelling—if you figure you'll never be approved for a loan to buy a house, you might as well throw your money at Bitcoin.
A pattern of rising distrust
Many Americans are not able to use basic financial services. In some cases, this is a problem of access; many cannot afford the services available to them or they simply do not qualify. But it is also a problem of trust. Only 14.5% of Americans think that their financial institution looks out for their financial well-being.
This mirrors broader societal patterns of rising distrust. According to the Edelman Trust Barometer, six in ten people around the world say that their default is distrust; 76% of people globally are concerned about mis- and disinformation. Whatever the cause of their exclusion, those without access to the financial services they need are more likely to turn to predatory sources, be swayed by financial misinformation, or be victim to financial scams. As more and more financial transactions take place online, it is easier than ever to target a struggling person with ads for predatory loans, and non-bank fintechs are growing rapidly.
In the absence of trusted and accessible financial service providers and faced with what to some feels like a hopeless future (climate crisis, intractable political divides, a global pandemic…), fringe alternatives have appeal. Yet they are also less secure, less carefully regulated, often offer worse rates, and are difficult to hold accountable. Growing evidence also suggests that automating credit and other kinds of financial decisions in digital platforms may lead to perpetuating long-standing forms of inequality and exclusion, a phenomenon some term “technological redlining” or “algorithmic discrimination.”
In this environment, how can credit unions both address unmet financial needs and build the communal trust that is needed to counter predatory practices, all while facing the pressures of digital transformation? We think that the only way to answer this question is by involving the communities that face barriers to access.
Community Credit Discovery Initiative
Filene is working with a team of researchers at the University of California, Irvine, to explore new possibilities for collaboration in cooperative finance. Supported by a National Science Foundation Convergence Accelerator grant, the team is composed of anthropologists, philosophers, economists, political scientists, and community data justice scholars. In partnership with credit unions and community-based organizations in Southern California, we are working to create a platform for dialogue and trusted exchange between credit unions and the communities they serve. Ultimately, seeking to develop a toolkit and a model for credit unions to incorporate financially marginalized communities into product design and delivery, ensuring that new financial services are designed by, with, and for those communities.
Credit unions command a high level of institutional trust in the financial services industry, even amongst people who do not make up their members. At the same time, the movement is grappling with how to recreate a sense of trust, community, and support, the strength of a member helping member approach, in a digital landscape. This makes credit unions the ideal partners to begin to collaboratively reimagine financial alternatives that truly serve, rather than exploit. Victor Rubin, a Senior Fellow at PolicyLink (a research institute focused on economic equity) put it this way:
“The lures of technology in the consumer finance sector might appear to be speed, near-universal access to funds or credit, and the elimination of human biases, but none of those positive features will come about automatically. Fintech will not serve lower-income communities and people of color equitably and fairly unless a high level of trust is first established, trust that is currently lacking for almost all financial institutions. Communities that have been financial marginalized need to be heard and to have meaningful input into the design of tech innovations. Credit unions, with their history of meeting financial needs of working people, are in an excellent position to build trust and a solid knowledge base in this way, and the Community Credit Discovery initiative combines rigorous research methods with strong connections to community voices.”
A collaborative approach
How is this all going to work? We begin with a set of research methods that will allow us to understand the financial reality for un- and underbanked communities, including qualitative interviews, surveys, and a participatory research action process called Photovoice. Informed by these insights, we will also analyze physical and virtual advertisements for fringe financial services in Orange County to get a better sense of the way that predatory service providers reach financially precarious people through targeted advertising algorithms and ad content. Using computational models of social trust and information spread, we will assess the effectiveness of potential interventions.
Throughout this process, we will hold a series of community listening sessions, which will bring together local credit union representatives, community organizations, and community members. Giving these stakeholders a chance to speak directly on the topic of trust and financial inclusion will inform our research, but it will also form the basis of a community of practice that leverages the strengths of both credit unions and the communities they serve.