Learning from the Developing World: Alternative Financial Products for CSAs

Wednesday, December 17, 2014

The conversations about delivery vehicles for Children’s Savings Account has mostly been confined to a comparison of state-supported 529s, on the one hand, and traditional deposit accounts, on the other. But there may be other options worth exploring, in today’s evolving technology landscape. And, here as in the world of microfinance and alternative credit, children’s savings advocates may have a lot to learn from the developing world. We’re still very much in a learning mode when it comes to mobile banking, but we are intrigued. Many unbanked Americans, including many in the low-income households of greatest concern for the CSA field, have access to mobile technology. This suggests that these technological innovations—and the relationships they can spark between those on the financial margins and the financial institutions that should serve them—may offer significant promise for bridging the divides that, today, contribute to failures of economic mobility. And we’re not the only ones thinking this way. The President’s Advisory Council on Financial Capability recently recommended that the U.S. Department of the Treasury use its power and relevant incentives to stimulate private sector development of mobile apps that would facilitate financial inclusion of low-income and consumers of color. While there are obviously regulatory considerations of critical importance here, as well as a need to motivate investment in the types of products that would best meet the needs of consumers on the margins, the potential for economies of scale, the advantages of meeting households in a medium where they are already comfortably operating, and the rapid evolution of this sphere make these intriguing options. Of course, because mobile banking is often built on a foundation of a traditional financial institution, some of the same challenges apply, including the potential for high fees to erode balances and the propensity to develop products primarily for the wealthier market as in traditional financial institutions. But the mobile banking market may view low-income customers differently, given their differential representation among mobile customers, and this may represent a market opportunity for CSA delivery. And, especially a few years in the future, mobile banking may not be at all limited to outreach and interface with traditional accounts. The rise of alternative currency platforms, in particular, may ultimately allow mobile tools to replace ‘brick and mortar’ institutions altogether. We’re interested in the idea that this ‘virtual bank’ model may allow CSA administrators to skirt some of the challenges related to scaling and jurisdiction, by transcending geographic boundaries and keeping costs very low. As this field evolves, there may be development of other online platforms, nascent or yet unimagined, including prepaid CSA cards, collective savings and financing groups, and other innovations that could prevent CSA champions from having to choose between 529s’ distance from low-income consumers, and traditional bank products. We look forward to working with innovators in and around the financial services industry to arrive at the best approach for getting CSAs to every American child.

 
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