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Article Excerpt
This article analyzes a demonstration program mounted by a major bank to understand whether access to information and communications technologies, combined with financial literacy training and training on how to use the Internet, can help low- and moderate-income individuals in inner-city neighborhoods be more effective financial actors. While quantitative analysis turns up few significant program effects, qualitative work implies that implementation issues likely compromised the effectiveness of the program. There was evidence of a potential link between information and communications technologies and financial literacy. Overall, urban low- and moderate-income individuals are interested in becoming technologically and financially literate and an intensive intervention may enable these goals.
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Electronic banking technologies have proliferated in recent years, and the availability of a wide range of products has led to increasing adoption among consumers. These technologies include direct deposit, computer banking, stored value cards, and debit cards. Banks and other financial institutions have worked hard to develop and deploy these technologies because of their potential to increase efficiency, cut costs, and attract new customers. Consumers are attracted to these technologies because of convenience, increasing ease of use, and, in some instances, cost savings (Anguelov et al. 2004). Electronic banking, in particular, has grown at impressive rates. Between 1995 and 2003, e-banking increased eightfold (Hogarth and Anguelov 2004). Between late 2002 and early 2005, use of online banking increased 47 percent. There is some evidence that computer banking is associated with better household financial management (Hogarth and Anguelov 2004). However, financial literacy, the digital divide, and other issues that separate disadvantaged groups from the financial mainstream make it difficult for low- and moderate-income (LMI) individuals to reap the potential benefits associated with computer banking.
This article analyzes a demonstration program (the Program) mounted by a major bank (the Bank) to understand whether access to information and communications technologies (ICT), combined with financial literacy training and training on how to use the Internet, can help LMI individuals in inner-city neighborhoods be more effective financial actors. When we began the study, our primary research question was to examine whether technological literacy could serve as a gateway to financial literacy. Secondarily, we wanted to investigate whether the Program could serve as a model to incentivize banks to engage more fully in the provision of financial literacy training. During the process of the research, we also realized that this case study could provide some key lessons for how to look at literacy from beginning to end when planning an intervention to create improvements for a critical population. We hypothesized that coupling a comprehensive intervention addressing all components of the digital divide with a financial literacy component targeted at LMI individuals would increase financial literacy and move participants across the digital divide.
Using quantitative and qualitative data, we examine the Program in the context of changes in the financial services environment and with respect to the financial literacy issue. We studied the ways in which ICT has changed banking processes and what evidence exists about access to and use of electronic banking. In brief, our quantitative analysis turns up few significant program effects. However, our qualitative work implies that implementation issues likely compromised the effectiveness of the Program. We also find evidence of a potential link between ICT and financial literacy. We argue that urban LMI individuals are interested in becoming technologically and financially literate and that an intensive intervention may enable these goals. Creative interventions are warranted for at least three reasons: (1) banks' history of underserving LMI communities, (2) predatory lenders' and fringe financial services providers' disproportionate targeting of these groups, and (3) difficulties associated with motivating adults to pursue financial literacy. At the same time, banks are unlikely to spearhead and fund these interventions unless they believe there is a return for doing so. The relatively recent popularity of the double bottom line concept, in which businesses seek to affect both their fiscal performance and their social impact, makes it possible to expand the definition of "return" for a program like this one. This research has implications for the role corporate actors can play in augmenting consumers' financial literacy and, potentially, affecting their financial behavior. The work also has implications for how best to deliver financial education. This case study illustrates the importance of defining success at the outset for ensuring that key elements of program design will be incorporated. Our research therefore responds both to the weak incentives for banks to provide financial education and to the difficulty of providing such education to LMI adults.
DEFINITION OF KEY VARIABLES, THEORETICAL FRAMEWORK, AND LITERATURE REVIEW
Definition of Key Variables
Before introducing the literature and theoretical framework that grounds this research, it is important to define key variables. ICT is an umbrella term that includes any communication device or application; with respect to this work, we are most interested in computers and the Internet. Access to ICT refers not only to literal access--that is, having access to a computer and the Internet at home or at another site--but also sufficient training to use the technology and content that is relevant to LMI individuals. Financial literacy refers to a person's ability to understand and make use of financial concepts. Anguelov et al. (2004, p. 1) maintain that electronic banking "encompasses a broad range of established and emerging technologies" and includes both "front end" such as ATM cards and banking and "back end" technologies such as electronic check conversion. For the purposes of this article, we use the terms "online banking" and "electronic banking" interchangeably to refer to consumers accessing and using existing bank accounts online. Typical activities include paying bills and transferring money between accounts.
Theoretical Framework
For many LMI individuals, access to mainstream financial institutions, such as banks, credit unions, and Community Development Financial Institutions, is tenuous because of poor credit histories, insufficient and inconsistent cash flows, and lack of financial literacy. Race- and gender-based discrimination likely also plays a role (Bates 2000; Immergluck 2002). Estimates of the number of unbanked Americans range up to 22 million individuals. (1) Many millions more are "underbanked"--they have a bank account but still use fringe financial institutions such as payday lenders and check cashing outlets (Aizcorbe et al. 2003; Stuhldreher and Tescher 2005). Cart and Schuetz (2001) theorize that lower-income families' nonuse of traditional financial services occurs for complex reasons including: unfamiliarity with banking and savings services, not writing enough checks to justify an account, and distrust of mainstream financial services providers. Other researchers question whether LMI individuals choose not to use mainstream financial institutions because the products and services offered fail to meet their needs (Bond and Townsend 1996; Morduch and Armendariz de Aghion 2005). Low-income families tend to have relatively high debt payment to income ratios are relatively more likely to make late bill payments and, as a result, pay more for credit (Aizcorbe et al. 2003 cited in Hogarth and Anguelov 2004). Other research has looked at how different groups prefer to obtain financial information; one study of low-income individuals showed a preference for learning from friends (Hogarth and Swanson 1993), which may limit these individuals' ability to make good financial decisions.
Banks have a history of underserving low-income communities. (2) Historically, banks have neither located in low-income neighborhoods nor have they catered to LMI individuals with products and services geared to these groups (Fondation, Rufano, and Walker 1999). Partly as a result of this, fringe lending has grown astronomically in recent years, and much of this activity is concentrated in LMI communities. Carr and Schuetz (2001) estimate annual fees collected at check cashing services are $1.5 billion annually, $1.6-$2.2 billion for payday lenders and $2.35 billion for rent-to-own stores. These authors theorize that the U.S. financial system is bifurcated, with mainstream financial services concentrated in vibrant communities and fringe financial services--for example, pawnshops, check cashers, payday lenders--concentrated in distressed communities. People who lack financial literacy most often reside in distressed communities and are less likely to be able to distinguish between financial products and to understand the implications of the transactions into which they are entering.
A primary reason why banks do not serve LMI communities concerns perceptions of demand and the size of the market. New methodologies for measuring market size have begun to question the reliability of typical market data and show that these markets are much larger than was previously presumed (Alderslade 2005). Overall, mainstream financial institutions' service of low-income communities continues to lag; however, some financial institutions and other purveyors of financial products have begun to recognize the potential for capturing these relatively untapped markets with new products. Financial institutions are investigating whether the lower cost of service that technology enables makes it worth the institutions' effort to expend the resources necessary to capture these markets. Banks are now exploring the potential of information technology (IT) banking tools to serve low-income customers and to attract the unbanked.
Personal finance is becoming increasingly more complicated because of innovation and deregulation of the financial sector, and the consequences of insufficient financial literacy are growing more severe, as evidenced by the relatively high default rates associated with subprime mortgages that are concentrated among the low income. Previous research has shown that low-income persons have the least amount of financial literacy and there are fewer public and private programs available to them to obtain greater literacy (Braunstein and Welch 2002; Jacob, Hudson, and Bush 2000). Moreover, a greater number of low-educated persons require financial literacy because most of them are working and managing money as a result of welfare reform and the expansion of the earned income tax credit (Anderson and Gryzlak 2002; Cancian 2001; Loprest 2001).
As noted, the reduced availability of financial literacy training for low-income persons represents a barrier to achieving financial literacy. Low incomes also limit the demand for such services among this group even when available. Therefore, it may be necessary to subsidize financial literacy programs for low-income persons to bring their level of literacy to an appropriate level. Such programs may have large returns because previous research has shown that financial literacy is an important determinant of economic well-being (Bernheim 1998; Jacob, Hudson, and Bush 2000). Here, we study one such program.
Our hypothesis that the Program could create both positive financial literacy and digital divide outcomes is based, in part, on the Technology Acceptance Model. The Technology Acceptance Model posits that perceived usefulness and perceived ease of use determine an individual's intention to use a system (Davis 1989). The Program used the free computers and Internet to get participants to the table. Participants did not necessarily perceive financial literacy to be particularly useful, nor did they believe that computers and the Internet were particularly easy to use. However, they did believe that they needed to be technologically proficient to obtain important information and to get a good job. Once they began to obtain training, we hypothesized that they would learn the connection between financial and technological literacy. The training itself would change their perceptions about ease of use of technology and about the usefulness of financial literacy.
Literature Review
Three bodies of research are germane to this study: the electronic banking literature, the financial literacy literature, and the digital divide literature. For each, we are most interested in the pieces that apply especially to LMI individuals.
Electronic Banking
In 1994, only 150,000 people banked from their home computers; by 1999, that number had grown to 3.2 million paying bills online (Orr and Ali 1999). As of late 2004, 53 million people or 44% of Internet users and one-quarter of all adults were using online banking (Fox 2005). Of all the major Internet activities tracked by the Pew Internet and American Life Project since its inaugural survey in March 2000, online banking has grown the fastest. In response to increased demand, banks are creating and expanding their online and e-banking presence (Furst, Lang, and Nolle 2001). Banks are strongly encouraging customers to conduct transactions online because electronic banking lowers costs for these institutions. The average transaction for banks over the Internet is one cent, compared to $.27 via ATM, $.54 by telephone, and $1.07 at a full-service branch (Cuevas 1998).
Electronic banking technologies can be classified as either "passive" or "active" (Kolodinsky, Hogarth, and Hilgert 2004). Passive technologies, such as direct deposit, do not require any behavioral changes on the part of the consumer; these innovations are therefore more easily spread to the mainstream. Active technologies, on the other hand, require new behaviors and are therefore more challenging to propagate. Electronic banking requires "perhaps the most consumer involvement, as it requires the consumer to maintain and regularly interact with additional technology (a computer and an Internet connection)" (Kolodinsky, Hogarth, and Hilgert 2004, 243). Consumers who use e-banking use it on an ongoing basis and need to acquire a certain comfort level with the technology to keep using it. LMI individuals are less likely to have this comfort level than are individuals who are better off.
The proliferation of new electronic banking technologies may, if used wisely, help to bridge the gap between those who operate...
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