The Aspen Institute

The ASPEN INSTITUTE FINANCIAL SECURITY PROGRAM (FSP), put on a conversation on how innovative new financial products can help families address the growing challenge of income volatility. The event was hosted by ORRICK and sponsored JPMorgan Chase.

Income volatility destabilizes nearly half of American households. Over the last year, EPIC has synthesized data, polled consumers, surveyed experts, published reports, and convened leaders, in an effort to better understand of how income volatility impacts low- and moderate-income families and how best to combat the most destabilizing dimensions of the problem.

As a result of this process, EPIC has identified innovative financial products as promising emerging solutions to help families that experience income volatility manage it successfully. On Wednesday, May 3rd, EPIC hosted a panel discussion to highlight new, innovative products designed to help households that struggle with income volatility and explore opportunities for further innovation. The event featured several promising developments, including innovative payroll services, new short-term savings tools, and hybrid financial products.
Panelists included:

• Fiona Greig, Director of Consumer Research, JPMorgan Chase Institute
• Howard Altarescu, Partner & Finance Sector Leader, Orrick
• Jotaka Eaddy, Head of Government Affairs, Lend Up
• Tim Flacke, Executive Director, Commonwealth

The conversation opened with a sobering presentation from Fiona Greig, JPMorgan Chase (JPMC) Institute’s Director of Consumer Research. The harsh reality? Income and expense volatility are common. According to JPMC’s research:

• 84% of customers in their dataset experience a more than 5% average change in income from month-to-month (100% experience such fluctuations in expenses)
• 41% of individuals experience greater than 30% average change in income each month
• 47% experience average change of 5% to 30%
• Only 30% of customers experienced a monthly average change of less than 5%. The average household in their dataset would needed $4,800 in savings to weather the level of volatility they experience. They only have $3,000.

These findings are a reflection of what many organizations are uncovering as they conduct their own research. LendUp, a financial technology startup that offers consumers socially responsible alternatives to payday lending, had to reevaluate their customers’ needs after they discovered that many were struggling with income and expense volatility in addition to limited access to credit. This has an impact on their needs—such as the flexibility to schedule bill payments to take place on paydays. Orrick’s Howard Altarescu raised the importance of understanding how other firms, such as payday lenders, market effectively to the same target consumers—better alternatives exist but familiarity and a focus on solving specific problems give high-cost short-term lenders an edge.

“We surveyed our customers and learned that 70% have volatile incomes.” – Jotaka Eaddy, Head of Government Affairs at LendUp

@JotakaEaddy just offering our customers ability to set payment date and adjust monthly payment makes a big difference #aspenEPIC pic.twitter.com/tSFqrYxn7V

— K Lucas McKay (@KLucasMcKay) May 3, 2017

Work schedules are at the root of the problem, can employers be at the forefront of solutions?

One theme of the conversation was the detrimental role of unpredictable work schedules and opportunities for employers to help. Millions of workers who are already struggling to make ends meet are also living with the insecurity of not knowing how much they’ll earn in a given week or month. This makes it nearly impossible to do effective long-term financial planning. Panelists raised a number of ideas for employers, including implementing predictable scheduling practices, financial wellness benefits, enabling employees to access what they’ve already earned before payday, providing accounts and matching savings, and partnering with fintech firms to make products such as credit builder loans available to employees.

There is a robust role for employers to help solve for & create buffers for income volatility says @LendUpCredit‘s @JotakaEaddy #aspenEPIC
— Aspen FSP (@Aspen_FSP) May 3, 2017

Tim Flacke of Commonwealth also raised the potential role for employers not just in making products available to their workers, but also in research and design efforts.

It’s not good for employers if their employees are stressed about whether or not they’ll be able to make a bill payment. – Tim Flacke, Executive Director at Commonwealth

 The rapidly-developing policy landscape

While employers have a significant role to play in supporting their employees’ financial health and helping them reduce and manage income volatility, many current opportunities to support financial innovation depend on policymakers. Regulators need frameworks for evaluating new types of products, such as hybrids that combine savings and credit. Regulation is currently based on defined product categories that are addressed by various statutes, but this does not line up with the more fluid way that consumers understand and use their financial tools. Updating financial regulation to accommodate the role of fintech and to be more responsive to consumers’ needs requires regulators to embrace innovation. In the U.S., UK, Canada, and elsewhere, regulators are creating innovation initiatives and examining how to address the growing role of financial technology. Partnership models, such as the Consumer Financial Protection Bureau’s (CFPB) Project Catalyst and the British Financial Conduct Authority’s “regulatory sandbox,” provide important feedback to firms and regulators alike.

To conclude the panel, our speakers identified several key questions for innovators, employers, regulators, and other stakeholders working to help families manage income volatility:

• How does the research on income volatility change the way we understand low- and moderate-income consumers’ needs? How should that impact product design and marketing?
• What is the role for policy in fostering solutions? How should regulators balance innovation with consumer protections?
• Can we innovate our way out of income volatility? Is it possible to solve this without directly addressing wages?

EPIC hopes to work toward answering these questions through continued cross-sector conversation.

To learn more about solutions to income volatility, specifically the role that fintech can play in mitigating household financial insecurity, we encourage you to check out our briefs on PAYROLL INNOVATIONS and HYBRID FINANCIAL PRODUCTS.