What to do About the Invisible Man
There are 26 million Americans who engage in so little financial activity that they are invisible to the Credit Reporting Agencies, according to a report released by the CFPB Tuesday. The reports indicates that while many of the invisibles are young, a disproportionate number of them are clustered in poor, minority neighborhoods. What the CFPB could not report on, and what I think is a huge piece of the puzzle, is how many of these invisibles are using financial tools such as pre-paid cards and payday lenders. What do we make of this research? I’m not quite sure.
In a worst case scenario, 26 million Americans don’t have access to the most basic building blocks of our economy. When I think of my own uncles and grandparents coming over from Germany in the 1920s, I think of cleaning ladies who stashed away nest eggs and husbands who were able to start small businesses in Brooklyn. We’re not talking titans of industry. For these individuals, their advancement to the middle class would have been impossible without access to a bank.
Flash forward to the modern day. In a best case scenario, pre-paid cards will become a large enough part of the financial mainstream so that new ways of assessing credit will shortly be developed and marketed. This is already happening. Big Data is so intrusive that algorithms are already being developed to assess the likelihood that someone would repay a loan based on activities that seemingly have little to do with traditional banking.
But let’s say the report reflects a more disturbing trend. If you believe, as I do, that America has to be the land of opportunity in order to be America, then any institutional impediments to upward mobility have to be eliminated to the fullest extent possible. If pre-paid cards become gateways to an individual’s first banking account and a more sophisticated credit history, then they can do much good. But in a worst case scenario, what the CFPB’s report underscores is that we are institutionalizing a system of financial haves and have nots. My relatives had to go to a bank to deposit a check, there wasn’t an alternative.
Today, it is too easy for the young consumer or new immigrant to avoid traditional banking all together. At the end of the day, a prepaid card isn’t the way to get a college loan. Any discussion of inequality and mobility has to include a discussion of how best to entice poor people into the financial system.