2004 University of Michigan Poverty Research Grants
Funded research
Michael Barr, Assistant Professor of Law, University of Michigan.
Financial Services for the Poor: Detroit Area Survey
Description
Low-income individuals often lack access to adequate financial services at a reasonable cost and with appropriate consumer protections. Cut off from mainstream financial services, low-income families face higher costs for transacting services. These families find it more difficult to save and to plan financially for the future. Living paycheck to paycheck leaves them vulnerable to medical or job emergencies that may endanger their financial stability, and lack of longer-term savings undermines their ability to improve skills, become a homeowner, and build wealth. Inadequate access to financial services diminishes the value of government income transfer programs and the Earned Income Tax Credit. Existing research has begun to describe the financial services predicament of the poor, but significant work remains to be done to map out the financial services marketplace in low-income communities.
As the Faculty Investigator for the University of Michigan’s Detroit Area Survey (DAS) for 2004-2005, I will analyze (1) how and why low- and moderate-income people in the Detroit metropolitan area use certain types of financial service institutions and products (e.g., banks, check cashers, pay day lenders, refund anticipation loans); (2) the costs and benefits of such services; and (3) how such persons indicate that they would respond to new types of financial services products tailored to their needs.
Using the DAS to analyze financial services for low- and moderate-income households will advance existing research in three ways: First, until recently, there was little research at all on the financial services needs of low-income households. Surveys have been undertaken recently in Los Angeles and New York, in Chicago, and in a handful of smaller communities. There appears to be a good deal of regional variation in the use of financial services; there is no existing study of financial services in this region. Developing a deeper understanding of the reasons for regional variation, mapped against the financial services actually offered in the area, will help us understand the factors affecting the financial choices of low- and moderate-income families.
Second, only one previous study looked at the customer preferences of a segment of “unbanked” households with respect to a range of financial services offerings that could plausibly be offered to them. This Treasury Department study focused largely on Social Security recipients, who have significantly different demographic characteristics from the low- and moderate-income population as a whole. The Detroit Area Study could fill an important gap in our understanding of the financial services preferences of low- and moderate-income households more generally.
Third, the recent economic downturn likely changed workforce participation, financial services offerings and needs of low- and moderate-income households. Understanding how changes in the economy affect financial services choices is critical to understanding how economic downturns affect low- and moderate-income households’ well-being.
This research will contribute to an important recent debate in the academic literature over the reasons why low-income households use alternative financial services. Moreover, this research will provide significant guidance to government policy makers about the financial services needs of low- and moderate-income households. The research will also contribute to local efforts, both private sector and governmental, to expand access to financial services in the Detroit area.
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