America’s current financial system is essentially broken for the many working Americans who live on the edge financially. Mismatched incentives are at the heart of the problem. One has only to look at the sad history of payday and car title loans, subprime mortgages, or bank overdraft “protection” schemes for examples of financial products and practices that are profitable for providers but damaging for vulnerable populations.
It’s Time to Tie Bank Profits to Customers’ Financial Health
A three-step proposal for U.S. regulators.
August 21, 2020
Illustration by Jennifer Tapias Derch
Summary.
Low-income Americans get a bad deal from the current financial system. The main problem is a lack of aligned incentives. Banks and other financial-service providers are making money at their expense. One has only to look at the sad history of payday and car title loans, subprime mortgages, or bank overdraft “protection” schemes for examples of financial products and practices that are profitable for providers but damaging for vulnerable populations. What is needed is a different regulatory approach that ties financial-services providers’ profit to customers’ financial health. In short, banks should only do well financially when their customers do well financially. The good news is that financial-services providers now have the data–and data-crunching methods–to create a meaningful rating of how their practices are improving or damaging the financial health of their customers. First, this information should be made public so regulators, consumers and other stakeholders can see which banks are best and which are worst. Eventually, banks could be rewarded based on the outcomes.