By: Nish Acharya
February 11, 2014
Over the last two weeks, we saw two interesting innovations in the financial services industry introduced - by the federal government. During his State of the Union address, President Obama introduced "MyRA" a retirement account targeted towards new savers and the under banked. Many analysts have referred to it as a hybrid between a traditional savings bond and a Roth IRA. The account provides account holders with the guaranteed backing of the US government on the principal, and interest rates along the lines of certain US treasuries.
The second innovation is actually a proposal for the US Postal Service to provide banking services at branches across the United States. The Post Office could provide pre-paid debit cards, remittances and loans to under banked consumers. In both cases, the federal government is looking to leverage its existing assets and economies of scale to provide financial products to segments of society that are not utilizing financial products as they could, or should.
Both innovations also serve important and large unmet market needs. In the case of MyRA, the accounts are needed because most Roth IRA's have high fees for participation, and only about 50% of employers even offer retirement accounts. For the Post Office, they are responding to the fact that they have facilities in every neighborhood in the United States, whereas commercial banks have largely left urban and rural areas.
Unfortunately for the United States, the under banked is a growing sector of our population. According to the FDIC, over 88 million Americans do not utilize the financial products that they should. This population includes younger Americans, immigrants, entrepreneurs and a large number of middle class Americans affected by the Great Recession. This is a large market crying out for disruptive innovation.
And yet, most of the innovation we are seeing in this space is incremental. We have large companies like Walmart and American Express entering the space through prepaid debit cards. Globally, we have seen microfinance explode over the last twenty years to provide cheap credit to the global under banked, but with little innovation since. We also have a series of startup companies that leverage technology and data analytics to create financial products that are not connected to branch banking or employer-supported accounts and are often targeted to the budget and spending habits of the individual.
But regardless of the size or innovation from these new market entrants, we are seeing the size of the under banked population grow to include better educated and compensated citizens. These new products and services are either unavailable, unaffordable or unknown to many.
So while it would be nice for the private sector to innovate and create new products at low cost for nearly one third of the American population, it does not appear to be happening. And in reality, the federal government actually has a pretty decent record of innovating in this manner. The federal government has always been a leading funding of research and development. Indeed, most of our innovative startup companies have products that were initially connected to federally funded research. In addition, agencies like DARPA have a record of quickly commercializing and scaling products. Even in the banking space, the Small Business Administration has regularly come up with new tools to finance entrepreneurship - including the SBIC and SBIR programs. In these cases, government is not the financier or innovator of last resort. It is, in fact, driving innovation that the private sector is unable to.
One third of Americans are lacking access to the financial products they need. In a society where access to credit is everything, this is an unsustainable trend. It is important that ideas like MyRA succeed - whether as government efforts or by the private sector.