Editor's Note: I last wrote: "For now, the plan is for the next faiV to be on the 22nd, and then on May 10th." You may have noticed it's now May 17th. Sigh.
- Tim Ogden
1. Is Finance Different?
I've mentioned my recent piece with Joyce Klein on what global microfinance can learn from the US past and present a few times in recent faiVs. One of the points in that piece is that “Subsidy is Permanent,” contra the early rhetoric of the global microfinance movement, because lower income/harder-to-reach segments will always be relatively less profitable than other segments. That in turn means that financial services providers will always be pulled upmarket to more profitable segments.
I bring it up again here because of an interesting conversation I've been having with Sasha Dichter of 60 Decibels about whether financial services are different than other types of products in this regard. Put another way, is it possible for there to be a “Walmart” of financial services that permanently and profitably targets the lower end of the distribution, without being pulled upmarket? And I bring up that conversation because I'd love to hear thoughts from faiV readers on this question: is finance different from other products?
I think so—at least right now—for a few reasons. The below is simplistic, lacks nuance, etc., but I'm not going to get any closer to turning the faiV into a full-on paper each time.
One, the potential harms of financial services are greater than that of other products. For most material products, and even most services, the potential loss from a “bad” product is the amount spent to purchase it. For most financial services products, the potential losses are much greater than the initial outlays (see item 2). Of course there are some material products that can cause lasting harm (to harken back to the last faiV, say, a dangerous table saw that costs the user multiple literal digits) and some financial services that don't have this potential, but I think the balance here tips heavily towards financial services being more dangerous.
Two, the nature of regulation to prevent such harms is quite different for material goods and services in general. Services most often require more “bespoke” regulation—whether a product is harmful or appropriate depends on the specific situation, whereas whether a vehicle is dangerous is much less a factor of the particular individual and their situation. But bespoke regulation is practically impossible (it's the trilemma!).
Three, I think our intuitions about products and prices are very different when it comes to services and material goods. If there was price discrimination on the same vehicle or table saw based on someone's economic situation we would object; we tend to think that a poor person and a rich person should pay the same for the same “product”. But the “product” in financial services really is different depending on the person, in a way that is opaque to the outside observer (and often even to the inside observer, e.g. asymmetric information). That puts pressure on regulators that influences the way markets work and what segments a firm chooses to serve.
In general, the way to be sustainable in low-margin products and services is to reach scale. That's been the hope of digital financial services—that they would enable the kind of scale that allows serving more customers with less subsidy. If you're a regular reader of the faiV you'll know I'm deeply skeptical about the actual cost savings from digitization (another point in the piece with Joyce), but scale does make a difference at the margin. Scale economies are somewhat different for financial services because of the bespoke aspect of each additional customer.
Which leads to the other reason I bring this up here. I've been reading a very good new book from Marion Fourcade and Kieran Healy, called “The Ordinal Society.” I'll be writing about the book as a whole in future faiVs, and authors willing, perhaps hosting a faiVLive, but a key point is how the ability to gather and process data is turning all products into something more like financial services—bespoke to the individual with the possibility for infinite price discrimination. Or put another way, all products become services and all services become financial services. The book captures a lot of themes that recur in the faiV and ties them together in ways that I hadn't. I highly recommend it.
So, tell me what I'm not seeing, or haven't read, or haven't considered on this topic.
2. US Consumer Debt
I never know what to make of the US Economy these days, particularly when it comes to US consumers, and particularly low income ones. On the one hand, real incomes have been rising, and faster at the lower end of the distribution. And consumer spending at all levels has remained high. On the other hand, there are lots of signals of growing distress. The number of credit card accounts in delinquency is rising sharply (and keep in mind that to be delinquent you have to have a balance, and balances are concentrated among lower income people) to levels not seen since 2012. The number of “seriously underwater” mortgages—homes where the balance of the mortgage is more than 25% higher than the value of the home—is also increasing. Those homes are, unsurprisingly, concentrated in poorer states and poorer neighborhoods. Separately the San Francisco Fed reports that Americans “pandemic savings” are now gone, turning negative as of March.
Meanwhile, Buy Now Pay Later products have expanded dramatically, but aren't reported in any way that allows a view into how much debt is accumulating there. A Bloomberg survey found that nearly half of BNPL customers reported they were behind on payments, while the amount financed through BNPL grew by around $20 Billion in the first quarter. (If you want to know more about the BNPL business, here's a detailed explainer from Patrick McKenzie). Once you take into account that interest rates are likely going to stay “higher for longer”, the pain for lower income households is likely to grow.
There's a quandary there now that may be new to these conversations. Wealthier households are benefiting from high interest rates, given lower relative net debt, higher savings and higher likelihood of having locked-in extremely low-rate mortgages. All of that translates to more spending, and more inflationary pressure, yielding higher interest rates. Meanwhile lower income households are much more exposed to variable interest rate debt and suffering more because of the inflationary pressure and the main tool to bring it under control.
It seems worth noting in this conversation that the Social Security and Medicare Trustees have released their annual reports, and are projecting that the trust funds will be insolvent within 12 years.
3. The (Dis)Connected Economy
Much of what we talk about in the faiV is the implications of increasing connectivity, and the challenges and potential downsides that don't always make headlines. This week there were actually a few of those headlines. You may have seen that there were widespread internet outages in East Africa, not due to the floods there, but because a ship ran into one of the few undersea cables that supplies the connection. Similar outages hit West African countries earlier this year.
But it's not just African countries that have been having issues. The solar storms that provided spectacular nighttime shows for the Northern Hemisphere also knocked out GPS communications, specifically for the increasingly automated tractors that drive much of the agricultural industry in developed economies. Owners reported tractors self-driving in circles, and behaving erratically. It could have a material impact on yields at the end of the summer.
On the literal opposite side of the world, an Australian pension management firm came very close to losing all of its data when an “inadvertant misconfiguration” caused Google Cloud to delete all of its data, and the backups. It was only the fact that the company had another set of backups on another service that enabled it to survive and recover.
This is one of the great fears of increasing connectivity and digitization—errors quickly propagate and actually get harder to recover from, especially if you're not a well-capitalized first world financial firm.
4. Development Economics
It's a broad category so let's start with the broadest question. What is Development Economics for? Jishnu Das wondered recently if Development Economics has lost its moral compass: “To be clear: This is not a critique of experimental techniques. Nor is it a rehashing of debates of different empirical strategies. The critique is of a more fundamental nature. Somewhere along the way to becoming popular, development economics lost its soul. Somewhere along the way in its quest for acceptance, development economics replaced its deep moral underpinnings, which had guided our actions despite a lack of certitude, with a set of profit-and-loss statements that now has us tiptoeing in fear instead of proceeding with moral courage.”
My take is, in many ways the opposite, but I guess you'd expect that from someone on the board of GiveWell. Deep moral underpinnings are what is required to have the humility to ask detailed questions not only about what works but about how to implement any program or policy in the face of large obstacles and the likelihood that the best intentions won't translate smoothly into the best outcomes. On the other hand, here's a thoughtful piece from Justin Sanderfur of CGD on what we should learn from PEPFAR and “the costs of cost-benefit analysis”. Speaking of CGD, Rachel Glennerster has been appointed as the new president. I certainly don't think of Rachel as a person who would ever be accused of losing her moral compass.
Microfinance has often been accused of losing its moral compass over the last 20 years, not least by the person most associated with modern global microfinance. One of the oft-cited data points is Cambodia. I mentioned 60 Decibels earlier—they have a new report based on interviews with nearly 3000 borrowers from 10 different MFIs in Cambodia, and because of their other work, the ability to compare client experiences and perceptions to those in other countries. The full report isn't free, because, Sasha tells me, they have not been able to find a funder to underwrite the costs of the research. Interpret that in moral compass terms as you will. I can tell you that it is thorough and thoughtful.
Finally, there's a new entry in the “cash vs. program” ongoing debate. An evaluation comparing cash grants to a more traditional program for young women providing training, assistance in starting a franchised business, and physical capital found that short-term outcomes are similar (and positive) but the more traditional program outperforms the cash grants over the long term.
5. Our AI Overlords
Imagine for a moment that a financial services company was set-up as a non-profit, specifically because the founders worried about the pressures to maximize profits at the expense of poor customers. Imagine that the financial services company even had a senior executive tasked with ensuring that their products were not doing harm in the short- or long-term, and even put that senior executive on the board of directors to really make sure that they had influence on the company's strategic decisions. Now imagine that the company has a great deal of success, but then the senior executive in charge of customer protection publicly questioned whether the CEO was trustworthy, then recanted, but shortly thereafter resigned along with most of the leadership of the customer protection group. What would you say was going on? How would that make you feel about the future direction of the company? Would you trust them more or less than other companies that hadn't made a big deal of consumer protection in the first place? Hmmm.....
Meanwhile, Google announced that they are working on embedding AI to do real time monitoring of phone calls to detect “conversation patterns” that are used in scams. Tech- and AI-enabled scams are something everyone should be concerned about. Here's a story about very sophisticated schemes to steal food stamps from low-income consumers at scale; and here's a story about the even more sophisticated networks and tools to scam elderly people and get access to their bank accounts despite two-factor authentication.
That being said, it feels like we are very quickly entering an arms race that involves ever more AI tools being generated to protect us from the ever more AI tools being developed to scam us. The only way to win is not to play? Especially if playing involves giving the AI the ability to monitor all your phone calls?
Chart of the Day
You should absolutely not take the above chart very seriously, but when it puts Jonathan at the center of microfinance research influence, how could I not include it? This is from "a bibliometric exploration of the knowledge landscape" of microfinance. No, I don't really understand what that means, or having scanned the paper, what conclusions any one should draw from it. Via Heliyon.
The faiV is written by Timothy Ogden and produced by the Financial Access Initiative at NYU's Wagner Graduate School of Public Service
Email: fai-wagner@nyu.edu
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