Today, you are going to hear from me!
In case you live under a rock, on Monday I defended my dissertation. And I passed. I am well on my way to being a doctor. A bit of red tape and paperwork and I will get hooded in December.
My degree is in Public Policy and Political Economy from The University of Texas at Dallas. Public Policy and Political Economy (PPPE) is a lot of words. What it means: Public policy, business, the economy, and politics are all intertwined. A degree in PPPE recognizes those interconnections and emphasizes inter-disciplinary research. This degree is highly analytical and quantitative. (That means I took a lot of statistics classes so I can evaluate data).
My dissertation in entitled "Fringe Knowledge, Fringe Banking, and the Near Poor." At some point I might post a PDF of the whole thing (but first I need to get it all formatted and perfected for submission!) so that all 1 of you who are interested can read it. For today, you get a very, very, very brief summary.
I had three main areas I focused on (obviously. read the title!)
- Financial Knowledge. Financial knowledge is understanding the key financial terms and concepts needed to function daily. This is not the same thing as financial literacy, which is the ability to utilize knowledge and skills to manage financial resources for a lifetime of financial well-being. In much of the research on this topic being done, authors use the words interchangeably because literacy is hard to quantify. In my research I used quantitative methods (factor analysis if you are a statistics geek like me) to tease out the inputs to financial literacy and then calculated a unified financial literacy variable I could use in models. Graphically, it looked like this:
|Directly from my dissertation.|
- Fringe Banking. This is the easiest part to explain. My research looked at the use of fringe banks (also called alternative financial establishments or predatory lenders). Fringe banking refers to any number of different financial services offered by non-traditional financial servicers. These include payday lenders, pawnshops, auto-title lenders, check cashing stores, layaway, refund anticipation loans, rent-to-own shops, etc. The transactions they offer typically involve loans of a few hundred dollars for a short term (weeks or months) with fees, charges, and interest that translate to a high APR (annual percentage rate). This graphic explains the financial bifurcation of fringe banking and mainstream banking.
|Directly from my dissertation.|
- The Near Poor. The Near Poor refers to the roughly 54 million American households who make between 100% and 200% of the poverty level ($20,000 to $40,000 for a family of four). These households aren't "poor" as they live above the poverty threshold but they lack a secure financial station. Many near poor households have multiple jobs, live paycheck to paycheck, and are financially stressed. One unexpected expense can leave them desperate for cash.
For now, what do these topics have in common? A lot!
- Fringe Banking and the Near Poor. Poor and near poor families are oftentimes cut off from the mainstream banks. Few brick and mortar banks open locations in their neighborhoods and even when banks are available, the near poor rarely qualify for the advertised free checking accounts. This leaves the near poor utilizing non-bank products (Fringe Banks!). This quote says it better than I ever could:
|Original Photo Source|
- This matters because mainstream banks encourage savings, asset protection, and wealth building. On the other hand, fringe banks assist with subsistence living but do nothing to divert a debt culture. These alternative financial products fill a need and help the poor and near poor with expenses this week and in the present moment. However, they discourage long-term planning and savings.
- And Financial Literacy. There is a belief in society that individuals who don't maximize their financial resources do not do so because they lack financial literacy. Financial education has become the hot thing for non profit organizations to offer. Offer a few classes on finance and financial decision making and it will stop the use of fringe banking. Right? I'm not so sure. And my dissertation was born.
I used four research questions to guide me. In my dissertation, I went question by question all the while building to the final penultimate question.
- Are the poor and near-poor equipped to make financial decisions? (Do the users fringe banking products, primarily the poor and near-poor, have the knowledge base to make rational and informed financial decisions?)
- What factors influence financial literacy (or illiteracy)?
- Are these the same factors that influence financial decision making?
- Is the use of the fringe banking system a symptom of financial illiteracy or evidence of financial bifurcation and stratification?
After a bunch of fancy models and statistical work I came up with a few conclusions. The most important is this:
The use of fringe banking products is due to a lack of financial literacy and so financial education is needed. BUT fringe banking usage is also due to structural issues in the financial system (lack of access to the mainstream banking sector -- the bifurcation I depicted above) and so increased education and literacy will never eradicate fringe banking. While education might be key, it is not the full solution. Knowing a decision is not in your best financial interest is only helpful if you have alternative choices. It is crucial that policy makers see the limitations of financial education. Financial education leads to improved financial knowledge but cannot lead to improved financial practices (and therefore financial literacy) without access to the mainstream financial market.
The "share your passion" series is going to continue and I would love to feature YOU. What are you passionate about? Could you write a few sentences about why and share that passion with all of us? You don't have to be a blogger to share!