José Quiñonez on Seeing the Credit Invisible

This is Pacific Exchanges, a podcast from the Federal Reserve Bank of San Francisco. I’m Linda True.

And I’m Paul Tierno. Welcome back to Financial Inclusion & Beyond, an ongoing exploration of what we can learn from efforts around the world to improve financial inclusion and wellbeing. In today’s episode, we speak with José Quiñonez of Mission Asset Fund, or MAF. It’s a nonprofit focused on expanding access to credit, building credit profiles and ultimately improving the financial lives of underserved communities.

Traditionally, low-income people have been sort of secondary users to products that were designed for other people in mind. They were either the afterthought or people that were just sort of thrown in to using products that were not specifically designed for them. So the concept of what I think banks and fintech companies and other institutions can do is to really step back and really think about well, what are the primary concerns and problems that low income people have and then build products particularly designed for them instead of forcing them to be again, secondary users to products that they designed for other people in other constituencies.

José has a wealth of experience integrating marginalized communities into the formal financial system. In our conversation, he highlighted the importance of credit to financial health. The immigrant communities he works with face a host of challenges in establishing formal credit histories. In response, the Mission Asset Fund has applied lending circles and other traditional lending schemes from Latin America, the Caribbean and across the world to communities in the Bay Area to provide credit and help them establish credit profiles that give them access to the formal financial system.

And the relative dearth of financial products for poor communities has been a recurring theme in this series. Traditional financial products are not always designed with lower income customers in mind, and this can lead to exclusion of the poor from the formal financial system.

Exactly. And so to promote financial health, Quiñonez suggest meeting people where they are and building products to address the primary concerns of the low-income community for user-centric and common sense design.

This approach seems particularly relevant now, as we navigate a pandemic that has left low income and minority communities with worse economic and health outcomes. As with some of our other episodes we’d note that we recorded this episode with José before the outbreak of the COVID 19 crisis. Okay. Let’s get to our conversation with José.

Welcome, José. Thank you for being here with us today.

Thank you for having me.

What does financial inclusion mean to you and beyond financial inclusion? What does financial health and wellbeing look like to you?

In the world today, there really are people that have access. They have availability of whole lot of financial products and services in the financial marketplace. And there are millions in the United States and billions across the world that do not. And so the concept of financial inclusion really forces that realization that there are people that are in the system, and there are people that are out. Before we use the term financial inclusion, we used to talk about financial capability or financial education or financial literacy. And those terms essentially kind of focused the problem based on the actual individual, in the sense kind of blaming somebody who’s poor for their poverty. With the term financial inclusion and now financial health, there’s a broader understanding that there are more systemic issues at play that are not related to somebodies’ inability to balance their checkbook.

Can you talk about Mission Asset Fund’s approach to including people in the financial system through existing social practices? And share some examples of what has worked well.

When we started our work back in 2008, trying to help low-income immigrants in the San Francisco area to improve their financial security, we basically asked ourselves a question, “How is it that people that are working low wages, earning very little, how is it that they can actually even survive in the very expensive, urban environment that is San Francisco?” At that time, the conventional wisdom just basically had us to think that all we needed to do is just to provide more financial literacy courses and hopefully do it in Spanish and maybe provide them some glossy brochure on how to balance their budgets. But we realized that that wasn’t going to be enough. So we asked a question, “Well, how is it that people are managing to do that? Not just here in the United States, but also across countries?” When you think about immigrants, I mean, they know more about our exchange rates more than any one of us, because they actually manage budgets across countries, they send remittances to family members in a lot of different countries across the world.

And so when we started to explore that, we realized that they were doing things that didn’t necessarily conform to our traditional mainstream notion of how people need to manage our money. They had other sort of practices, even their cultural relationships to money, were just slightly different than the traditional norms of how we think about it. And so we started exploring those ideas without judgment. We realized that, particularly for Mexican immigrants, they have this rich tradition of coming together and lending and saving money through groups that are called tandas, cundinas, and there’s a practice there’s also called sou-sous all through the Caribbean. And what we really quickly realized was that the activity that was happening in these ROSCAs as academics call them or rotating savings and credit associations, that that activity really mirrored the activity that we do in a formal financial system, where we borrow money and then we pay back that money.

So when we borrow a loan from a bank and we make those payments, that activity gets recorded and reported to the credit bureaus. And so by reporting it and recording it, we are able then to improve our credit scores, improve credit history, and access a world of other opportunities in the marketplace. But the activity that people were doing very informally through this tandas, cundinas, sou-sous was not being recorded. But the activity itself was exactly the same, which is people were taking borrowing money. They were paying that back, because of the social connection, the importance of maintaining those relationships was really key. So they were always paying those payments, but because nobody was recording and reporting it, it essentially disappeared. That’s how we came up with a concept of lending circles – a formalizing that informal activity, servicing that loan for them we’re able to then report that activity to credit bureaus, helping people build and improve their credit scores.

I know that MAF describes its approach or its guiding principle or philosophy is meeting people where they are, whatever that all may entail. What are the benefits to meeting people where they are in their current set of circumstances. And also what are the benefits to starting with some tried and true traditional practices from around the world and just formalizing them?

Clearly, one of the benefits is that whatever program or service that is done in through that approach is going to work because that’s where the clients are. That’s where the users are. And that’s going to make whatever you build more sticky as designers call it. Instead of recreating something that people may have never heard of, then you have a problem of trying to get them to where you’re at. And that’s a whole other level of engagement, a whole other expense, just operational. As about meeting people where they are, by doing it, if I’m a position of actually respect, instead of talking about it from that should perspective, we’re basically like looking at what is it that is working in their lives and then really trying to figure out what, how can we add to that? How can we use that as a starting point of our conversation so that that way we can then build a product or a service that is actually relevant.

Traditionally, we’ve tried to get people into the financial mainstream and here, what we’re trying to do is the opposite, which is trying to say, “How can we actually change the systemic issues or change how people are integrated in the way that actually is relevant to their realities?” So for us as a point of common sense, as a point of design is a principle of now that we call it a user-centric design principles. But really we just think about it as a common sense way of actually building something to succeed.

What can banks do better to service the under-banked and unbanked? And what can NGOs and other efforts do better?

One of the insights in developing products based on people’s own realities and meeting people where they are at is that even for low-income individuals low-income communities that, that we can use technology to create products that are specific to them. Traditionally, low-income people have been sort of secondary users to products that were designed for other people in mind. They were either the afterthoughts or the people that were just sort of thrown into using products that were not specifically designed for them. So the concept of what I think banks and fintech companies and other institutions can do is to really step back and really think about well what are the primary concerns and problems that low-income have, and then build products particularly designed for them instead of forcing them to be again, secondary users who have products that they designed for other people in other constituencies.

Could you give us an example of what such a product would look like? What is a typical product that’s not designed for lower income person in mind, and how would it look like designed for a lower income person?

There are banks and credit unions and other fintech companies have, for example, they won’t lend anything less than $10,000. Because to them, they have a notion that in order to service a loan for $10,000, it’s so expensive that they’d rather do one of those than 10 loans of a thousand dollars each, because they think that the expense, the underwriting and servicing costs of managing 10 is so great for them that they’ll rather just do one for 10,000.

But the reality now is that with technology, we’ve been able to sort of minimize those costs to the point that servicing a smaller loan may not be as expensive as they think it is. Some banks are starting to experiment with smaller loans, but other banks need to do more like that. And it’s about, again, using the power of technology, try to minimize the servicing cost, but really trying to create this product based on the needs of people themselves, rather than based on the need of their own servicing platform, or based on their own assumptions of what it would take to actually provide that service to people.

This feels like a tricky dilemma in that banks and fintechs are sort of being required to police themselves in terms of offering a certain product to a certain demographic. And I’m wondering, do you see a role for financial regulators here? Do they need to be involved? And if so, in what way?

There’s definitely a role. And then that role should be expanded even. Regulators have to be sure that consumers are protected, to ensure that principles of consumer transparency and advocacy are there. Because I think now with fintechs, other companies, and other non-bank companies coming into the field, I think that’s a good thing, but we have to ensure that whatever it is that they do and create and develop, it has to be for the betterment of the consumer. We’re starting to hear reports of fintech companies or in lenders that are using technology to essentially be better predators, be more efficient in the ways of making people more, or getting people to be more heavily indebted.

There was a recent report that came out and looking at what Kenyans are experiencing with a plethora of different fintech companies in their country. And I was really astounded by this quote of a client in Kenya using a lot of the services that basically felt that they were now enslaved to this fintech companies. But fintech promise is not necessarily just to make predators better, but it’s about how can we use that technology to provide better services that are actually good for clients. And so, I think that regulators are the ones that have to be on top of that. That role is critical to making sure that we use technology for good, that actually drives people to improve their financial lives.

Earlier, you mentioned about the credit score. And most people know that the credit score is considered a critical element for proving financial health. Are there other critical points that we’re missing?

There was a report that came out back in 2007, and then there was really reiterated by another report the CFPB issued several years ago that found that about 44% of people that live in low-income communities actually are credit invisible, that don’t have access to a credit score, or may not have a credit report. And when they’re credit invisible in that ssense and that becomes an impediment to actually accessing services in the financial marketplace. It’s sort of akin to a passport of sorts. So without the passport, people are just denied at every turn. Without a credit report or credit scores, people can’t get loans to buy cars, they can’t get loans to buy houses, can’t even get an apartment without a credit report. I mean, some states in the US without a credit report, can’t even get jobs.

That credit report is really an instrumental tool that is really important to unlocking people’s financial potentials. We tend to limit the conversation about poor people in terms of income or in their behaviors on what they’re doing wrong. But when we think about the credit system, that really does beg the question about the systemic nature of how people are kept out of the credit system altogether. So, this is something that we’ve tried to address head on.

It seems as if education might be integral to improving financial circumstances, but there’ve also been studies that show that financial education alone has very little impact on actually changing financial behavior. Do you agree with that? What do you think is most effective for meaningful and impactful change to financial behavior?

In the field, there’s a lot of conversation about whether financial education is actually working or not working. A lot of heated debates about that. So of course there’s an inherent educational component to everything that we do. The question is, what else can they do beyond just as education. Particularly for adults. You can’t just transmit education by the way we think of getting people in a classroom. And so for us, it’s about, “well, how can you provide timely, actionable, relevant products and services that are actually going to impact that lives” because that’s what they want, right?

I mean, that’s what they’re interested in. That’s what they’ll put their attention to. And so then you include education into that product that’s going to actually impact their lives. So to me, the question is not about “not education or education.” It is about how can you actually make it actionable. Because from that perspective, then you can then actually see the impact of that intervention or the product or the service, that includes education as well.

For our listeners, what is the best tool anyone could have to control their finances and optimize their financial wellbeing.

Wow. I want that too.

I want that too.

Yeah. You know, that’s a great question. And I’m not sure that there is this one magical tool. There’s one magical sort of product that will work for everybody. And I think one of the things that I’ve realized in all of our work at MAF, is that things are complicated. There’s a certain complexity to people’s financial lives that we have to sort of embrace because through that we’re able then to look at solutions that are elegant. Solutions that can help people today, and then solutions that can help people tomorrow. That is not one product or one solution, but it’s about, “well, what is it that people need to do right now in their stage of life right now?” Because as an adult, as a student, let’s say, as a student, they may be concerned about student loans. Well, how can you intervene and think about and provide a service to help them think about that.

I mean, for somebody who has recently retired, how can you help them manage life just with social security income or something like that. Or even low-income communities where that income, it comes from a lot of different sources. So how can you help them manage that complexity of them getting income from a lot of different sources? So there is no one tool. With technology that we have now, we can actually create a lot of different tools that are relevant for different people and allow more cost-effective manner.

It sounds like at Mission Asset Fund, you will take practices that immigrants are engaged in and use those and formalize them. I’m wondering if there’s anything else that we can learn from the rest of the world on improving financial inclusion, health, and wellbeing. If there’s anything from economic development or just other trends that you’ve seen that might be useful in the domestic approach.

That’s a great question. And that has actually led me to one, build the Mission Asset Fund and lending circles specifically, because it was realizing that people have different conceptions of money. We need to acknowledge that. Here in the Western society, money is very individualistic. But in other traditions, it may be more about how people actually help their family members. I can say this about myself, that my success in life, I know that it’s not my own. That my success is shared with family. And that’s just one version of that, but there’s many other more complicated versions of that idea, but it’s about accepting the fact that not everybody in the world has the same relationship with money that we do in Western societies. And once we open up that understanding, then we can actually then see much more elegant ways of helping people.

And then when you start to unpack that, then you see how money is a way of people maintaining relationships with one another. People lend money to each other because they know that they’re going to need money to borrow money from them down the road. I mean, we found that about 48% of our clients save money outside of the typical savings account by sharing money with each other. People save and build and maintain relationships through money. So that’s another area of exploration of how social capital is actually very intertwined with their financial capital.

This is the first time that I’ve seen anyone make the linkage between social capital and financial capital. And I think a lot of fintechs are trying to do that in some ways. Do you think we’ll be seeing more of that in the future?

I can’t speak for all of the fintechs, but I do know that this is a reality – that I think once we start thinking about money from this account basis, or start thinking that we’re going to solve financial inclusion by giving everybody accounts, and then we start thinking about how people actually manage their money, or how people who actually use money to establish and strengthen relationships, then we can start building more services around that and start using the technology to make things better for them.

And part of that is about acknowledging people’s relationships. People’s income don’t just come from their wages, but they actually come from gifts or transfers or how people sort of pool money together across families. When we realize that, then we can create products to manage that complexity of income, or even understanding that people manage risk in a lot of different ways. So it’s not just about getting an insurance product from an insurance provider, but it may be it’s about managing risk by lending money to a lot of different friends or family. So as we start understanding the complexity of people’s relationships and engagements, then I think we can build better services and even better regulatory infrastructures to manage that complexity.

It seems like there’s a recurring theme in this conversation that there are some structural barriers to inclusion that perpetuate exclusion, but that there are also unintended consequences of institutions call them that also perpetuate exclusion. So for instance, something like a credit report, which was meant to grease the wheels of the financial system, actually can exclude people who don’t have one. Or a fintech that was also meant to promote financial inclusion will not necessarily reach out to, whether it’s an immigrant population or some other demographic, that is, as you call it, a sort of secondary user. And I’m wondering if you see a distinction between structural barriers and unintended consequences, or whether to you, they’re just sort of in the same bucket as prohibiting or precluding inclusion.

That’s a great way to describe it. And I think trying to focus our conversation, our attention on those barriers that sometimes are just invisible. I mean, we don’t even see it we think that everybody has clear, full access to everything in the financial marketplace. When in fact, that’s not the case. Depending on who you are, depending on your credit score, depending on where you live, some products may be available, other products may not be there. Some products might be affordable, sometimes they’re not. So there’s a lot of barriers in the financial marketplace that we may not even see.

And so I think we need to sort of focus on that. So what I’m suggesting is that instead of doing that, let’s just focus on how is it that people are actually managing their money and holding them up as the experts of their own lives. And I think we can get to better, much more inclusive systems and products that are more relevant to their lives that actually gets to the point of unlocking their financial potential. It’s not about just getting somebody an account or somebody this loan, but as about how can we help them build and realize their economic potential so that they can wield their power of choice, their concept of financial citizenship, which is really realizing their full human potential there.

The consumer in most cases has been the taker of financial products. The banks make the product, the fintechs make the product. And you’re talking about the consumer empowerment for consumer lives at a very individual level. How can the consumer become, for the lack of a better term, the price-setter or the product-setter?

I’ve had this concept, and I think I just used it very briefly, the concept of financial citizenship, the idea that it is inherent upon all of us, just by our humanity, that we have certain potentials. And I think that from a financial standpoint, we need services. We need products. We need help. One of the most important things we’ve designed as a humanity is a concept of money, right? I mean, that’s a product in and of itself. So I think we need to kind of start the conversation at that level so that they can say, “well, what else do you need in order to develop the human potential?” So a relevant concept that I’ve managed to offer into the conversation, is the concept of the hierarchy of financial needs. And I basically used Maslow as a model to develop what we call the hierarchy of financial needs, where Maslow asked the question, “What is it that people need to do in order to develop the human potential?”

We did a corollary of that concept by asking the question of, “What is it that people need to do in order to develop their financial potential?” And so, in a very similar way, we say, “well, people need to have income. They need to have cash in order to develop, manage their expenses. They need to have insurance products at a similar level that Maslow talked about security. They need to have insurance products to manage their risk for their assets. In terms of belonging, people need to have access to credit because like in love and belonging, you have another person, another entity, to help you, teach you how to become a human, because we can become human all by ourselves. In the same way, if financially you actually need a lender. And so credit’s really important in that sense.”

And then you need savings. And then the point of self-actualization for us, it was about investment opportunities. And so in developing this concept of hierarchy of financial needs, we realized that that’s not the case just for low-income people that need all these things, but we all need those things. We all have income needs, we all have insurance needs, we all have credit needs, we have saving needs and investment needs so that we can manage and develop our financial potential.

And so to your question about how is it that people can price or create their own products, I take that to say, well, they need to do all this things all the time. They may look differently depending on their stage of life, whether they’re young adults or working adults or retirees, they will have all these needs all the time. They’re ever present. I mean, they’re always in tension with each other. From that perspective, it’s not about one product, but it’s about recognizing that those tension are there. So how can you build products to help them along their own sort of journeys?

You talked about the credit score as a critical element. Are there any other critical elements that we should be looking at besides the credit score, besides individual lives? Is there any technical piece we’re missing?

The long answer is that there’s a lot. They need to have cash. You can’t be financial included without cash, right? Because it’s not about an account. You have those accounts, but if you don’t have cash in it, what good is that for you? So you have to have cash, you to have income. And then the idea of insurance is really important as well, because sometimes the most important asset that people have, particularly low-income folks, is their body. They might go to work and if they break their arm, they can’t work anymore. So they need to have health insurance, they need to have a lot of different sort of insurance so just to kind of protect their most valuable asset in that sense. And of course, credit and savings is really important as a way of acknowledging that they’re investing in themselves.

And then from that, we determine what is the one product that is important for them today. And then tomorrow might be a different product. And then they may find that they can actually avail themselves of those needs by accessing services from the financial marketplace, from accessing government program and services like health insurance. Sometimes they do that by managing credit through a tanda, or cundina, or managing their savings by lending to their brothers, because they know that that money is going to be good for them in the next year or so. Now the question then for us is to say, “Well, how can we then appreciate that complexity? And how can we then try to come up with interventions or supports or technology to help to do a better?” not supplant it, not minimize it, not telling them to stop doing that, but it’s more like how can we help them manage their complex financial lives, better, even for poor people.

This has been great José. We really appreciate you coming in and speaking with us today. Thank you very much.

Thank you for having me. Thank you.

Thank you.

It’s been fun.

We hope you enjoyed our conversation with José. This is an important conversation that emphasizes that financial exclusion isn’t just some distant issue that people face in the developing world, but a challenge here in the United States too- home, to some of the world’s most sophisticated financial services. And as financial systems have grown more complex, poorer communities are often left behind or just forced to adapt to tools that weren’t built with them in mind.

Thankfully, people like José are leading with common sense approaches and meeting the community where they are. He thinks banks and fintechs can find willing participants if they focus on these users who need more help than ever, given our twin crisis in public health and the economy.

For more episodes like this, you can find us on iTunes, Google Play, Stitcher and Spotify. If you like what you hear, please leave a review. Feedback from listeners like you will help more people find us and for even more content, look up our Pacific Exchange blog available at frbsf.org. Thanks for joining us.