Financial Predators on Mobile Devices

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March 14, 2012; Source: U.S. Federal Reserve

According to a recent Federal Reserve report, smartphones and other mobile devices have the potential to greatly expand financial services for previously underserved populations, including low income individuals, minorities, and young people but, according to some nonprofit advocates, it also invites predators.

According to the Federal Reserve report, underbanked populations (people with bank accounts who use payday loans, auto-title loans, check-cashing services, or payroll cards), make use of mobile financial services at roughly the same rate as the general population: 89 percent of underserved consumers use mobile devices to check balances, 20 percent make mobile bill payments, and 55 percent use mobile devices to transfer money.

But “mobile banking—like any technology in the financial services sector—can be a double edged-sword,” says Ginna Green, a spokesperson for the Center for Responsible Lending.  “Smartphones and other mobile devices can give more consumers greater access to financial services, but the protections in the mobile space are only as good as those in the financial sector as a whole.”

Fringe financial service providers such as payday lenders increasingly market high-rate loans through text messaging and mobile-enabled services, which then link the lender directly to consumers’ accounts. Payday lenders, who typically operate from storefronts in low income communities, provide short-term loans at annual percentage rates that often exceed 400 percent.

“Once you give a payday lender access to your bank account online, they essentially gain unfettered access,” says Green. “We’ve seen examples where lenders will sweep consumers’ bank accounts. After they get the money, it’s nearly impossible for the consumer to get it back, and so that person is forced to close his or her account.”

This doesn’t mean that organizations which provide financial services to underbanked consumers and low income households should ignore the mobile space. On the contrary, nonprofits need to keep pace with the rapid migration to mobile technology in the overall financial sector.

“There’s a whole new landscape and language that people in our industry need to understand as it relates to mobile banking,” says Jill Sturm, Financial Services Director of EARN, a San Francisco-based nonprofit organization that provides micro-saving and other wealth-building programs for low income families. EARN, which has transferred many of their previously face-to-face interactions online, is looking at the mobile space for future opportunities to engage their communities. “Given where the banking sector is headed, the nonprofit sector needs to step it up a bit when it comes to the use of mobile in low income communities,” Sturm says. “Nonprofits tend to be high-touch,” she adds. “In reaching out to low income consumers, we need to be careful we’re not leaving parts of our community behind.”

According to Federal Reserve report, the heart of the problem in “banking the underbanked” is a lack of overall trust in the financial sector among low income communities. When asked their primary reason for not having a bank account, the majority of unbanked survey respondents said they “don’t like dealing with banks.”

“People feel tripped and trapped by bank fees,” says Green. “Fortunately there’s a new cop on the beat in the Consumer Financial Protection Bureau, who can help ensure that mobile products are used to better our economic well-being and not endanger it.”

“The mobile sector is only going to grow larger,” Green concludes. “Our sector needs to ensure sure the rules of the road apply to everyone.” –John Hoffman