"Trust Is the Bedrock of Economic Activity": A Conversation about Financial Empowerment
Jessica Washington: Hello, and welcome to the Economy Matters podcast for the Federal Reserve Bank of Atlanta. I'm Jessica Washington, representing our Retail Payments Risk Forum at the Atlanta Fed, and I'm your host for today. This episode is the third in a series spotlighting our strategic priority of promoting safer payments innovation.
The Atlanta Fed does play several roles in the payments industry. We are an operator, supervisor, researcher—and our district is also a major hub for domestic payments. Approximately 70 percent of US payments flow through Atlanta, earning the metro area the name "Transaction Alley." So, I'm pleased to be here today. I'm joined by Andrea Donkor, the senior vice president of consumer practices and regulatory relations at PayPal. Andrea, thanks so much for being with me today.
Andrea Donkor: Thank you for having me, Jessica.
Washington: Before we begin, I should say that our views and our conversation here today are the expression of the presenters alone and do not reflect the views of the Federal Reserve Bank of Atlanta, or the Fed system, or of PayPal. All right, so let's start chatting about what we have on the agenda today. The Atlanta Fed has a high-priority initiative to promote safer payments innovation, and then alongside that we also prioritize efforts to enhance economic mobility and resilience—particularly for minority and low- and moderate-income families and individuals. Let me just paint a picture. What if everyone who was seeking a job could get a good job? What if everyone could advance their career and make more money, and could have a convenient and vibrant neighborhood? And consider this: what if everyone, when life dealt us unexpected shocks, could weather those shocks and easily recover? If both of those things happened, we'd have economic mobility and resilience and a way to get ahead when times are good and then bounce back when times are rough.
Research has actually shown lately—over the past four decades, really—upward mobility has eroded, and Americans born at the lower end of the income scale are increasingly unlikely to climb that scale. And so, we do believe that systemic racism—and then structures and institutions that restrict opportunity based on someone's skin color, or family connections, maybe their geography—we believe those are economic issues at the Atlanta Fed. When people and communities are limited in reaching their full potential, we all lose. And because we have smaller economies—and siloed economies, sometimes—we would have a less resilient economy overall.
So, Andrea, you are an esteemed leader in financial services, law, and compliance. And as we've gotten to know each other, I know we both share a passion for inclusion, and I want to hear a little bit about how your experience has led you to think about these economic issues.
Donkor: Thank you for that, Jessica. Your intro hit it right on the head. The metrics around the lack of inclusion today, it's staggering. Globally, there's a stat that 1.7 billion people today are living outside of traditional financial systems. In the US, it's somewhere around 185 million people who struggle to get by every month. And you mentioned in your opening, what happens if someone experiences a sudden economic shock? Forty percent of Americans today if faced with an unexpected expense of $400, they either have to sell something or borrow money to be able to cover it. That was the path we were on even before COVID-19, and all COVID-19 has done is further accelerate these disparities in ways that really highlight just the layers of impact in which people are economically left behind. We're talking about individuals and small businesses, which are the lifeline of many economies, that are being left behind. We're talking about, to your point, large-scale systemic issues which cannot be solved solely by governmental or social sectors. There's a responsibility for all of us who participate in the financial ecosystem to help improve this. And one of the ways that those of us who are participants can help to do this is by providing more options and access for people to build, manage, and grow their money. In the context of PayPal, or fintech, that means digitizing transactional processes. That makes, in turn, financial services more affordable for folks, convenient, secure—that helps to improve the financial health of the millions of people, for example, that use our products. And that's in furtherance of driving that type of financial inclusion for many who have been left behind.
I mentioned before, leaving behind small business owners, and that they are the lifeblood of many economies. We need to enable more people to become entrepreneurs, provide them with support to build and grow their businesses in an increasingly digital economy. I often think about, if you were a bookseller 40 years ago, you have your brick-and-mortar shop and you sell your books out of your store. Today if you want to be competitive in an increasingly digital economy, you need to be able to think about: how do I broaden my reach? How do I have an online presence? And whereas your strength may be with respect to selling books, it might not be in the digital solutions that enable you to have an online presence. When I think of an organization like ours—at PayPal, that means increasing access and financing for these types of businesses. It means creating digital solutions and commerce tools that allow businesses to reimagine how they reach their customers. And again, that's how you then ensure that a critical component of the American financial ecosystem is being brought along as we digitize. So what we're really talking about is economic empowerment, even through simple things. And it's an inherent right to be able to earn, grow, and move your money with dignity and with options, choice, and access. And now with mobile devices, what's interesting is so many people across the globe essentially have the power of a banking branch in their hands. We often talk about economic empowerment. I think it's also important to acknowledge what I talk about as a kind of ever-present, yet invisible, economic disempowerment that so many of us face, and how that shows up. Certainly, there are the tangibles in terms of cost—how much more expensive it is to pay the fees and manage the movement of your money—that disproportionately impact underserved communities when they are challenged, because there's not access to traditional means. So that might mean more costly options. But there are also less visible impacts: the economy of time, and how lack of access to financial systems disparately impacts underserved communities is a big one. I'll give you an example. It's one of my favorite anecdotes because it serves as both an illustration of this point, and coincidentally for me, the moment that I had this instant connection between PayPal and our mission and my own lived experience, and recognizing I think the potential for our company, and fintechs, to improve financial circumstances in communities like the ones that I grew up in.
It's maybe March or April of 2017. I had just joined the company, and our CEO, Dan Schulman, was highlighting in All Hands that he'd taken on the experience of standing in the line at a check casher to understand the experience of our customers. And he had mentioned, he said, "You know, I saw folks standing in line for long periods of time to cash their check, and then after that standing in another line to then pay their bills." And it hit me like a ton of bricks because as a kid, that was my own experience. I'm from the Bronx. I had parents who initially began their journey outside the traditional financial system, and I dreaded every Friday. We would literally stand in line for long periods of time to cash a check, and then go and pay the electric bill—same place, new line. That economy of time—the freedom to be able to move your money in a more convenient way—that's the type of economic disempowerment that we don't always recognize that occurs for folks every day. When you're thinking about digitized payment alternatives—bill-pay alternatives, being able to do that in the power of your mobile phone—that is transformative for folks.
The other one I'll call out is the economy of trust. Trust is the bedrock of economic activity. If you're looking for folks to entrust their hard-earned wages with you, they need to believe that you're going to keep their money safe, make their access to their money convenient, and give them flexibility and options in terms of how to manage it. And it's really this latter piece, around trust, that informs the behaviors for many around what they do with their money, whether or not they entrust it to a financial institution or keep it under their mattress, so to speak—and I know that that seems like an outdated reference about putting your money under your mattress, but there are analogous practices.
And I think of my own experience. There's this concept of >susu, which is like this informal savings club that arises in different African and Caribbean cultures, where essentially every payday folks take a certain portion of their pay, they give it to the person who is entrusted as, so to speak, the head of the informal savings club. And someone in that circle gets paid out every month, a massive amount of money, based on the parts that all the other participants put in. Many a Christmas, many a tuition bill as a kid, was paid through that. But that also can be risky, right? And that's again because of trust, a lack of trust in formal financial systems. We're often required to think of other alternatives. I hope that answers your question—probably more than you wanted, in terms of how I think of these things and why it's important for us to really focus on—certainly economic empowerment, but also acknowledge what disempowerment looks like for folks, and how do we improve those circumstances as well.
Washington: Yes, thank you for that. You did answer my question, and you laid the foundation for the purpose of financial inclusion. And I loved your phrasing it as "economic empowerment" and the dignity aspect. And of course, the history of payments themselves is based on trust—deciding what is it worth exchanging, whether it be bartering for sticks or rabbit pelts or what have you, it was all a matter of trust. One thing you said about the story about your mom, and how that affected you from a payments perspective. I remember one new innovation that's out today that really is personal for me is the ability to prepay a utility bill. And this new innovation that connects maybe someone's smart meter with their mobile device and their utility app and says, "Hey, last year you spent $25 on your electricity this week, so if you can't afford to pay one lump sum at the end of the month, you can chip away at it." And you might even create more pride in saying, "Well, okay, I can turn these lights off, or not run as many loads in the dryer—I can hang my clothes, or something like that."And not having, as a single mom—I grew up in that "single mom household" for a portion of it—and I remember the bill collectors calling, and I remember it getting very stressful when there were these big lump sums. And so I think that giving people that option like you were talking about, the different ways to pay. And in addition to that, you talked about more than just the cost itself but the time as a function of cost. Some of these utility solutions, bill-pay solutions, you can now pay a lot of bills in line at your local grocer or at your local convenience store. We're seeing a lot of innovations today, and something that we've been thinking about at the Fed—I know you know—is this realization about how our fellow citizens are sitting on the sidelines of prosperity, but there's also this increasing digital economy—and specifically, digital payments. Even though there's a rapid adoption of digital payments, there are still a large portion of the population who rely on cash as their main means of conducting transactions. In many cases, those cash-reliant consumers are vulnerable populations, and we don't want this digital growth, which can be very beneficial, to further marginalize these vulnerable populations from the economy—now a very digital economy.
And so, there is a growing divide between the digital payments economy and those who still rely largely on cash, and that's where we have focused our research on payments inclusion. We define that to mean ensuring that payment systems remain open for everyone and making sure that everyone has fair and equitable access to those payment options. And then, three—that everyone can use those payment options fairly and equitably. And that's taking one bill payment and making creative ways to pay things, right? With all this innovation that's happening, what is the responsibility of the payments ecosystem specifically, as these financial systems evolve?
Donkor: It's a great question. Like you in the example that you gave, I marvel at the possibility of how technology has truly helped to enrich the financial experiences, and create access, for so many. And to your point, it's helpful and can be a tool in addressing the large-scale disparities that we talked about earlier in the discussion. I made the comment around having the power of a banking branch in your hand through the use of mobile devices and, similarly, how to engage in commerce in ways that were unimaginable years ago. You talked about the bill-pay experience from the power of just that same device through digitization, and it is mind blowing. But specifically, I think the role of the ecosystem is to design inclusive products. It is incumbent on organizations to be cognizant of exactly what it is they are solving for, for whom, and ensuring that those innovations are closing those gaps. At the same time, those innovations don't have to be large-scale, transformational, never-before-seen products. They can also be smart and thoughtful improvements on the existing design that enables more access and reach. You gave that great example about not having to do this lump-sum payment. It can be broken out into parts, and tracked through that.
And when I think of improvements on the design, at PayPal we have a product that I'm proud of—among the many—that is called our "PayPal working capital product." And this is a good example of thinking smart and helping to close the gap. This is an ideal service for enabling underserved small business owners to access capital. PayPal today reaches about 10 million Americans' small businesses, and the focus here is on providing capital fast. It has impressive geographic and demographic reach, but essentially fueling growth for these businesses who need that capital infusion—for example, maybe to restock your inventory, or other things.
And here's what's unique about it—and this is where I talk about just improvement on the existing design. It is a loan, but in this case the merchants choose how they repay, and it's based on a share of their sales—we may decide 1 percent or 5 percent, but a share of your sales to automatically deduct as payments, ones that make managing cash flow easier for them. But two, it ties us to their success. And again, it's turning on its head how you think of lending, to enable your customer and not necessarily just see them as an income source for you. Other transforming things are, for example, the merchants pay a fixed, affordable fee when you apply. The loan is primarily based on your PayPal account history, so there's no credit check required, so it doesn't affect your credit score. Again, thinking about who you're serving: a particular demographic that may have not had access to traditional credit lending spaces. And then receiving that funding in minutes, so it's not time consuming as an application process, or there's no check of your financial history.
The reason why I mention this is it's incumbent upon us as an organization to think about if, in fact, small businesses are being so disproportionately impacted, what are some of the ways in which we can better serve and/or provide injection of capital more quickly to them? And what is it, also, that we're solving for in this context? The reality is that after 2008, the financial crisis, there are a number of "banking deserts" where these amounts—less than $25,000, let's say, somewhere in that ballpark—can be transformational for a small business. Those types of loans had essentially all but dried up for them, but we were able to build something that, as an alternative, provided flexibility for these businesses as they needed that injection. I use this as an example to say, responsible innovation—taking into account who you're serving—has to be, I think, the responsibility of the financial ecosystem. It doesn't mean always these huge, transformative technological advancements. They can truly just be smart, thoughtful improvements on an existing design that enrich your customers' lives.
I will also add that that innovation has to be done with regulatory considerations at the forefront, making sure that whatever innovations, regardless of the degree of them, that they don't compromise the integrity of the financial system. They can't come at the expense of consumer protection, and that also, at the same time, we foster these proactive and transparent relationships with regulators around the world to support these types of efforts. I'll pause there for a moment, because I want to make sure I answered your question. I know you mentioned a fair bit around the exclusion of folks, in terms of bridging the digital divide.
Washington: Yes, you did answer my question, and really opened up that inclusive design process being so fundamental and challenging the ways that we innovate—things like, who are you designing for? Who are your test populations and our payment companies? Are we innovating for the customers we have now, or the customers that we can't quite reach—and those needs that we haven't really uncovered yet? So yes, we have talked about how exclusion is happening here in the United States, and where discussions and decisions need to be directed towards payments inclusion and how we innovate. I think that we hope that we're presenting—by posing the problem this way—that we are offering policymakers a new approach to financial inclusion that focuses on options—and really highlighting those who are reliant on cash, and what are the barriers, whether they're perceived or real barriers. So we know there are a lot of solutions today that are attacking this inclusion issue, and I love the example you gave with the lending optionality and having success be shared and having the product almost morph to the changing circumstances.
And I think about other innovations, like delivering payroll and wages faster. Having that shift and having that less volatile income cycle may open up a lot of opportunities. And then I mentioned the bill-payment issue with the prepaying and how that can change someone's life. But I want to turn our focus, like you said, to regulation and policy. None of these solutions are ubiquitous or available to all, or they don't know they're available—maybe they're state by state. And so, in some cases there are actually laws and policy, or regulation, that inhibits the expansion of some of these solutions. For instance, some states not allowing to prepay utilities in some cases, or thinking that an advanced wage product could be more of a lending product and having more compliance burden to go along with it. So, we see a lot of solutions that are out there, even doing workarounds in some cases—and in that case we actually might be limiting security and consumer protections, like you brought up, so it's a balance. How do we coalesce around these regulations like security and consumer protection while keeping that innovation train moving?
Donkor: It's a great question. I think it is important for us to evolve, and potentially even recast the dynamic with respect to industry and regulatory relationships. I think our regulators first and foremost do, and—as is appropriate—they supervise and as necessary, leverage enforcement to ensure that the industry is operating in a way that protects its customers. But it can't be the only way in which industry and regulators engage, which often can happen. And that does a disservice to the most important stakeholders in this ecosystem, which are the customers. So there's a need for industry to be transparent with regulators about developments, innovations on the horizon, and engage them. But in addition, it's also important for regulators to be able to signal receptivity for industry transparency when it's not happening in a supervisory or enforcement context.
I recall a conversation with a regulator about two years or so ago. He said to me, "You have to remember that we're one regulatory body, and there are hundreds of you, and the pace of evolution is staggering"—he was referring to the licensees—"and the potential impact to consumers is just growing. And while you are all providing different variations of products, in the absence of insight as to what you're doing I don't have an appreciation of whether or not our supervision is appropriately tailored." And in essence it was, "Help us, help you," so to speak—which is, "engage us." And I found that that sentiment is not unique, but there aren't always formal structures for it. We try to do our best in creating the opportunities to engage with our regulators, and we've always found it to be helpful to do so.
To your point about coalescing around consumer protections, for industry right now I think that that means us having some North Star principles that are unwavering—again, when we center the customer, the consumer. And by the way, this is all based on a supposition as it is. With us, PayPal, that inclusion and focus on our customers, that inclusive way, that's at the heart of what we're doing. But primarily that means accepting that because of the scale and the pace of innovation, that there will be products that we put out in the marketplace that do not yet have the benefit of regulatory frameworks, or even oversight.
To that end, there has to be a shared responsibility to ensure that we are offering products to consumers with some of these North Stars in mind. I'll note one or two, from my view: transparency and education. For a customer, they need to understand: What's the product? How does it operate? How does the fee structure work? What are my alternatives? How are my funds protected? What happens if something goes wrong? Enable the customers, in essence, to be able to make an informed choice around whether that product is right for them. And the other, which you touched on at the very start of this, Jessica, is fair access and fair and equitable treatment—ensuring that the factors that go into determining who's approved for the product that you're offering, as well as how discretion is applied in the treatment of the customers throughout the lifecycle of the experience, that that's based on fairness principles…again, with an eye towards inclusion and creating greater access. And whereas there might be products, again, because of the scale of innovation that we're offering in which there aren't formal regulatory frameworks today, the principles are out there.
I tie this back to a previous comment that I made around engaging with regulators beyond the dynamic of supervision or enforcement, because in this context if industry is in a position to operate prior to formal regulatory frameworks being in place, and we're doing so with some of these North Stars that I called out—transparency and education, or fair access and fair and equitable treatment—there is an opportunity for industry to share learnings, data, and insight that can help inform the regulatory frameworks that could emerge and ensure that they're appropriately tailored. That dynamic is critical to responsible innovation. So if anything, I think that that's the obligation. It's a symbiotic relationship between industry and regulators at this junction to ensure that collectively we can serve the customers.
Washington: Yes, I really hear what you're saying about those guiding principles and ensuring that we can organize around that as we collaborate and educate with those guiding principles in mind. You and I met, actually, because you're serving as a member on the Special Committee on Payments Inclusion, a space where we've come together across industry stakeholders. There are regulators involved, and consumer advocates, and academics, and fintechs—banks as well. And we're there to talk about how payments innovation can advance economic mobility and resilience, and through this research we want to understand how digital payments can actually provide sufficient incentive for cash-based consumers to change their behavior. We want to make sure that we identify the unique challenges that might be inhibiting their desire to change, because they are an active participant as well, we have to remember.
As we're talking about collaboration on the regulation and innovation side, it's: what are they thinking about this space? And there are real digital divide issues still at play here. When you think about making a payment, you have to have the basics of technology to facilitate that transaction, but there's also at play social norms theories, and social pathology theories, meaning that some hesitation to adopt these technologies—these digital payments—are based on real barriers, and some are really based on perceived barriers. We really need to—the committee, I think, we're really interested in seeing where those differences are, because we can change real things, but for the perceived barriers we can't not validate those reasons. We know that being unbanked in many cases is a rational decision for someone based on their particular financial health in life, based on fees or whatever the case may be—balance minimums, and things like that. So, it's a rational decision. What this tells us is that there's likely big gaps in education and literacy, and I think that we always want to bring that along as well. What are your thoughts to round us out about how we might think about adoption and education going forward?
Donkor: Jessica, I agree with everything that you said. And you know, there is this perception because of the growth of financial technology and digital adoption, that it is maybe exceeding cash or encroaching on exceeding cash today, in terms of folks who are leveraging cash. The reality is that 85 percent of the world still runs on cash. And when you are looking at emerging and developing countries, that number is more to 90 percent, if not north of that. All the signs, yes, are pointing towards rapid increasing digitization. Folks estimate that in the next five years, we'll see six billion smartphone users. And to that end, the mobile device is key. I talked earlier about having the power of a banking branch in your hand through your mobile device, but what is interesting—and I'll draw on my own personal experiences for a moment—as I mentioned, my parents actually are from West Africa, and when you go to many sub-Saharan African countries and you look for a brick-and-mortar bank to walk in and get, let's say, a revolving line of credit or other types of payment services, you'd be hard pressed. There wasn't a lot of traditional banking infrastructure in a lot of developing and emerging countries.
Now what we're seeing is, we're going from cash economies and totally jumping over the traditional financial systems into now the possibility of mobile device and digitization adoption. So when we talk about even globally the concept of adoption—yes, you're bridging a significant gap for folks, even in terms of institutions. But the reality is, in the US as well—where, again, a lot of folks have been left out of the traditional financial systems. Again, we're talking about that gap, too, in a very different way. The reality is, though, that people do desire today, for whatever reasons—some of which you pointed out—payments experiences or financial services experiences in different contexts.
So thinking about payments, for example—there are people who are looking for seamless integration of commerce across marketplace platforms, online merchants, mobile directly in store safely, social media, other contexts. And it's important for us to acknowledge that there are many use cases today—good, better, indifferent—for folks. I think about PayPal, and one of the things that I think we've done successfully is that we've realized that there is no monolith of consumers. In order to succeed in serving consumers, it's important to understand who they are, what they're telling you they need, and understand the social barriers—and, to your point, the pathology that informs those needs. Which is why, for example, across all of those contexts I've mentioned, whether it be marketplace, online, in store, we make sure we have solutions for folks who have that need.
And that is important for us to do, too, because one of the things that you called out earlier in the discussion is the fact that there is a digital divide today. And the digital transformation that's happening—we need to be able to ensure we're being thoughtful because we don't want to further exacerbate the inequality that exists within our system. And by the way, the reality is that digital transactions are more affordable and do create greater access, and can be more secure than cash. And so, to the extent we can drive that type of adoption, absolutely that makes sense. That's why we take care to ensure we get the right design that can drive easier adoption across different demographics and continue to engage with our stakeholders to make sure we're getting that right.
But we are dealing with, to your point, other socioeconomic factors that do create a bridge for folks. And I talked earlier about the economy of trust. There are people who still are reluctant to engage in digital payments because they are concerned about privacy or general protection of their financial data. But that being said, we also know there's a growing interest in folks wanting to have access to broader commerce and payment options—and again, talking about optionality. So being inclusive and providing access means giving people comfort that there doesn't have to be this trade-off between having access to global commerce, and worrying about your data. And that means strong privacy and information security controls that have to be integral to the operations of your company, if you are supporting digital payments in commerce. But at the same time—and again, I'm thinking about this in the context of PayPal—it's understanding that folks want to be able to engage in the economy in different ways and being able to provide that optionality.
Funny story: I'm going back a year or two—it had to have been two years, because I was actually at a conference, I was actually outdoors—but at an in-person conference, a regulator came up to me. She saw that I was with PayPal and said, "Listen, last week I was going to buy this t-shirt that I had been looking for forever. The problem is, I didn't know who this merchant was. I wasn't sure about their website entirely, but I really needed this shirt. And I was 30-70," and she was essentially leaning towards not getting this t-shirt. She said, "And then at the end of it I saw the PayPal button, and then I knew I could buy that t-shirt." It was actually pretty interesting, pretty funny. And the feedback she gave me is because she knew that her transaction would be protected, and that's because we have 20 years of tokenizing transactions, and underlying financial data, which makes the transaction secure. And so for us, it's about getting that message out there, for example, that we encrypt every transaction. Those are the things that we have to make sure, in the user experience, is also clear to our customers. So to your point, there is an element of mistrust. I think to be able to account for that, we have to do a combination of, yes, educating but also still offering our customers choices. We have to meet them where they are.
Washington: That's fabulous. I like that example—it really highlights how repeated experiences can build trust and standards around these features and functionality. And I think features and functionality is a great area of opportunity in education, and you uncovering—demystifying—these features and functionality so it doesn't feel so magical when a payment happens, and using similar definitions and nomenclature around the types of providers and the types of accounts we have, whether it's offered by a traditional bank or a non-bank, that we are clear and conspicuous in the way we describe these financial services. And I think with standards around that type of education, I think we might be able to pull down some of those barriers—both in the regulatory environment, the policymaker environment, and for consumers.
Well, Andrea, this has been a great conversation. Your expertise and passion for the topic adds so much value to the industry, and it was my pleasure talking with you today.
Donkor: It was my absolute pleasure being here. Thank you so much, Jessica.
Washington: Thank you. This podcast will be archived on the Atlanta Fed page under Economy Matters, and be sure to look for future publications coming from the Special Committee on Payments Inclusion. And I hope you all have a wonderful day. Thank you so much.