Basic Finance in the Information Age: Moving Toward a Public Good?

Background: In the information age, finance has changed dramatically and become more pervasive, all families require access to a range of complex financial instruments to achieve financial well-being. This transition offers positive potential for efficiency and inclusion, but in practice that potential is not yet realized. Currently, financialization benefits some sectors of the population, but it places low-and-moderate-income households at a significant economic disadvantage and has contributed to rising income and wealth inequality (Lin & Tomaskovic-Devery, 2013; Martin, 2002; Van Arnum & Naples, 2013). This conceptual study (1) explores the growing importance of basic finance in everyday life by examining the association between financial inclusion and financial well-being, particularly for low- and moderate-income households, and (2) discusses the effectiveness of a social policy strategy to achieve financial inclusion for disadvantaged populations through the lens of a public good.  

Methods: Based on a review of research about financial inclusion effects on household financial well-being, we assess the importance of financial inclusion for low- and moderate-income households. We then conduct case studies of two policies that identify institutional determinants of financial inclusion: retirement savings accounts and child development accounts (CDAs). Finally, we create a theoretical model to summarize the findings and connect two key ideas, an institutional perspective on financial inclusion and its importance to financial well-being.    

Results: A broad review of empirical analyses indicates a strong relationship between basic finance (e.g., payment system, emergency savings, asset accumulation, credit, and insurance) and financial well-being, implying the importance of financial inclusion on financial well-being. The two case studies on retirement savings accounts and the development of CDAs further underscore the key role of institutional arrangements in achieving financial inclusion. The analysis of retirement savings accounts indicates that, when lacking specific institutional features to address financial exclusion, financialization has been regressive and exclusive (e.g., defined-contribution retirement savings) rather than progressive and universal (Beshears et al., 2009; Bricker et al., 2014; Steuerle, 2016; Weller & Ghilarducci, 2015), barely benefiting the poor. In contrast, the analysis of CDA policy suggests that appropriate policy design can achieve universal financial inclusion and benefit the poor (Morrissey, 2016; Sherraden, 2014; Sherraden et al., 2015).

Discussion: In sum, the study affirms the importance of basic finance (achieved through financial inclusion) on household financial well-being in the information age, and identifies key determinants of financial inclusion. The theoretical framework built on these findings allows us to focus on financial inclusion as an achievable policy goal through institutional arrangements. The study defines financial inclusion broadly, beyond those products and services provided solely by the financial sector. In fact, we suggest that financial inclusion in the information age can become like a public utility or perhaps like a pure public good. While this may seem unlikely today, information technology will make public good finance very possible in the not-too-distant future.