Simple and effective: Let's keep giving people money
The impacts and opportunities of cash transfer programs
One of the most promising trends in recent economic and financial policy has been the movement towards unconditional cash transfers (i.e. giving people money), vs. more complicated benefit schemes. For the past few years, there were a number of nonprofits on the leading edge of experimenting with these ideas, including GiveDirectly, which pioneered an unconditional cash transfer program in Kenya. And in the last few years, we’ve seen these programs take off in the United States, most notably with the relief checks in the CARES Act and follow-up relief bills. In this post, I’ll cover some of the evidence supporting the benefits of these checks and some f of their implications and opportunities for fintechs and financial services companies.
Unconditional cash transfer programs have improved livelihoods and outcomes across a multitude of variables, including household income, poverty, and health. Today, the city of Stockton, California released results from the first year of a two-year guaranteed income experiment. The experiment distributed $500 a month for 24 months to 125 randomly selected recipients that were at or below Stockton’s median income. The findings from the first year included the following:
Guaranteed income significantly reduced income volatility, which allowed recipients to much more easily cover unexpected expenses without stretching their finances or credit
Recipients obtained full-time employment at more than 2x the rate of the control group
Recipients had statistically significant improvements in mental and emotional health
Recipients spent funds on core necessities; less than 1% of recipient funds were spent on alcohol and tobacco
These findings mirror the positive findings that rigorous nonprofits have uncovered when it comes to cash transfer programs. Givewell, a highly respected nonprofit intervention evaluator, writes that “cash transfers have the strongest track record we’ve seen for a non-health intervention, and are a priority program of ours.” GiveDirectly also cites a number of positive studies finding that cash transfers have positive impacts on their recipients on their research website, which also addresses concerns people have over recipients mis-spending cash transfers, or cash transfers being a dis-incentive for recipients to work (two concerns the Stockton results also refute).
The pandemic relief checks, a bipartisan effort to relieve the economic pains of the pandemic through sending checks to the vast majority of American households, also had strikingly positive effects. A New York Times article in the summer of 2020 summarizing studies on pandemic-induced poverty found “An unprecedented expansion of federal aid has prevented the rise in poverty that experts predicted this year when the coronavirus sent unemployment to the highest level since the Great Depression, two new studies suggest. The assistance could even cause official measures of poverty to fall.”
What are the implications for financial services and fintech? At a very basic level, fintechs have already found success helping with rapid and effective distribution of the pandemic funds; Square Cash, specifically, has seen a lot of success from seeing new members direct deposit relief checks, and used that to encourage more engagement on the platform. Most all neobanks can take advantage of cash transfer programs to attract customers and increase engagement.
There’s also a concern amongst some that disbursing so much cash into the economy could cause inflation; I’m more skeptical of these claims, but in the case that does happen, fintechs can help ensure customers allocate their funds to investments/areas that hedge against inflation risk, such as TIPS.
Most importantly, many fintechs today help the vast majority of Americans just survive, whether that’s through optimizing finances and credit, increasing access to emergency funds, or helping people live paycheck-to-paycheck. A world in which we had local and/or national regular cash transfers that reduce income volatility and improve economic outcomes could change the paradigm to one where fintechs and the financial services industry more broadly can focus on helping their customers truly and sustainably build wealth, rather than help them just barely get by.