Good financial decision-making doesn’t occur in a vacuum. Neither can effective financial education. In a recent paper on the state of U.S. financial education “From Financial Literacy to Financial Action”, Barbara Kiviat and Jonathan Morduch make the connection between successful financial literacy efforts and the actual products available to consumers. Essentially, you can encourage people to live healthy financial lives, but when they live in a reality with few good options and too many bad financial products - like check cashers and pawnshops on every corner - it’s hard to make a change. It’s like learning about good nutrition and the merits of eating whole grains and broccoli, but living in a ‘food desert’ neighborhood without a grocery store and your only option is a cup-of-MSG-noodle-soup at the corner market. But even worse - it’s a cup of soup you have to keep paying back for months and months.

This may seem obvious, but it has long been a pet peeve of mine that discussions of financial literacy focus almost exclusively on the content, format and timing of the education itself, rather than on the products available in the marketplace. The authors explore three critical elements of financial products – access, design and appropriateness. Access and design focus on making sure that people can obtain and successfully use quality financial products, such as the widely touted Bank On initiatives which connect the unbanked to low-cost checking accounts. But what is really groundbreaking is their discussion of appropriateness. 

Kiviat and Morduch explain appropriateness as follows: “some financial products may be so hard to fully understand or so vulnerable to failure that access deserves special scrutiny.” In other words, there may be products that are so consistently bad for people’s financial well-being that they are downright inappropriate to offer. Ever.  Although the word does not appear in the paper, “inappropriate” could be another way of saying “predatory.” And regardless of what word we use, we can clearly connect the dots between quality products and good financial training outcomes. This is important because if public dollars are used to fund financial literacy efforts we would get more for our money if the most inappropriate products were less available. Good financial outcomes for individuals require both education and regulation.

San Jose is one of the more recent cities where advocates are working to restrict inappropriate products – payday loans in this case. The Campaign Against Payday Predators, which Opportunity Fund endorses, is working to enact a moratorium on new payday businesses within the city limits. To learn more about this local effort, consider attending a community briefing in San Jose next month (Wednesday February 8th, 9:30am-1:30pm). Entitled When Cash Runs Out: Discussing the Spectrum of Alternatives to Payday Loans, this event will bring together local advocates and financial educators to discuss both how to help community members avoid payday loans and access alternatives (education) and how to achieve results around regulation. It’s a great opportunity to see the connection between financial literacy and policy – and to get involved in a local issue that is critical to economic security.

For more information or to RSVP, contact Teresa Magana:  408-280-2417 or teresam[at]lawfoundation.org

UPDATE 2/29/12: Santa Clara County Supervisors voted to pass a 45-Day Moratorium on new payday establishments while developing a permanent restriction to keep payday stores out of unincorporated parts of the county.