Preserving the American Dream

It’s a Small World 

We live in an increasingly interconnected world. On campus, many MBA students feel called to study issues and pursue careers that will position them to develop opportunities for greater prosperity, health, and happiness for people in far off corners of the planet. They want to deliver on the promise of the American Dream beyond our own borders.

This is important. In our global ecosystem we need to be part of the solutions to challenges like poverty, inequality, and environmental degradation that transcend national boundaries.

What About Our Own Backyard?

What has happened to the American Dream – the idea that freedoms granted in the U.S. provide opportunities to prosper, succeed, and move up the socioeconomic ladder through hard work – on home soil? The reality is that initiative and effort are often not enough to get Americans out of the traps of poverty, and that the gap between the haves and the have-nots continues to widen.

The American Dream Deferred 

Many factors play a part in the American Dream. Material prosperity and economic mobility are central, of course, but this notion of opportunity is not just a financial construct. However, we aren’t succeeding by any measure – not wealth, health, education, or happiness.

This chart shows a snapshot of wealth distribution in the United States, with the top one percent of earners possessing 40 percent of the wealth.

The accompanying short video illustrates the reality of economic inequality in the U.S. in a compelling, concise way.

The sad truth is that income inequality has been increasing for the past three decades and there has been an increase in “permanent inequality” – the advantaged becoming permanently better-off, while the disadvantaged become permanently worse-off. The American Dream is increasingly out of reach.

Bringing the Under-banked into the Economic Mainstream

To better understand where opportunities for innovation and improvement exist when dealing with economic mobility in the U.S., I spoke with Steve Zuckerman, MBA ’87, and Managing Director of Self-Help’s California operations. Self-Help is a nonprofit organization that has a variety of programs to provide financing, technical support, consumer financial services and advocacy for those left out of the economic mainstream.  Here are some of Zuckerman’s insights specific to financial challenges and solutions for the poor and underserved:

• Financial education is not a silver bullet: In working to connect low-income Americans to formal financial services, many think that education is the key. Self-Help agrees education is critical, but also has learned that low-income people usually understand the financial system very well, and make sophisticated and complex choices within the options available to them. The problem often lies in the options.

• Financial product options are not designed to serve low-income families: Minimum deposits and check clearance times often put traditional financial services out of reach, and overdraft and other fees can make “free” checking anything but free. Check cashers may actually be more economical, but provide no avenue for savings and credit. Payday lenders make credit readily available with a lure of short-term emergency use, but exorbitant fees usually trap borrowers in a vicious cycle of 400 percent debt.

• Zero Savings = Zero Options: For people living paycheck to paycheck and spending every dime they earn, it is incredibly hard to ever get ahead. Even renting a place to live is a huge challenge, given requirements for a security deposit and first and last month’s rent up front.

• Financial health is a foundation for healthy families: A solid financial footing – a few dollars in a savings account and a productive banking relationship – creates a solid foundation for families. Without some degree of financial health it’s very hard to have domestic stability, to stay in one place, keep your kids enrolled at one school, have time for your kids, etc.

• Many people simply need to make more money. Wages have fallen to a record low as a share of America’s gross domestic product. Until 1975, wages nearly always accounted for more than 50 percent of the nation’s G.D.P., but last year wages fell to a record low of 43.5 percent. The stagnation in wages cannot be ignored. As Zuckerman said, “Creating a market with responsible products and services is critical, but our members and clients also complain of a more fundamental problem: ‘I need to make more money.’”

Clearly, to address such challenges in the financial systems for low income families, more effective solutions need to be developed and delivered. Innovation has been a foundation of Self-Help’s work for many years and they continually push boundaries to find real solutions.

Prospera – An Innovative “Hybrid” Branch Model

Zuckerman reflected on Self-Help’s work to bring un- and under-banked Americans into the financial mainstream through Prospera, a new division of Self-Help Federal Credit Union. Its six branches “meet customers where they are,” he said, “offering the services they want – like check cashing, bill pay, and remittance services – in small, convenient branches that look a lot like check cashers. But then we give them a path to the mainstream products and services of a credit union.”

Zuckerman emphasized that they need to treat Prospera’s clients not as beneficiaries but as customers. “We learned that we couldn’t just tell our clients about the benefits of saving. We needed a more market-driven solution. We launched a campaign called ‘5 for Me’ that framed savings in terms of what customers can do with the money they save over time. It created positive emotions for our customers, and rather than framing savings as ‘good for you’ it made saving attractive, fun and easy. The campaign improved the rate at which our check-cashing customers opened savings accounts which, we hope, will open a gateway to long term savings.”

As a nonprofit, Self-Help has a unique position in the realm of financial service providers. The Prospera model isn’t profitable yet, but Zuckerman and his colleagues believe that as it scales it will be. Given Self-Help’s mission, they welcome replication from any agency – or business – that is committed to serving these markets responsibly, and are eager to share the lessons they’ve learned about customer-centered design and the economics of bringing the unbanked into the financial mainstream. A recent article by the SF Fed provides more depth on their model.

As I wrapped up my conversation with Zuckerman, I asked him why he chose this type of work. With an MBA from Stanford and a successful investment career, working for Self-Help was not the next logical career step. Steve expressed the following reasons for working at Self-Help:

• “The chance to help create a more level playing field.”

• “The chance to build new models that take the best of business and the best of the social sector to remove barriers for people lower on the economic ladder.”

• “The opportunity to see hard working Americans battling to overcome enormous obstacles and build better lives for their families – that’s their gift to me.”

I was inspired by our conversation, and think that Zuckerman exemplifies a 21st century leader. A leader whose career operates more like a pin ball than a ladder, a leader who has made a choice to contribute to society, a leader who believes that with hope, resources, resiliency and enough innovation we can preserve the American Dream.

Steve Zuckerman, MBA ’87, worked for a year at Self-Help before coming to Stanford’s Graduate School of Business, then rejoined in 2006 to launch its California operation and, in 2008, Self-Help Federal Credit Union. Between his two tours with Self-Help, he worked at McCown De Leeuw & Co. (MDC) where he was a managing director and had primary responsibility for fundraising, investor relations, and internal management activities. He currently serves on the board of Positive Coaching Alliance and the Advisory Board at One PacificCoast Bank, FSB, and over the years has served on numerous nonprofit and corporate boards.

Self-Help is a leading nonprofit Community Development Financial Institution (CDFI) founded in 1980 that has a variety of programs to provide financing, technical support, consumer financial services and advocacy for those left out of the economic mainstream. The organization has demonstrated that low-income borrowers pose no greater credit risk than other borrowers, and when given access to the right financial products and tools can repay their loans, build their businesses, improve their communities, and build wealth through home ownership and home equity. Among its many honors, Self-Help was one of 12 organizations featured in Forces for Good: The Six Practices of High-Impact Nonprofits.