What forces some families to miss bills, skip taking medications, borrow from friends and family, or turn to payday lenders to make ends meet? The answer lies in a combination of income volatility (i.e., difficulty maintaining a stable income and building financial security), changes in the financial system, and a loss of trust in community institutions.

Each year, roughly one in four American families will face an “income shock,” which can include losing a job or experiencing a sudden health or work limitation. Major expenses, like a health bill or fixing a car, can also undermine families’ financial footing.

When considering both income and expense shocks, income volatility affects many families, and not just low-income families. The wide-reaching issue and its implications were discussed last week at an Urban Institute panel discussion.

Who has income volatility, and how do they cope?

Rachel Schneider, senior vice president of the Center for Financial Services Innovation, described meeting people who experience income volatility. To write her forthcoming book, The Financial Diaries: How American Families Cope in a World of Uncertainty, coauthored with Jonathan Morduch of New York University, Schneider and her colleagues tracked every dollar earned and spent by 235 households across the country.

One woman Schneider interviewed, “Elaine,” was the manager of three restaurants. She enjoyed her job, but her income fluctuated significantly from week to week.

“Over the course of the time we got to know Elaine, her lowest paycheck was $378, and her highest paycheck was $831,” said Schneider. “Enough of the time she was earning so much above or below her average, planning was really difficult.”

To cope with financial volatility, people like Elaine often turn to the social safety net (public benefits) and the private safety net (savings). Families with as little as $250 to $750 in savings are less likely to experience economic hardship.

When a safety net isn’t available, people with volatile income may turn to check cashing and payday lending services to make ends meet. University of Pennsylvania professor Lisa Servon worked at a check cashier in the Bronx, New York, and at a payday lender in Oakland, California, to learn more about this industry and its clientele, a journey described in her recent book, The Unbanking of America: How the New Middle Class Survives.

“I learned a lot about how people manage their money by working at the counter,” said Servon. “This population is not who I thought it would be. Many of the people who use these services own homes, have college educations, and make $50,000 to $75,000 per year.”

The rise of this industry is evidence of seismic shifts in financial policies and bank practices. “We faced an era of great deregulation starting in the 1980s, which enabled banks to…focus on commercial and investment activities and to develop products that took banks away from the consumer,” said Servon.

She added, “Banks also shifted the ways in which they make money. Now banks are making $33 billion per year on overdraft fees.”

How banks can serve people with volatile income

People with volatile income are often considered incompetent with their money by choosing expensive options like check cashing, when in reality, they are simply faced with tough choices. “Oftentimes, we make the mistake of suggesting that the people in this space don’t know how to manage money,” said Bruce Murphy, executive vice president of KeyCorp, one of the country’s 20 largest banks.

He added, “I would suggest to you that they know how to manage money better than most of us, because at the end of the day, they always have more month than they have money, and they will do what it takes to survive.”

Banks can succeed and help the community when they understand and respond to the needs of people with volatile income. “We understand that balancing our mission and margin provides us with three things,” said Murphy. “The opportunity to make a difference in the community, an opportunity for our employees to see our presence, and it does create a return.”

Murphy described how KeyCorp has had success across customer groups by developing new products for people with volatile income. One product, a checkless checking account that clients can’t overdraw, has brought more customers to the bank than any other.   

The bank has also focused on financial education and encouraging customers to enter the branch and talk with experts. “We teamed with HelloWallet to offer every client, for free, the ability to receive an online update on where they are from the perspective of financial health,” Murphy explained. Clients can then talk with someone at their local branch to learn more about their financial health score and how to improve it.

Structural changes in jobs, the financial sector, and families that have exacerbated the income and expense volatility and resulting financial insecurity take a toll on families and communities. Government, the financial sector, communities, and households all have a role to play in reversing the trend.