Financial Inclusion: Why Improving Access to the Underbanked is Good For Business
The pandemic has increased the public’s awareness of the racial wealth gap and the role that banking has played in racial wealth inequality. According to the Federal Deposit Insurance Corporation (FDIC), approximately 7 million households in the United States are “unbanked,” meaning no one in the household has a checking or savings account at a bank or credit union.[i] Many more are “underbanked,” meaning they have only limited access to mainstream financial services.[ii] Instead, the underbanked typically rely on cash or high-cost alternative financing such as pre-paid debit cards, check-cashing services, pawn shops or payday loans. FDIC surveys show that unbanked and underbanked households are disproportionately low-income and minority populations.
The role of banking in racial wealth inequality
I believe banks can provide three key financial products that help build wealth over time:
1) Deposit accounts that are free or have low monthly fees, with safeguards to prevent excessive overdraft charges. Excessive charges and overdraft fees can cause a debt trap for people with low incomes and low savings. To illustrate, large US banks received more than $11 billion in overdraft fees in 2019. Just 9% of all bank accounts were responsible for paying 84% of those fees.[i]
2) A credit card or other tool to cover short-term deposit account shortfalls and surprise financial needs. Remember, consumer credit scores haven been largely based on past borrowing behavior. Therefore, consumers that have never borrowed from a bank or credit union could be denied a credit card even if they have a strong track record of paying bills on time. People that don’t have credit cards often have to resort to high-interest payday loans if they have a cash shortfall.
3) Affordable mortgages. Affordable and accessible mortgages enable homeownership, which can help build wealth over time and potentially lead to multi-generational wealth.