How Banks Can Make a Lasting Impact With the Financially Underserved

For the financially underserved in the United States — primarily socioeconomically disadvantaged people of color, as well as minority-owned small and medium-sized businesses that lack sufficient access to the banking ecosystem — the widening wealth gap and financial hardships resulting from the pandemic is their lived reality.

Herein lies an opportunity for banks. There are millions of U.S. households that are unbanked or underbanked, according to the Federal Deposit Insurance Corp., and nearly 1 million minority-owned small businesses, according to the U.S. Census Bureau. Without access to the banking system, these groups often turn to higher-cost alternatives for their banking needs, and may be unable to build wealth for financial goals such as retirement or a home purchase. This lack of access also means they may be unable to borrow to attend college or start a business.

These groups need the support and security that the banking system offers. Now, with more banks reassessing the fee structures of their deposit accounts and financial products, financially underserved individuals and businesses are likely to represent new customers and additional sources of growth in the face of increasing competition from nonbank financial technology companies.

What’s more, bringing financially underserved individuals into a banking system that fosters an environment of trust and promotes their financial well-being can directly benefit U.S. economic growth. Narrowing the wealth gap for Black Americans could add roughly $1 trillion to the U.S. economy by the end of this decade, according to a recent study by McKinsey & Co.

Household wealth in the United States continues to grow, but a large number of people still lack financial assets such as stock market investments or nonfinancial assets such as real estate.

Census data underscores the disparity in homeownership rates among various racial groups in the United States. Homeownership rates for all races, except white Americans, has declined as the pandemic continues, the data show. Further, the gap between white and Black homeowners is yet again nearing its widest point since the U.S. Census Bureau began tracking the data.

The economic disparities don’t end with financially underserved U.S. households. The pandemic has deeply affected small businesses owned by people of color, according to data published by the Federal Reserve. Here are some of the findings from the Fed’s 2021 Small Business Credit Survey:

  • Ninety-two percent of Black-owned firms reported experiencing financial challenges in 2020 (up from 85% in 2019), followed by Asian-owned firms (89%, up from 70%) and Hispanic-owned firms (85%, up from 78%). White-owned firms were the least likely to report financial challenges (79%, up from 65% in 2019).
  • Black business owners were the most likely to tap into their personal funds in response to their firms’ financial challenges (74%) compared to Hispanic-owned firms (65%), Asian-owned firms (65%), and white-owned firms (61%).

The Fed also points out the concerns faced by small businesses owned by people of color in how they obtain financing needed to operate their businesses. From the report:

  • Across owner groups, Black-owned firms that applied for traditional forms of financing were least likely to receive all of the financing they sought (13%). Hispanic and Asian-owned firms (20% and 31%, respectively) were also less likely than white-owned firms (40%) to receive all of the financing for which they applied.
  • Firms owned by people of color were twice as likely as white-owned firms to report that they did not use a financial services provider. Twelve percent of Black- and Hispanic-owned firms did not use financial service providers, followed by 11% of Asian-owned firms and 6% of white-owned firms.

The financing challenges that underserved individuals and minority-owned businesses faced before the pandemic, coupled with the shock of the pandemic itself, has created a perfect storm. This current economic environment highlights the need to help these groups — and that banks can play a significant part in this effort. Here are some ways banks can deploy support:

  • Invest in community development financial institutions (CDFIs) or become CDFI-certified.
  • Create programs to support community development activities.
  • Increase educational outreach to the under- or unbanked.
  • Support minority communities through charitable giving.

Banks don’t necessarily need to be creative with ways to support the financially underserved, but they do need to be intentional. During the current economic recovery, the public has viewed banks much more favorably than they did coming out of the Great Recession. But in the near term, working to close the increasing wealth gap and support the financially underserved will likely be key areas where banks can make the biggest difference, cultivating increasingly favorable views from customers and the broader public. In doing so, banks can unlock a means to new growth while simultaneously supporting continued economic expansion.

This article was originally published by RSM US LLP in its winter 2022 industry outlook for financial services.

How Fintechs Can Help Advance Financial Inclusion

Last year, the coronavirus pandemic swiftly shut down the U.S. economy. Demand for manufactured goods stagnated while restaurant activity fell to zero. The number of unbanked and underbanked persons looked likely to increase, after years of decline. However, federal legislation has created incentives for community banks to help those struggling financially. Fintechs can also play an important role.

The Covid-19 pandemic has affected everyone — but not all equally. Although the number of American households with bank accounts grew to a record 95% in 2019 according to the Federal Deposit Insurance Corp.’s “How America Banks” survey, the crisis is still likely to contribute to an increase in unbanked as unemployment remains high. Why should banks take action now?

Financial inclusion is critical — not just for those individuals involved, but for the wider economy. The Financial Health Network estimates that 167 million America adults are not “financially healthy,” while the FDIC reports that 85 million Americans are either unbanked or “underbanked” and aren’t able to access the traditional services of a financial institution.

It can be expensive to be outside of the financial services space: up to 10% of the income of the unbanked and underbanked is spent on interest and fees. This makes it difficult to set aside money for future spending or an unforeseen contingency. Having an emergency fund is a cornerstone of financial health, and a way for individuals to avoid high fees and interest rates of payday loans.

Promoting financial inclusion allows a bank to cultivate a market that might ultimately need more advanced financial products, enhance its Community Reinvestment Act standing and stimulate the community. Financial inclusion is a worthy goal for all banks, one that the government is also incentivizing.

Recent Government Action Creates Opportunity
Recent federal legislation has created opportunities for banks to help individuals and small businesses in economically challenged areas. The Consolidated Appropriations Act includes $3 billion in funding directed to Community Development Financial Institutions. CDFIs are financial institutions that share a common goal of expanding economic access to financial products and services for resident and businesses.

Approximately $200 million of this funding is available to all financial institutions — institutions do need not to be currently designated as a CDFI to obtain this portion of the funding. These funds offer a way to promoting financial inclusion, with government backing of your institution’s assistance efforts.

Charting a Path Toward Inclusion
The path to building a financially inclusive world involves a concerted effort to address many historic and systemic issues. There’s no simple guidebook, but having the right technology is a good first step.

Banks and fintechs should revisit their product roadmaps and reassess their innovation strategies to ensure they use technologies that can empower all Americans with access to financial services. For example, providing financial advice and education can extend a bank’s role as a trusted advisor, while helping the underbanked improve their banking aptitude and proficiency.

At FIS, we plan to continue supporting standards that advance financial inclusion, provide relevant inclusion research and help educate our partners on inclusion opportunities. FIS actively supports the Bank On effort to ensure Americans have access to safe, affordable bank or credit union accounts. The Bank On program, Cities for Financial Empowerment Fund, certifies public-private partnership accounts that drive financial inclusion. Banks and fintechs should continue joining these efforts and help identify new features and capabilities that can provide affordable access to financial services.

Understanding the Needs of the Underbanked
Recent research we’ve conducted highlights the extent of the financial inclusion challenge. The key findings suggest that the underbanked population require a nuanced approach to address specific concerns:

  • Time: Customers would like to decrease time spent on, or increase efficiency of, engaging with their personal finances.
  • Trust: Consumers trust banks to secure their money, but are less inclined to trust them with their financial health.
  • Literacy: Respondents often use their institution’s digital tools and rarely use third-party finance apps, such as Intuit’s Mint and Acorns.
  • Guidance: The underbanked desire financial guidance to help them reach their goals.

Financial institutions must address both the transactional and emotional needs of the underbanked to accommodate the distinct characteristics of these consumers. Other potential banking product categories that can help to serve the underbanked include: financial services education programs, financial wellness services and apps and digital-only banking offerings.

FIS is committed to promoting financial inclusion. We will continue evaluating the role of technology in promoting financial inclusion and track government initiatives that drive financial inclusion to keep clients informed on any new developments.