Millions of Americans Lack Access to Traditional Banking: Who Are They and What Are the Impacts?
Even as the trend of using cash dwindles, millions of Americans remain unbanked, meaning they don’t have access to standard financial services such as savings accounts, credit cards, or personal checks. This lack of access disproportionately affects certain demographics, leaving them vulnerable to predatory lending practices and hindering their financial progress.
Key Takeaways:
- 6% of Americans are unbanked, rising to 23% for those earning less than $25,000 annually. This lack of access disproportionately affects Black and Hispanic adults.
- “Banking deserts” exist in both rural and urban areas, leading to limited options for financial services. Predatory lenders often fill the void, further exacerbating financial vulnerabilities.
- Younger generations are increasingly unbanked, potentially due to a perception of traditional banking as outdated. This presents a unique challenge for financial institutions trying to connect with young adults.
A Disconnect Between Communities of Color and Financial Institutions
The Federal Reserve reports that Black and Hispanic adults are more likely to be unbanked than white and Asian adults. This stark disparity is often attributed to a lack of physical bank presence in these communities, creating a self-perpetuating cycle of financial exclusion.
Joe Lugo, founder of J^3 Creations, highlights the potent message sent when a community lacks visible financial institutions: "When they don’t see a financial institution or a bank, [they] tend to say, ‘There’s no avenue for me this way. If I had a dream to start a business or buy a home, that’s not for me because they don’t exist here.’"
This sentiment is echoed by Darrin Williams, CEO of Southern Bancorp, Inc., who emphasizes the reality of rural banking deserts: "In many of the markets we serve, we’re the only bank in town. Often competition of the bank is a payday lender or some predatory provider of capital."
The Unbanked and the Risks of Financial Exclusion
The unbanked population faces significant challenges in managing their finances. Keeping cash at home or relying on apps like Venmo and Cash App, which are not FDIC insured, exposes their money to greater risk. While keeping some cash on hand is crucial for emergencies, a basic checking account can help build credit and establish healthy financial habits.
However, those without bank accounts often turn to alternative options, like check cashing services or payday loans, which come with high fees, exorbitant interest rates, and a lack of federal insurance. "They’re getting preyed upon," says Preston Duppins, a financial advisor at Vilardi Wealth Management, referring to individuals who take out payday loans. These risky choices further exacerbate their financial vulnerabilities.
Building Trust and Bridging the Gap
To improve financial inclusion, experts believe that financial institutions must actively engage with underserved communities, meet them where they are, and build trust.
"Most of the time, marginalized folks are not willing to venture out of their areas," said Lugo. He emphasizes the need for financial institutions to "go out into the community, they’re promoting their services into the community, they’re creating programs specifically for the community."
MoCaFi, a fintech company serving the unbanked and underbanked, initially faced challenges in attracting customers. Their free bank account offering, while seemingly beneficial, was not immediately embraced. This led the company to shift its approach and partner with local governments to distribute benefits like universal basic income.
"Giving them access to some benefit and then using that conversation as a way to be able to get them into our demand deposit account is how we shifted," explained Wole Coaxum, CEO of MoCaFi.
In addition to building trust through outreach, education and representation also play crucial roles. Financial advisors like Duppins underscore the significance of diversity in the profession: "We need to continually focus on women, women of color, men of color in this space, in this banking industry."
Addressing Financial Exclusion: A Multi-Pronged Approach
Addressing financial exclusion requires a multi-pronged approach:
- Expansion of physical bank presence in underserved communities to provide greater access to traditional financial services.
- Collaboration with local governments and community organizations to create targeted programs and initiatives that meet the specific needs of marginalized populations.
- Education and financial literacy programs to empower individuals with the knowledge and skills to manage their finances effectively.
- Increasing diversity within the financial sector to foster greater understanding and sensitivity towards diverse communities.
By addressing the systemic issues that contribute to financial exclusion, institutions can create a more inclusive and equitable financial landscape for all Americans.