The portion of Americans who lack relationships with financial institutions (FIs) had been dropping steadily before the pandemic. The Federal Deposit Insurance Corporation (FDIC) said that the rate of unbanked U.S. consumers had fallen from a peak of 8.2 percent in 2011 to 5.4 percent in 2019, the most recent year for which data is available. This figure represents a consistent decline from 2013 totals, yet this means that 7 million Americans were still unbanked.
The most recent survey, which pooled responses from nearly 33,000 households, found that the numbers are particularly stark for Black and Hispanic households. Nearly 14 percent of Black households were unbanked in 2019, for example, as was the case for 12 percent of Hispanic households. Just 2.5 percent of white households were unbanked.
Many FI executives are worried that the FDIC’s upcoming 2021 report will reflect the realities of financial hardship stemming from pandemic-related job losses, Sidney King, CEO of Alabama-based Commonwealth National Bank, said during a recent PYMNTS interview.
“COVID-19 has hurt the underbanked and underserved the most because lots of them work in the hospitality and services industries, where jobs were lost,” he explained. “In some instances, a lot of them did better with unemployment insurance, but that was temporary, and that underserved market is still struggling.”
Commonwealth, founded in 1976, is a community bank that is among the first Black-owned FIs. King said that its mission includes serving the historically underserved Black community, where many financial problems stem from the fact that consumers’ parents and grandparents lacked banking relationships.
“If you don’t have a banking account, you never learn the discipline of money,” he said. “If you never learned about money … it’s impossible to manage your finances.”
King said many unbanked consumers cannot afford the fees that banks charge to maintain checking accounts. Government fees have made free checking a thing of the past, he said, and many unbanked consumers are paying high fees to cash their paychecks and get money orders.
“They are paying $5 to cash a $100 check,” he said. “But there’s also a history of redlining and systematically keeping the African-American community out of the banking system. Today, there are only about 15 Black-owned and -operated banks. They’re disappearing, and that lack of trust in banking still prevails today.”
The Right Payment Tools And Education Are Crucial
King said that educating consumers on the benefits of banking relationships is one of the most crucial steps in promoting financial inclusion. Reaching the consumers who need to hear these messages can be challenging, however. King said that Commonwealth National Bank routinely advertises free sessions for unbanked consumers on the importance of maintaining relationships with FIs. But the number of individuals who show is often low — if they show at all.
“We’ve had instances where a session is scheduled at a community organization and the only people who show up are the instructors,” he said. “It’s frustrating.”
FIs and organizations nationwide have also turned to numerous financial tools to help them reach unbanked and underbanked consumers, and many are recognizing that prepaid debit cards hold promise in this regard. U.S. consumers who lack bank accounts represent almost one-quarter of prepaid debit card users, according to a recent survey, illustrating these consumers’ familiarity with such tools. The U.S. Treasury has also begun using prepaid debit cards as an efficient way to reach unbanked consumers, distributing nearly 4 million such cards loaded with stimulus funds to reach those who lack FI relationships.
Debit payment tools are seen as viable options that can improve financial access for unbanked consumers and help them participate in today’s connected economy. But King still recommends that individuals monitor the exact specifics of how and where they are using these tools.
“They’re good for some people who don’t have that banking relationship, where they can get paid with that card,” he said. “But there are risks associated with it. If you check into a hotel, they’re going to immediately post a charge to your account that will sit there until checkout. In the meantime, you won’t have access to those funds, and that’s been a challenge with a lot of folks.”
Tackling the problem of financial inclusion is tricky for FIs, as they must meet the unique needs of consumers who lack accounts or access to traditional financial services. Many banks are finding that pairing robust financial literacy outreach with the judicious deployment of spending tools such as prepaid debit cards can give these consumers much-needed access to financial services that would otherwise be out of their reach.