By Mckenna Moore
Over 6% of Americans—20.5 million people—are unbanked, according to the FDIC’s latest data, meaning they have no checking or savings account. Nearly 50 million more are underbanked: They have at least one bank account but still use alternative financial services like payday loans and check cashers outside the banking system.
Many go unbanked because they don’t have enough money to open a bank account or continue incurring overdraft fees. And going un- and underbanked isn’t cheap: Over the course of a lifetime, being unbanked can cost a person $40,000 just in fees, David Rothstein, a principal at the Cities for Financial Empowerment (CFE) Fund, says.
“Whether it’s cashing a check every time you get paid, whether it’s having to pay a bill, whether it’s overdraft fees, or insufficient fund charges that can occur monthly,” Rothstein says, “these are all things that take money away from the people who can generally least afford it for financial services.”
Lower-income customers pay higher interest rates and incur more fees, too, which subsidize the perks and rewards that “prime” customers—those banks deem the most creditworthy—get. Banks and their prime customers reap the rewards from the “subprime” customers, a system which often forces the latter out of the banking system in frustration.
When the Financial Health Network breaks down the data by demographic, it becomes clear how disproportionately this exclusion impacts certain groups. The study found that 15% of Black adults are unbanked, while 8% of Latino Americans and 4% of white Americans are. Similarly, only 11% of white people are underbanked, while 23% of Latino people and 32% of Black people are. This is one of the many ways redlining has continued to impact communities of color since it began in the 1930s. Since the nation’s inception, Black and brown Americans have experienced disproportionate suffering economically, which compounds as white, wealthy communities bounce back from recessions, and nonwhite, lower-income communities do not.
“Supposedly there’s been a major recovery since the Great Recession, but communities of color haven’t recovered,” Ashley Harrington, the federal advocacy director and senior counsel at the Center for Responsible Lending, says. “They lost over a trillion dollars in wealth that has yet to be regained. We have been most impacted by every single pandemic and recession that has hit this country; and this pandemic, this recession is no different.”
Financial institutions are chartered and regulated by the federal government, making financial inclusion a task for politicians. The Community Reinvestment Act (CRA) of 1977 obligates banks to meet the financial and credit needs of the communities they serve, including low- and middle-income neighborhoods. Bank regulators are then charged with examining the banks’ compliance with the CRA.
The next President will have the responsibility of setting economic policy priorities and appointing leaders for the federal banking regulators, both of which have implications that will trickle down to the lowest levels of government.
Democrats and Republicans agree that financial inclusion is an issue, but they often butt heads on how to address it. The politicians, nonprofit leaders, and financial services professionals Fortune spoke with make it clear that movement here is gravely needed.
“Change!” shouts Aaron Klein, a fellow in economic studies at the Brookings Institution who serves as policy director of its Center on Regulation and Markets.
“A banking system that works for [the un- and underbanked] and not banking that exploits them,” says Lauren Saunders, associate director of the National Consumer Law Center.
“A bold policy agenda that centers racial and economic justice,” says Harrington.
“Certainly not more of the same,” says Linda Jun, senior policy counsel at Americans for Financial Reform.
The suggested solutions range from targeting overdraft fee abuse to data use reform to public banking to improved education on the current financial system—and everything in between.
Experts say the most effective way a President could increase financial inclusion, though, is to simply make it a priority. Whether 2021 brings President Donald Trump’s second term or former Vice President Joe Biden’s first, the victor needs to acknowledge that there’s a problem and set policy goals to address it, says John Thompson, chief program officer at the Financial Health Network.
“The FDIC has done a terrific job measuring [unbanked and underbanked rates], and in the process of measuring it, we’ve seen improvement,” Thompson says. “But we really haven’t set at any policy level a goal that we’re going to eliminate it, or we’re going to try to make it equitable.”
In setting those goals, Thompson says, the data needs to be broken up by demographics to make sure the outcomes help the communities most affected.
Beyond measuring the problem and making financial health an issue of importance at the national level, Rothstein says that the President must ensure whomever he appoints to lead regulatory agencies like the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) values financial inclusion, too.
As American adults faced economic hardships brought on by the pandemic this year, a real-time payment system—which many countries around the world have already instituted—could have saved money and prevented suffering, Klein says. Anyone receiving their stimulus check by direct deposit, including those who are underbanked, had to wait several days before being able to actually use their money because of the way clearinghouse settlements work in America. This was not ideal for many who lost their income during the pandemic and were just scraping by, desperate for the stimulus funds to hit their accounts. Situations like this often result in crippling overdraft fees that turn swaths away from formal banking altogether. Many people choose to use check cashers instead of bank accounts to gain access to their money more quickly, but a chunk of the check’s value is taken as a service fee.
Real-time payments technology has existed for quite a while now, Klein says, but the federal government chose to build a new system, the FedNow Service, which will not roll out for at least a couple of years. When available, though, the Fed says it will “enable financial institutions in the U.S. to clear and settle transactions in virtually instantaneous fashion.”
Jodie Kelley, CEO of the Electronic Transactions Association, noted that many companies in the private sector like Square, Venmo, Zelle, and PayPal have real-time payment systems already, giving users access to their funds much faster than traditional paper checks.
Many Americans who opted to get their stimulus checks mailed—thus waiting even longer for access to their money than those who chose direct deposit—chose to do so because they did not have a bank account. To fold them into the formal banking world, Rothstein suggests that the federal government work on integrating banking programs into its systems. For instance, the IRS could provide an option to open a simple, no-fee bank account on the website used to choose how to receive stimulus checks. He says integration like this could be worked into many government-citizen interactions, such as unemployment compensation, taxes, and the Special Supplemental Nutrition Program for Women, Infants, and Children, also known as food stamps.
“Having the ability to open and facilitate that bank account opening during the enrollment process…would certainly help individuals come into the banking system and save them a lot of money,” Rothstein says.
While fintech often spurs important innovation like real-time payments, New Economy Project codirector Deyanira Del Río notes that some fintech companies are also known to develop “disruptive” alternative products that are high-cost, unregulated, and exploitative to the un- and underbanked.
“Some policymakers and regulators are so enamored with the rhetoric and promises of fintech that they don’t see the harms that they’re perpetuating against low-income people, immigrants, and others,” she says. Those harms are numerous and varied, Del Río says, and can include practices like issuing loans with triple-digit interest rates because fintech companies are often unregulated by the usury laws banks must follow.
On the flip side, congressman Patrick McHenry, ranking member of the U.S. House Committee on Financial Services, believes that technology is the best way to make banking and other financial services cheaper, thus lowering a common barrier to entry. He says he’s in favor of a “less onerous” regulatory environment to encourage that, pointing to the way Trump’s administration has loosened financial regulations over the past four years.
“It is generally a lessened weight of regulation versus a heavier weight of regulation on financial institutions. That’s the difference between these two candidates,” he says. “And one has shown in his first term a model at modifying regulation and lightening the burden of Dodd-Frank, and using more technology in the process of COVID and enhancing the technological shift.”
But Americans for Financial Reform’s Jun says that regulation is much needed after Trump’s first term, which has been chock-full of deregulation. According to Trump’s campaign website, “860 regulatory actions have been withdrawn or removed from active status,” in his first term. That includes the rollback of Dodd-Frank—enacted under President Obama after the market crash of 2008 to prevent any similar events—which eased rules on liability and data reporting on all but the largest banks. Americans are more vulnerable now than ever before, Jun says, and the CFPB seems to be focusing on giving companies flexibility rather than giving citizens relief.
This is generally the crux of the disagreement between Democrats and Republicans on how to approach financial inclusion. Democrats tend to believe that operating a bank comes with the responsibility to provide services to un- and underbanked people in the community that may not maximize profits, while Republicans believe the bank has no such obligation, or at least a looser one, experts say. Republicans also tend to think the market will correct itself, and regulation will fail, while Democrats are often in favor of more rules.
Deputy national press secretary for the Trump 2020 campaign Ken Farnaso wrote in an email that the President has spearheaded “pro-growth policies, deregulation, and tax cuts” in an effort to strengthen the American economy through his first term. The Trump campaign directed Fortune to the White House for more details, which did not respond to a request for comment.
The Trump administration has been busy in this arena for the past four years. Trump installed Kathy Kraninger as director of the CFPB, who is attempting to remove Obama-era protections for consumers against predatory lending. The OCC also proposed the True Lender Rule, which would effectively allow the circumvention of state usury laws by fintech companies, leading to loans issued with no interest rate caps, according to Raquel Villagra, staff attorney at the New Economy Project. Del Río says there’s been “a long, slow gutting” of the CRA under Trump and several of his predecessors. Harrington says the OCC’s recent changes to the CRA “will actually not help the communities that the Community Reinvestment Act was envisioned to help serve.”
Many of the regulations that have been rolled back under Trump were proposed under President Obama, for whom Biden served as Vice President. Biden has laid out economic policy plans that prioritize racial equity, strengthen and enforce regulations on banks and fintech companies, roll back Trump administration policies aimed at destroying fair lending, and provide student debt relief to increase financial inclusion.
“Even before Trump drove our economy into a recession, left frontline and essential workers to fend for themselves during a dangerous pandemic, and turned a blind eye to the disproportionate impacts of COVID in communities of color, he was already giving bad actor lenders a free pass to exclude neighborhoods and borrowers who have repeatedly been locked out of investment and economic opportunity,” Biden campaign spokesperson Rosemary Boeglin wrote in a statement. “Joe Biden has a real plan to build our economy back better, and that means bringing every community along. Biden will ensure that we all have a fair shot to pursue our own American dream by opening the doors to financial inclusion and closing gaps in access, for instance by setting aside future PPP [Paycheck Protection Program funds] for the smallest small businesses that often don’t have the necessary banking relationships.”
As evidenced in Tuesday night’s debate, policy specifics are rarely focused on when Trump and Biden meet, let alone the specific policy approaches each campaign has for financial inclusion. But as America weathers the historic crises of COVID-19, the worst economic downturn since the Great Depression, and a racial reckoning, economic justice concerns will continue to wrestle their way to the forefront in politics.