America's Poor Still Lack Access to Basic Banking Services

In recent years, the Treasury Department has made financial inclusion a priority. What’s to come?

Jessica Rinaldi / Reuters

Despite a sprawling and varied financial industry, more than one-quarter of Americans don’t have adequate access to basic banking tools, such as checking accounts, credit cards, or loans for instance. That group—known as the underbanked—is made up of those who suffer the most from growing inequality and systemic marginalization: Americans with low incomes, those with less than a college degree, and minorities.

There are signs of improvement: A recent study from the FDIC found that the share of the totally unbanked—those without any checking account or access to traditional financial services at all—had declined to 7 percent from 7.7 percent in 2013. But the share of the underbanked—that is those who have checking accounts but still rely on alternative products such as payday or auto loans to make ends meet—has remained just about the same, at around 20 percent. That means that there is still a significant amount of work to be done when it comes to providing the necessary services for vulnerable Americans.

Over the past few years, the financial invisibility that has long plagued many Americans has become decidedly more visible, with more media attention paid to those without access to banking. That’s allowed important momentum to build on the existing work of nonprofits and other groups that have for years been attempting to help the underbanked. This shift to greater awareness didn’t happen by chance—it came about in part because of the creation of a federal agency tasked with protecting consumers and ensuring fair and equitable financial access to financial products, the Consumer Financial Protection Bureau. Since the Bureau’s inception, the dangers of high-priced loans, cycles of debt, and the lack of sufficient banking tools have been in the news again and again. And that’s led other agencies to make the underbanked a priority too: About a year ago, President Obama lamented the continuing cycles of poverty that are worsened by lack of financial access, and made financial inclusion one of his stated priorities for the Treasury Department. Spearheading that effort has been Treasury Secretary Jacob Lew, who says that the U.S. faces some unique challenges when it comes to making financial services universally available.

The lack of banking access in developing nations has long been a passion project for startups, aid organizations, and financiers looking to give back. These groups have looked to innovations in mobile payments and digital-wallet transfers to help those in rural or developing nations improve their access to basic banking operations in order to start businesses or buy basic goods safely and efficiently. But within the confines of an already developed banking system, the millions of Americans suffering from lack of access have been harder to see, and to reach. “In the United States, we have a deeply established financial system, and we have to simultaneously look at opening access to the traditional financial system but also looking at how technology can be used to expand the opportunities," Lew told me in an interview. The challenge is that, “new technologies have to afford the same degrees of consumer protection and have the same degrees of prudential security that traditional tools have," he added.

On Thursday, Treasury, in conjunction with the United States Agency for International Development (USAID), will host a two day forum to discuss what they have learned and what they hope to do to continue the push toward full financial inclusion both in the U.S. and overseas. Many of the solutions for the U.S. involve boosting financial access within communities by encouraging investment and community-banking initiatives. The Community Development Financial Institutions Fund (CDFI) program has taken on the challenge of providing small-dollar loans as a replacement to costly payday and auto-title options that have recently been become subject to new regulations by the CFPB. In 2016, the CDFI fund has doled out more than 20,000 loans under $5,000. Treasury also recently announced that it would provide $7 billion in tax credits spread among 120 organizations working to revive the economy in communities around the country through CDFI.

There are other proposals too: Treasury, USAID, and the State Department will announce a new fellowship—under the existing Franklin Fellows program—specifically for experts who want to commit a year or two to helping the federal government achieve its financial-inclusion goals. There are plans to include more financial-awareness and -literacy programs in workforce-development efforts. And, despite challenges, around 15,000 people have signed up for myRA—the government sponsored IRA savings plan, that the department will continue to promote.

But the future of many of these programs will be determined—in large part—by what the next administration and the next Treasury Secretary choose to prioritize—and fund. For his part, President-elect Trump has said little about financial inclusion. And while his newly appointed Treasury Secretary, Steve Mnuchin, has experience and expertise in finance—he, like several secretaries before was an executive at Goldman Sachs—he also has yet to say anything about how he views the goals of financial inclusion set forth by his predecessor. But while the incoming administration hasn’t said whether or not it will promote similar goals for the underbanked, there are some reasons to suspect it will not. During his campaign, Trump called for decreased regulation and more specifically a repeal of Dodd-Frank—the act that created the CFPB. Even if Trump and Mnuchin don’t wholly dismantle the agency, weakening the CFPB could hamper its ability to curtail abuses—such as high-interest loans and recurring fees—that have been rampant in the alternative banking sector. And OneWest, the bank once helmed by Mnuchin, is currently facing allegations that the bank discriminated against minority homebuyers—the very same group that financial inclusion programs seek to protect.

If the next administration fails to make financial inclusion a priority, it’s possible that the private sector will take up the cause—but that too will require direction and incentives from the federal government. While the government has made headway in weeding out bad actors in the lending and banking space, there’s been little success when it comes to having mainstream banks and credit unions extend their services to poorer Americans. If that’s going to change, the CFPB will have to step in with clear regulatory parameters that tell banks how they can structure small-dollar loans and other services in order to make a profit without causing further problems.

Lew hopes that the same spirit of innovation that brought the underbanked in developing nations into the fold, can thrive in the U.S. “The technology-development process is one that in general is better left to the private sector, where entrepreneurship and innovation naturally happen,” he said. “I think there's an environment that has been ripe for more progress to be made here, both domestically and internationally."