Look, I’m no economist but I know an alarming finance stat when I see one, and know that there are steps we can take to rectify it, especially if we incubate and prove out these ideas in a collaborative and complementary way across our burgeoning social sector ecosystem.
The stats I continue to be perplexed by are the continued millions of folks unbanked or underbanked in our community and the lack of progress made here especially given the promise of numerous fintech options and advances popping up over the past decade.
Currently a quarter of US households are either unbanked or underbanked and half of those unbanked households say they don’t have the funds to meet minimum balance requirements.
“Unbanked” is an informal term for adults who do not use banks or banking institutions in any capacity. Unbanked persons generally pay for things in cash or else purchase money orders or prepaid debit cards.
“Underbanked” refers to individuals or families who have a bank account but often rely on alternative financial services such as money orders, check-cashing services, and payday loans rather than on traditional loans and credit cards to manage their finances and fund purchases. This may be because they lack access to convenient, affordable banking services or because they need or prefer to use alternatives to traditional financial services.
The Federal Reserve notes that both the unbanked and underbanked “are more likely to have low income, less education, or be in a racial or ethnic minority group.” Among the underbanked, 21% had a family income of under $40,000 (vs. 7% with incomes over $100,000) and 21% had a high school degree or less (vs. 9% with a bachelor’s degree). In terms of race/ethnicity, 35% of Blacks and 23% of Latinx were underbanked vs. 11% of Whites.
While this issue looks much bigger and complex than one strategic philanthropy and their nonprofit partners might be able to tackle without the sizeable buy-in of both government and the banking sector, they can play a pivotal role in advancing this topic with a generational focus.
Fintech – fintech isn’t just the banks and financial services companies creating new tools. While accessibility is paramount, the democratization of financial services may be more impactful than tackling it through much larger and richer institutions. A great example of this is the Stellar Network which offers a global payment system with a transaction speed of three to five seconds that is based on blockchain technology. It’s free to use, and all software for the network has been released under the Version 2 Apache License, allowing free modification and distribution. By keeping solutions like this free and assisting development of financial products and services within it, there is no doubt the spread of low-cost financial offerings for the unbanked and those living in poverty can be achieved.
Financial Literacy – With over 80% of Americans unable to translate a tax form and one in four American student loan borrowers in default, there is no doubt that financial literacy is a key part of tackling this issue more broadly.
Financial Literacy (philanthropy) – As the result of school districts lack of modernization, experts who teach financial literacy are few and far between. Many teachers unfortunately lack the knowledge themselves on financial literacy, they are ill prepared to teach it to the next generation of students. The school system is still widely geared toward more traditional subjects such as maths, science and english and might be served by funding to upskill teachers, provide them with teaching materials and products, and reward schools that show progress in their communities. This could either come in the form of underwriting these options (similar to the Social Emotional Learning program ‘Harmony’ which was disseminated through National University on the back of a $185m gift) or become an impact investment play.
Philanthropy really has an opportunity here to catalyze new approaches here by putting money into unfamiliar markets, products and partners.
Financial Literacy (nonprofits) – Families lack critical education in finance. It’s a compounding generational issue, hence my focus on playing the long game here and identifying tech as a way to accelerate solutions, not provide a silver bullet. As is the case with most life skills, the best education starts at home, but where do they begin? How do parents frame the topic in a child-friendly way? This might be something for community groups to add to their services, especially ones like the YMCA, United Way and other anchor institutions that provide critical frontline support in resources and education. This can also be woven into more traditional support services such as free tax return help etc.
Impact Investing – As mentioned above, impact investing could be a key approach to tackling these issues with a bit more nuance than traditional nonprofit delivery. From being a guarantor to leverage further government engagement or to take on the risk of lower interest loans for those working to improve the financial stability of low and moderate income households, by utilizing these emerging tools we can start to embed financial empowerment strategies into local civic infrastructure and most importantly see those returns on investment.
Other options that are gathering support are Individual Development Accounts (IDAs) which are savings accounts that are matched by funds provided by donors, nonprofits, or others. The IDA is designed to help low-income individuals save for a specific goal within a defined time period.
Other Key Stakeholders – Obviously we would be remiss in not noting that the banks will also need to come to the party and to their credit have identified the underbanked as a separate market segment and are dedicating resources to them as such. Banks providing financial services to underbanked markets may receive consideration under the Community Reinvestment Act (CRA). They may also meet certain requirements under the Equal Credit Opportunity Act. Other corporate funders might see this as an opportunity to focus their CSR efforts and also stimulate some important public private partnerships depending on the scale.
And dare we forget the potential for USPS to deliver (excuse the pun). Postal service reform has already begun to permeate national policy platforms as a response to a perceived need for an extra pillar in our banking sector for those who don’t have bank accounts or sufficient accessibility, and as an important response and remedy to egregious payday lending rates.
During last years presidential primary season, four candidates from the Democratic Party proposed various options at transforming post offices into financial service centers with small low-cost loans, payments, online services and checking and savings accounts to serve the 14 million Americans who don’t have bank accounts. I could also see the USPS become fiscal sponsors for nonprofits too – because there is no doubt that these problems with fiscal responsibility permeate into the organizations and groups we serve too.
All of the above have numerous pros and cons. Plus, any form of perceived consensus from those that really pull the levers of change (both legislatively and financially) would center on trials for mobile banking options rather than offerings through brick-and-mortar branches – which ultimately dovetails into similar issues for lifting up these communities such as affordable and reliable internet access. Approximately 19 million Americans – 6 percent of the population – still lack access to fixed broadband service at threshold speeds. In rural areas, nearly one-fourth of the population – 14.5 million people – lack access to this service. In tribal areas, nearly one-third of the population lacks access. Even in areas where broadband is available, approximately 100 million Americans still do not subscribe.
At the end of the day the most simple, yet effective step might just be to prove some of the solutions we are seeing and for all the aforementioned key stakeholders advancing the conversation as a collective force. These intersecting approaches such as financial literacy in schools and a more dynamic regulatory environment for new players in the financial services sector could be the right mix to advance the cause and also ensure a new wave of fiduciary responsibility rather than providing an open field to ‘disrupt’ the sector and further compound the critical issue we are trying to solve.