The question of how to bring America’s unbanked or underbanked households into the mainstream banking system, the importance of which was underscored by challenges they faced during the pandemic, was addressed in a symposium hosted by BPI on Oct. 26, 2021. The event, titled “Barriers to Deposit Accounts for the Unbanked and Underbanked and Going the Last Mile,” featured researchers and practitioners delving into this question from wide-ranging perspectives. Below is a high-level summary of the symposium.
The first panel, “Customer and Institutional Barriers to Financial Inclusion,” examined reasons why consumers are unbanked or underbanked and covered consumer financial behavior, financial literacy, household situational factors and products or practices that may impede financial inclusion. One key point conveyed about consumer financial behavior is that consumers lacking confidence in their ability to manage a bank account can be a barrier to financial inclusion. The panel also discussed how a non-level regulatory playing field may have implications for financial inclusion. For example, one area discussed that may warrant further study is the Durbin amendment’s two-tiered pricing system for interchange fees. This system may incentivize FinTechs’ providing payments services in partnership with smaller banks, which, in turn, could have implications for inclusion and consumer protection based on differences in institution size, reach and level of supervision or regulatory oversight. The panel also discussed the pricing of products and services sought by unbanked and underbanked consumers as a driver of consumer behavior. For example, consumers may seek short-term loans from payday lenders rather than mainstream financial institutions if the pricing of that product is more favorable at the former. In other words, function matters more than form for these consumers.
Panelists agreed that increased financial literacy and education are misjudged as a remedy for increasing inclusion—the unbanked and underbanked generally can well assess the benefits and costs of alternative financial products and services provided they receive accurate information.
Other themes explored included the need for further research on competitive performance of banking institutions with respect to overdraft fees, the role of digital access and the notion that real-time payments would facilitate financial inclusion as one reason why consumers remain unbanked or underbanked and seek alternative sources of banking services, such as payday lenders, because those consumers need access to funds more quickly than the banking system can provide in some cases. The discussion noted that a real-time payment option does in fact exist in the U.S. right now with The Clearing House’s RTP Network. Thus, for instance, stimulus payments could have been made in real time if Treasury had chosen that option. The panel also touched on the importance of digital access as a tool to increase inclusion, while emphasizing that challenges remain with this solution as there is a “digital divide” with respect to access to digital tools and channels. Finally, the panel noted that further regulatory clarity with respect to innovative solutions for increasing inclusion is needed. For example, alternative data use by financial institutions may increase inclusion, but institutions may be reluctant to use such data if regulators do not make clear that such use is permissible.
The second panel, “Practical Solutions to Increase Financial Inclusion,” discussed products, tools and services that target unbanked and underbanked consumers. Panelists shared lessons learned about such services and products and discussed research on financial inclusion solutions. Topics included the successful use of alternative data in credit underwriting for increasing inclusion; the order in which financial institutions process debit transactions and how that impacts overdraft charges, which can impact inclusion; the effect of living in a low-income neighborhood on banking relationships and credit access; and the role of digital currencies and FinTech providers.
The discussion highlighted research indicating that the key to attracting unbanked and underbanked consumers lies in designing appealing product features, such as no or low balance requirements and no overdraft fees, and that less, if any, importance is placed by those consumers on what type of entity is offering the product. For example, echoing a theme from the first panel, the second panel discussed research showing that, even when consumers are provided increased access to credit, they still seek payday loans because they can get access to their money immediately, which is not always the case in the traditional banking system. Regarding CBDC, the panel discussed design features that could potentially increase financial inclusion, emphasizing features that address commonly cited reasons for being unbanked, such as privacy concerns and perceived high costs of accounts. Panelists also highlighted obstacles to CBDC serving as a vehicle for financial inclusion, such as limited access of unbanked populations to high-speed internet and distrust of bank accounts, which could translate into distrust of CBDC accounts, as well. Regarding FinTechs, panelists emphasized their heterogeneity and thus the varying degree to which they may advance financial inclusion goals. At one end of the spectrum are innovators that are marginally expanding access to affordable credit, some of whom are partnering with banks, while at the other end are FinTechs that may be best characterized as “online payday lenders.”
Examples of successful financial inclusion initiatives underway at banks were offered. These include collaborative work with Community Development Financial Institutions and Minority Depository Institutions, as well as broader efforts to support the growth in underserved communities and advance socioeconomic mobility. The Bank On program, comprising local partnerships of city, state, and federal government agencies, financial institutions and nonprofit organizations joined nationally under the leadership of the Cities for Financial Empowerment (CFE) Fund, was highlighted as a major financial inclusion initiative. A focal point of the Bank On effort is to have banks and credit unions offer low-cost deposit accounts that meet the National Account Standards developed for the program, and it was emphasized that 85 percent of new accounts opened through this program were opened by individuals that were completely new to the bank. The panel emphasized that there is not a “one-size-fits-all” solution to increasing inclusion. Different communities may be unbanked or underbanked for different reasons, so financial institutions are experimenting with products and marketing campaigns to determine what may resonate with different sectors of the population.
The lunchtime discussion with keynote speaker Rep. Jim Himes (D-CT) focused on the need for bipartisan policy solutions for financial inclusion. As chair of the Select Subcommittee on Economic Disparity and Growth, he said he hopes that the Subcommittee will put forward useful ideas for increasing financial inclusion. With respect to stablecoins and cryptocurrency, Himes said Congress is looking at the topic. Crypto can be a speculative investment, but the blockchain is an interesting concept, he said. Echoing comments heard during the second panel discussion, Himes noted that different cultural communities think about financial services and products differently and that addressing issues related to economic isolation for rural and high-poverty neighborhoods is essential. In response to a question about how Congress will address future low-income rental housing needs, Himes said stakeholders are considering more innovative approaches like multi- or mixed-use development versus consolidating poverty in public housing. He also said local zoning restrictions can be a problem for affordable housing in large U.S. cities. Finally, Himes recognized the value of competition in the financial services sector but underscored that FinTech innovators must be subject to the same data security requirements as banks to protect consumer data.
The third panel, “Pushing the Limits of Financial Inclusion: Regulatory Dimensions,” covered the role of regulations and regulatory agencies in financial inclusion, such as the role of the Community Reinvestment Act and fair lending rules, capital regulation and know-your-customer requirements. The panel also discussed the new Justice Department initiative to combat redlining and the related joint DOJ, CFPB, and OCC first settlement under the Initiative. The panel noted that these agencies are focused on rooting out 21st century redlining, which does not necessarily equate to literally drawing red lines on a map, but rather, the agencies assess whether majority borrowers are being treated better than minority borrowers by, for example, being offered better, more or different products than minority borrowers. Unintended regulatory consequences were discussed, including how unrealistic assumptions in the Federal Reserve’s bank stress tests about dynamic behavior of credit card balances during economic downturns may incentivize banks to reduce credit card lending to underserved communities. This led to a broader discussion about regulators and policymakers and institutions finding ways to reduce the cost of financial services to increase inclusion. Panelists emphasized that periodic reevaluation and recalibration are appropriate in the regulatory sphere, including with respect to stress tests, to balance key legal or policy objectives.
Much of the discussion centered on the potential benefits of a digital ID in the United States to enhance both inclusion and national security. Panelists described how the public sector is working with the private sector to advance the goal of a digital ID that can enhance financial inclusion by lowering the cost of providing financial services, while also furthering security objectives. Other regulatory roles highlighted by the panel included facilitation of innovations in credit scoring; an enhanced focus on increasing homeownership and supporting small businesses, particularly among minorities; and support of MDIs, especially by facilitating their access to capital and technology. The ability of agencies to convene various groups of stakeholders was noted as an important tool to learn about ways that the public and private sector can work together to increase financial inclusion. The OCC’s “Project REACh” was cited as an example of this agency-led public-private engagement to address inclusion.
Please contact BPI’s Paige Paridon at paige.paridon@bpi.com with questions about the event.
