The Financially Underserved: How Banks are Positioned to Make a Lasting Impact

By Brandon Koeser

For the financially underserved in the United States—primarily socioeconomically disadvantaged people of color who are unbanked or underbanked as well as minority-owned small and medium-sized businesses that lack sufficient access to the banking ecosystem—the widening wealth gap and financial hardships resulting from the pandemic are not just media headlines. They are a reality.

Herein lies an opportunity for banks. There are millions of U.S. households that are unbanked or underbanked, according to the Federal Deposit Insurance Corp., and nearly 1 million minority-owned small businesses across the country, according to the U.S. Census Bureau.

Without access to the banking system, these groups often turn to higher-cost alternatives for their banking needs and as a result may be unable to build wealth for financial goals such as retirement or a home purchase. This lack of access also means people in these groups may be unable to borrow to attend college or start a business.

These groups need the support and security the banking system offers. Now, with more banks assessing the fee structures of their deposit accounts and financial products, financially underserved individuals and businesses are likely to represent new customers and additional sources of growth for banks as the sector faces increasing competition from nonbank financial technology companies.

What’s more, bringing the financially underserved into a banking system that fosters an environment of trust and promotes their financial well-being can directly benefit U.S. economic growth. A recent study by McKinsey & Co. indicates that narrowing the wealth gap for Black Americans could add roughly $1 trillion to the U.S. economy by the end of this decade.

Growing disparities

Household wealth in the United States continues to grow, but a large number of people still may lack financial assets such as stock market investments or nonfinancial assets such as real estate.

Data compiled by the Census Bureau shows the disparity in homeownership rates among various racial groups in the United States.

As the pandemic continues, the data shows that homeownership rates for all races, except white Americans, is declining. Further, the gap between white and Black homeowners is yet again nearing its widest point since the Census Bureau began tracking the data.

And the economic disparities don’t stop with financially underserved U.S. households.

Data published by the Federal Reserve shows how deeply the pandemic has affected small businesses owned by people of color. Here are some of the findings from the Fed’s 2021 Small Business Credit Survey:

• “Ninety-two percent of Black-owned firms reported experiencing financial challenges in 2020 (up from 85% in 2019), followed by Asian-owned firms (89%, up from 70%) and Hispanic-owned firms (85%, up from 78%). White-owned firms were the least likely to report financial challenges (79%, up from 65% in 2019).”

• “Black business owners were the most likely to tap into their personal funds in response to their firms’ financial challenges (74%) compared to Hispanic-owned firms (65%), Asian-owned firms (65%), and white-owned firms (61%). Almost half of Black-owned firms (46%) reported concerns about personal credit scores or loss of personal assets as a result of late payments, the highest share among the owner groups. In contrast, white-owned firms were the most likely to report that there was no impact on the owner’s personal finances.”

The Fed also points out the concerns faced by small businesses owned by people of color in how they obtain financing needed to operate their businesses. From the report:

• “Across owner groups, Black-owned firms that applied for traditional forms of financing were least likely to receive all of the financing they sought (13%). Hispanic and Asian-owned firms (20% and 31%, respectively) were also less likely than white-owned firms (40%) to receive all of the financing for which they applied.”

• “Firms owned by people of color were twice as likely as white-owned firms to report that they did not use a financial services provider. Twelve percent of Black- and Hispanic-owned firms did not use financial service providers, followed by 11% of Asian-owned firms and 6% of white-owned firms.”

The financing challenges before the pandemic, coupled with the shock of the pandemic itself, has created a perfect storm for minority-owned businesses.

Returning to their roots

The current economic environment is highlighting the need to help the financially underserved. Banks can play a significant part in this effort—as they did in the early 1800s, when some of the earliest banking organizations helped support people and communities in need by providing a means to save or finance the building of homes or business activities.

Because of the variety of needs among financially underserved communities in the United States, banks can deploy support in numerous ways. Here are some options:

• Become CDFI-certified: CDFIs promote economic opportunities in financially underserved or distressed communities by helping individuals finance a home purchase or small business and investing in local community initiatives.

• Create programs to support community development activities: Get creative in how the organization, through its own customers, can support community development activities in underserved communities. Sunrise Banks, a nearly $2 billion community bank headquartered in St. Paul, Minn., has created a deposit impact fund, which will help it drive local development efforts in underserved areas. At Sunrise, a customer or business can open a deposit account and designate it as an impact deposit fund, and the proceeds will then be used to support those community development efforts. The funds still belong to the account owners, but their use is allocated to support these important efforts.

• Increase educational outreach to the under- or unbanked: While the latest data compiled by the FDIC indicates that roughly 5.4% of U.S. households are unbanked, it doesn’t take into account the additional U.S. households that are not fully engaged with the financial services system. This refers to households that have an account at an insured institution but also obtain financial products or services outside of the banking system.

In an effort to attract more households, banks can look to increase their marketing campaigns and awareness efforts around the importance of participation in the banking system

• Support minority communities through charitable giving: Consider allocating a higher portion of charitable giving to underserved or minority communities. In 2021, 69%—or $1.9 million—of charitable giving made by Pacific Premier Bank, a nearly $21 billion bank with branches across the west and desert southwest, was pledged to support minority communities.

Banks don’t necessarily need to be creative with ways to support the financially underserved, but they do need to be intentional.

During the current economic recovery, banks have been viewed much more favorably than they were coming out of the Great Recession.

But in the near term, working to blunt the increasing wealth gap and support the financially underserved will likely be key areas in which banks can make the biggest difference and cultivate increasingly favorable views from customers and the broader public.

In doing so, banks can unlock a means to new growth while simultaneously supporting continued economic expansion.

Brandon Koeser is senior manager, financial services senior analyst at RSM US LLP.