As The Nation Nears Full Banking Inclusion, It’s Time To Focus On Financial Health

As The Nation Nears Full Banking Inclusion, It’s Time To Focus On Financial Health

Good news from the FDIC: Fewer than 5% of American households lack a bank account, down from 8% a decade ago and the lowest level since the agency began tracking it.

The story of how roughly 5 million households entered the banking system since 2011 is instructive as we consider both how to keep them in and how to reach the remaining 6 million still outside of it, 70% of whom are households of color. FDIC data shows that 11% of Black households and 9% of Hispanic households are unbanked, relative to 2% of white households.

It’s also time to start thinking about what happens to people after they open an account. A bank account is a necessary ingredient in achieving financial health, as demonstrated by the fact that, according to the Financial Health Pulse® 2022 U.S. Trends Report, only 3% of unbanked individuals are financially healthy. That said, a bank account alone is insufficient to ensure a positive trajectory: Only 36% of bank account owners are financially healthy.

The issue of the unbanked first hit the radar in the United States in the 1990s, when the federal government first decided to try to reduce the volume of paper checks it was mailing each month to Social Security and disability benefit recipients. As the Treasury Department tried to switch to direct deposit of benefits, it found that 10 million recipients didn’t own a bank account.

That understanding ultimately led Congress to mandate the FDIC to begin estimating the number of unbanked households. When the FDIC launched its biennial National Survey of Unbanked and Underbanked Households in 2009, it turned out 7.6% of Americans lacked a bank account. By 2011, that figure would climb to a high-water mark of 8.2%. It has been declining ever since, reaching 4.5% in 2021.

Survey respondents describe a range of reasons for not having an account that have remained stubbornly consistent over time: They don’t have enough money to meet minimum balance requirements or they think the fees are too high or unpredictable; they avoid banks because of privacy concerns or lack of trust; banks don’t offer the services they need or are inconveniently located; they have had bad experiences with banks in the past; they don’t have the required identification needed to open an account.

It took a combination of a strong economy, lower-cost accounts, bankable moments like natural disasters and the pandemic, and advances in technology to enable so many people to overcome these challenges over the last decade.

The economy is likely the biggest driver. The FDIC finds that about half of the decline in the unbanked rate since 2011 is due to changes in household socioeconomic circumstances such as increased income and more education, factors driven by a robust labor market. Also, the government ultimately mandated direct deposit for federal benefits in 2013, and the Treasury Department developed campaigns and products to drive people into accounts.

At the same time, coalitions of banks, community groups and city governments began forming, first in San Francisco and then around the country, to develop quality standards for bank accounts. The Bank On movement’s account standards – low cost, low minimum balance requirements, no overdrafts – addressed many of the concerns voiced by unbanked people. The Cities for Financial Empowerment Fund then created a certification process for banks and credit unions, and today 300 depositories – including the biggest banks – offer accounts that meet the standards.

Fast forward to the pandemic. The FDIC and the CFE Fund leveraged this infrastructure and created the #GetBanked campaign to encourage unbanked people to sign up for accounts in order to receive their government stimulus payments electronically and avoid having to go to a physical location to deposit or cash a paper check. Technological advances over the last decade enabled consumers to open accounts via online and mobile platforms and manage their money virtually, making it more convenient for consumers and more cost effective for banks.

Those efforts appear to have worked. In the FDIC’s most recent survey, just over a third of households that had opened a bank account between March 2020 and June 2021 said that receiving a government benefit payment contributed to their decision to open the account.

However, just as the promise of government aid drove account openings, job loss and reduced income were the reasons cited by about one in five of those who had closed an account. While the economy is still continuing to add jobs, some companies have already begun layoffs in advance of a potential recession. An important task now is keeping the newly banked, banked. In the same way that lenders allowed pandemic-challenged borrowers to defer mortgage payments, maybe it’s time to think about offering a temporary pause in monthly checking account fees to consumers who have been laid off and no longer have an incoming direct deposit.

The pandemic created a highly visible, national bankable moment. Reaching the remaining unbanked households may require a more intentional geographic strategy. The rates of unbanked vary by state, from a low of 1.2% of the population of Utah to a high of 11.1% in Mississippi. The FDIC’s data allow for an analysis of the states and metropolitan areas with the greatest concentration of unbanked households representing different racial and ethnic communities. A lack of money is generally the root of the problem, and the rise of dozens of guaranteed basic income pilots in communities across the country could represent the next big bankable moment.

But while important work remains to make banking access universal, now that the vast majority of households in America have a bank account, it’s time to set new goals to achieve the outcome we ultimately seek – financial health and well-being for all. A critical starting point is to learn from the FDIC’s experience and rigorously measure the state of financial health. As the FDIC has demonstrated successfully, what gets measured gets managed.

Note: Jennifer is a member of the FDIC’s Advisory Council on Economic Inclusion.

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