Financiers must do more for inclusion of unbanked consumers (Under the Hood)

Though the unbanked population is shrinking, lenders must keep chipping away at financial inclusion to broaden access to credit products among underserved communities. Last year, 5.6 million U.S. households — about 4.2% — were unbanked, down from 7.1 million, about 5.4%, in 2019, according to newly released data from the FDIC . Yet without financial inclusion, consumers face lending disparities that stem from wealth inequality, the U.S. Treasury Department wrote in its inaugural National Strategy for Financial Inclusion report last month. The agency developed a national roadmap meant to expand access to foundational financial and wealth-building tools like credit and investments. Overall, the ratio of unbanked consumers within minority populations has been slashed in half since 2009, according to the FDIC. The percent of unbanked Black consumers has dropped to 10.6% from 21.4%, whereas the percent of unbanked Hispanic consumers has decreased to 9.5% from 19.6%. But the fact that these unbanked consumers lack bank accounts makes access to credit more difficult. Notably, the FDIC points out that many unbanked consumers continue to balk at opening bank accounts, primarily because they think they lack enough money to meet minimum balance requirements. Other reasons cited include mistrusting banks, maintaining privacy and avoiding fees that are either too high or unpredictable. Still, some unbanked consumers are receptive to auto loans and other mainstream credit products, like credit cards, mortgages and student loans. Among unbanked consumers, 8.3% had auto loans last year, while 10% used credit cards. Those numbers compared to 33.7% and 79.3%, respectively, for banked consumers, according to the FDIC. Without mainstream credit tools, financial inclusion will remain limited, the Treasury Department contends. To that end, Treasury outlined five objectives to improve financial inclusion. While some relate to traditional bank products like checking and savings accounts, others focus on the potential for alternative credit analysis and financial literacy partnerships with community organizations. For instance, the agency urges financial institutions to adopt new analytical tools, such as artificial intelligence and machine learning models, to assess consumer creditworthiness. Lenders might also consider information excluded from credit reports, like bank account cash flow data and payment history for rent, internet and utility bills, to better evaluate consumer risk and price credit more accurately. The challenge with that undertaking, Treasury writes, is to prevent discriminatory outcomes. Additionally, the Treasury Department suggests that lenders partner with organizations in underserved communities to expand financial education and broaden economic opportunities. On the auto finance front, financiers might expand language access and cultural sensitivity by providing multilingual support to serve customers with limited English proficiency. They could organize financial literacy programs and workshops to educate unbanked and underbanked individuals about basic financial concepts, budgeting, savings, credit and responsible banking practices. In Mexico, a company called Vexi offers credit cards to help the growing middle class build credit histories. Only about 10% of Mexicans have credit cards, so Vexi’s main goal is to bring more Mexicans into the financial system. Similarly, digital financial services platform Nubank offers a suite of consumer-friendly products aimed at previously underserved populations within Latin America. Nubank launched a digital savings account feature within its app last year that spurred 1.3 million people to sign up within two months. To attract customers within underserved populations, auto lenders might consider collaborating with community-based organizations or nonprofits. One example is to host a job fair with local organizations to match job seekers with local businesses, thereby creating potential customers for their auto loan services. Considering the speed with which mobile banking and app usage has grown, auto financiers might also work to create digital tools to help borrowers track credit-building efforts. According to the FDIC, mobile banking as a primary method of account access among banked consumers has skyrocketed in the past decade. Usage among 15- to 24-year-olds has shot up to 76.6% from 19.7% in 2013, according to the FDIC. It soared to 74.8% from 12.8% in the 25- to 34-year-old age bracket, and to 66.4% from 8.6% in the 35- to 44-year-old age bracket. Even older Americans have bolstered mobile banking usage, to 19.3% from 0.6%. As consumers become more tech-savvy, auto financiers must plan products that cater to consumers’ tech interests. Perhaps financiers could play up access to online payment services like PayPal , Venmo and CashApp to pay their auto loans.

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