In the US, financial services are available to all in order to ensure the safe handling of money. Banks and credit unions make it easy to deposit earnings and manage savings accounts to promote lifelong financial fitness. However, a surprising number of households have no bank account at all, even though financial institutions are all around us. The number of unbanked individuals may be due to a number of reasons, income being the most relevant. Financial exclusion seems to be closely associated with socio-economic factors such as race and ethnicity, so we decided to do some research at the nerd hub.
We sat down with Luisa Blanco, PhD, an assistant professor of economics at Pepperdine University and adjunct researcher at the Center for Latin American Social Policy at RAND Corporation, to discuss the latest news in the financial services industry. Dr. Blanco has written extensively on issues related to economic development in Latin America and has published a collection of scholarly articles ranging from tax havens to immigration regulation. She is currently researching the financial exclusion of minorities in the US.
In an effort to survey banks on their ongoing efforts to serve the unbanked, the FDIC reported 7.7% of American households (approximately 9 million) did not have a savings or checking account in 2009. Furthermore, racial and ethnic minorities are much more likely to be unbanked than the general population. “Minorities more likely to be unbanked include blacks (an estimated 21.7% of black households are unbanked), Hispanics (19.3%)… Racial groups less likely to be unbanked are Asians (3.5%) and whites (3.3%).”
The proportion of underbanked households is quite similar to this distribution as well. An underbanked household is one that has a bank account, but relies heavily on alternative financial services, such as money orders and payday loans.
Surveys, Studies and Statistics
The American Life Panel Survey asked participants (18 years and older) a simple question: Do you have a bank account – checking, savings or Money Market Fund? Dr. Blanco reported, “While only 8% of whites did not have a bank account, 32% of Hispanics and 39% of blacks did not have one.”
In examining an older population, the Health and Retirement Study asked participants (51 years and older) the same question and the race stratification remained consistent. These statistics show that racial and ethnic minorities are more susceptible to financial exclusion compared to the population as a whole.
Implications of Financial Exclusion
Someone who is financially excluded is unable to access financial services in appropriate form. According to Dr. Blanco, there is the individual side (demand) and the institutional side (supply). She suggests that many socioeconomic factors contribute to financial exclusion, such as poor education and low levels of income. These economic conditions directly affect one’s accessibility to financial services and are unfortunately consistent among racial and ethnic groups.
Thus it is necessary to discern what is causing this marginalization of populations in the financial services sector, and this is exactly what Dr. Blanco seeks to find out. She is determined to uncover the driving factors behind the poor financial literacy of racial and ethnic minorities.
What needs to change? Financial literacy is key. It takes an understanding on both sides to address the issue and find a solution to eliminate the causes of financial exclusion. Dr. Blanco views this as an opportunity to examine what costs are involved and to prove to institutions, policy-makers, and the general public, that financial exclusion of minority groups has negative effects on society.
The Bottom Line
The financial fitness of racial and ethnic minorities, above all else, may be jeopardized due to a poorly structured financial services industry. Hopefully the work of Dr. Blanco and her associates will determine what needs to be done to cater to all socio-demographic groups. In the meantime, NerdWallet hopes to provide clear, concise financial tools and resources for all, hoping that one day everyone will be financially literate.