Financial inclusion is a public policy imperative

Written by Janet Truncale, EY Vice Chair and Americas Financial Services Organization Regional Managing Partner, and Bridget Neill, EY Americas Vice Chair – Public Policy

The global pandemic brought to the forefront the far-reaching impacts of systemic racism, discrimination and other societal disparities in countries and communities around the world, especially as they relate to equity and access to prosperity. In the US alone, nearly 50 million people are underbanked — having access to at least one bank account but still relying on alternative financial services like payday loans and check cashers — while over 20 million are completely unbanked. [1] These individuals also lack access to loans, mortgages and insurance — key resources for reducing poverty and increasing prosperity. In order to create an economy that serves and benefits all, more must be done to address a lack of access to affordable financial services products and resources that meet the needs of underserved groups and communities. 

According to the latest data from the World Bank, [2] more than 1.7 billion people globally are underbanked. For this reason, 7 out of 17 United Nations Sustainable Development Goals consider financial inclusion an essential factor in improving the condition of the most marginalized populations.

Financial inclusion has significant benefits for emerging countries and businesses that operate in these markets. An EY study has estimated that broader access to banking, saving and lending products could boost GDP by up to 14% in large emerging countries such as India and up to 30% in frontier economies such as Kenya. This point is underscored in the Inter-American Development Bank’s 2020 Global Microscope report, [3] which concludes that there is no possible choice between promoting financial inclusion and stimulating the economy.

By looking at the demographics of the underbanked and unbanked, the disproportionate impact on certain groups becomes clear. In the US, for example, data published in November 2020 [4] showed that 16.3% of Native Americans, 13.8% of Blacks and 12.2% of Hispanics are underbanked, compared to 2.5% of white Americans. Women also are underbanked at a higher rate compared to their male counterparts, as women represent [5] 56% of underbanked adults. The lack of access to financial products is also evidenced by persistently low rates of home ownership for Black Americans. Data from the Urban Institute [6] shows that the nearly 30-percentage-point gap between white and Black homeownership today is actually larger than the 27-percentage-point gap in 1960 before the passage of the Fair Housing Act.

The COVID-19 pandemic further highlighted these disparities, as many of us relied on digital payments, credit cards and other financial tools to get through lockdowns and gain access to government programs. On the other hand, the roughly 35 million unbanked and underbanked individuals — many of whom reside in communities of color — have little access to digital tools and rely on options that require in-person interaction, spending approximately $147 billion annually on high-cost alternative financial services that are often predatory and under-regulated. [7] Research shows that if racial gaps were closed today, $5 trillion could be added to the US GDP over the next five years.[8]

Just as the health crisis and associated job losses have hit minorities and women disproportionally, we see a similar pattern with the underbanked. According to Women’s World Banking President and CEO Mary Ellen Iskenderian, “Inclusion and digital are closely linked and women are at a disadvantage in terms of access to the actual technology.” [9]

Inclusion is playing a fundamental role in Latin America’s and the Caribbean's economic response to the crisis caused by COVID-19 and will be essential for its recovery. Some good news is that COVID-19 government benefit programs brought an estimated 40 million unbanked [10] people in Latin America into the financial system in a matter of months. The key will be building on this momentum and helping these individuals navigate the systems and tools available to remain “banked.”

When more efforts come together to bring new communities into the financial system, there are important areas of focus that must be kept in mind. Iskenderian pointed out, “We also know that trust is another huge barrier to people entering the financial system — to really embracing financial services.” She asked, "How do we make sure that, as we move toward more technological use, people still feel trust and security?” [11]

A discussion hosted by the EY organization at the Institute of International Finance’s Washington Policy Summit in March explored other trends and opportunities related to expanding financial inclusion. Here are a few key takeaways for policymakers, businesses and other stakeholders to consider:

1.     Public- and private-sector collaboration is key to advancing financial inclusion. Doing so would result in clear benefits to society and business. Governments can create the regulatory framework to allow for different types of financial institutions to thrive, which is key to building financial inclusion. For example, the needs of a small merchant trying to reach more customers and manage payments are different from those of an individual trying to get a loan. Additionally, public-private efforts to expand access to the internet and broadband can help increase financial inclusion rates by bridging the digital divide facing some unbanked populations.

2.     Continued efforts to support financial literacy are critical. Such programs should seek to build trust and confidence in safe and credible financial services products, along with educating individuals regarding services and tools and their benefits. EY research shows that effective financial literacy programs offer opportunities for public-private partnerships and focus on ways that innovation and technology can not only protect consumers but also lower barriers to entry, including costs.

3.     Diverse workforces are key to reaching underbanked populations. It is important to acknowledge the systemic inequality that historically has existed within the industry, including lack of access to banking and consumer financial services, financing for affordable housing and home ownership, among others. Inclusive cultures and hiring practices in both business and governments can help address challenges and impediments to reaching unbanked populations by bringing greater awareness of the needs of these populations as well as the disparate impact of policies on unbanked communities.

Some progress on reaching the underbanked has been made over the last decade, but there is more work to be done. The pandemic has underscored inequities in our systems, and it is critical that policymakers and the business community collaborate to address them.

The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization.

[1] “What the unbanked need from the 2020 election,” Fortune website, https://fortune.com/2020/09/30/2020-election-trump-biden-financial-inclusion-economic-policy-unbanked-underbanked/, accessed 30 April 2021.

[2] “Financial Inclusion,” The World Bank website, https://www.worldbank.org/en/topic/financialinclusion/overview, accessed 10 May 2021.

[3] “Financial Inclusion in Times of COVID-19,” Inter-American Development Bank website, https://events.iadb.org/calendar/event/22635?lang=en, accessed 10 May 2021.

[4] “Shares of unbanked households in the United States 2019, by ethnicity,” Statista website, https://www.statista.com/statistics/416227/banking-status-of-households-usa-by-ethnicity/, accessed 5 May 2021.

[5] “The Global Findex Database 2017,” The World Bank, https://globalfindex.worldbank.org/sites/globalfindex/files/2018-04/2017%20Findex%20full%20report_0.pdf, accessed 10 May 2021.

[6] ”Reducing the Racial Homeownership Gap,” Urban Institute website, https://www.urban.org/policy-centers/housing-finance-policy-center/projects/reducing-racial-homeownership-gap, accessed 10 May 2021.

[7] “Financial Services and the Competitive Advantage of Racial Equity,” PolicyLink website, https://www.policylink.org/resources-tools/competitive-advantage-racial-equity-financial-services, accessed 30 April 2021.

[8] “Closing the Racial Inequality Gaps,” Citi GPS website, https://www.citivelocity.com/citigps/closing-the-racial-inequality-gaps/, accessed 30 April 2021.

[9] “Axios roundtable on global financial inclusion,” Axios website, https://www.axios.com/axios-roundtable-on-global-financial-inclusion-20d9dee1-9cb2-4284-84f0-931c993a62c9.html, accessed 30 April 2021.

[10] “How COVID-19 accelerated financial inclusion in Latin America,” Americas Market Intelligence website, https://americasmi.com/insights/how-covid-19-accelerated-financial-inclusion-in-latin-america, accessed 10 May 2021.

[11] “Axios roundtable on global financial inclusion,” Axios website, https://www.axios.com/axios-roundtable-on-global-financial-inclusion-20d9dee1-9cb2-4284-84f0-931c993a62c9.html, accessed 30 April 2021.