It’s no secret that wealth and income disparities in the United States are bad — and getting worse, with inequality reaching its highest level in 50 years. The banking industry has, historically, done plenty to make the problem worse.
First, let’s look back to the 1990s, when federal deregulation made it possible for banks to close less profitable branches and withdraw from economically disadvantaged communities across the United States. This effectively created “banking deserts,” and these deserts grew in the wake of the 2008 financial crisis. From 2012 to 2017, nearly 6,800 bank branches closed, and banks are still consolidating branches.
The repercussions of these deserts are far-reaching. In the absence of mainstream FDIC-insured banks, “alternative” financial services companies moved in — outfits like payday lenders, check-cashing stores and pawn shops — which often make people’s difficult financial circumstances worse with high fees, confusing terms and little credibility. Sure, they met a need, but at what cost?
“The average borrower spends over $500 a year in interest just on payday loans,” wrote Terri Friedline and Mathieu Despard in The Atlantic. “Residents end up diverting money that could have otherwise been used to pay for irregular expenses or to build wealth, instead paying to use the basic financial products that they so desperately need to manage their financial lives.”
In addition to depriving consumers of the basic banking tools they need to achieve financial health, lack of geographic access to banks has also served as a kind of gating mechanism to credit. As economists from the New York Fed noted, access to credit declines and loan rates increase as the distance between a bank and a borrower grows.
While the absence of mainstream banking services has become a problem, their presence isn’t always a panacea: As I detailed in a previous article, traditional banks have inherent structural challenges that limit their ability to serve customers who aren’t wealthy.
That’s not all. In spite of the fact that redlining has been illegal for decades, a 2018 report showed that blacks and Latinos continue to be denied conventional mortgage loans much more often than white Americans. And just last year, a branch of one multinational bank got in hot water for discriminating against a black multimillionaire.
Taken altogether, an increasing number of Americans are left overcharged and underserved. But, thanks to technology, a new era of more inclusive banking is on the horizon.
Analysis: One would think an article with this title would belong in the science and tech category, but it actually has more holistic standpoint in recognizing the problematic of how certain groups do not share the same banking experience as others. Many people do not share the same banking experience due to historical social factors, and the ways banking has changed in the last few decades to become both more and less inclusive. I appreciate the way it explains deregulation that occurred in the 1990s, which in turn created banking deserts for underserved communities, helping me to better understand how discrimination in banking has prospered for so long. While being gated from credit, people began to rely on payday lenders instead of banks, but now that banking has transformed into a mobile/digital industry, people do not need to worry about geographic access. Digital platforms along with new alternative data technology will allow banks to better determine which banking and loan products are most appropriate for customers, without relying on things like credit scores, the amount of a downpayment, or personal bias. In using technology and data analyzing methods to take certain biases out of the banking experience, I believe economically disadvantaged customers will benefit, but I also believe other parts of the banking experience will need to grow more personable and less robotic. I question if there are ways to provide a more empathetic, person-to-person interaction experience with mobile banking. How can we create an opportunity for customers to learn more about their finances and reflect on banking decisions?
Citation: Walsh, C. (2021, January 6). Council post: How tech is making banking more inclusive. Forbes. https://www.forbes.com/sites/forbesfinancecouncil/2020/01/27/how-tech-is-making-banking-more-inclusive/?sh=46d4bc3e2df1
