By Jamila Abston Mayfield, FSO Americas Financial Services Risk Management Partner, Ernst & Young LLP
Too many of the world’s less wealthy could be better served and supported by the financial-services industry (consciously or not). The negative impacts of COVID-19 have exacerbated existing divisions in the United States, which consequently disproportionately harm the already underbanked and groups at risk of poverty.
Documents published by the Bureau of Labor Statistics (BLS) noted that 11.5 percentage points of the 14.7 percent unemployment rate in April 2020 were attributable to temporary layoffs. This metric highlights how early COVID-19-era temporary layoffs diminished income stability for Americans and disproportionally impacted the underbanked. At the same time, responses to the pandemic have been encouraging—specifically, the distribution of more than $788 billion in Paycheck Protection Program (PPP) loans, as reported by the Small Business Association (SBA), showing that more groups are beginning to understand more of the issues—and signs of progress are evident.
Changes initiated by both public and private institutions have increased protections and relaxed restrictive policies to increase access to and retention of financial instruments. For example, governments have stepped up in areas such as mortgage forbearance. There’s also been an increase in government relief that has allowed for better management, or delay, of mortgage payments, which has been a tremendous help for many impacted by the pandemic.
In addition, markets are responding. Most financial institutions are now providing additional education. There’s been greater investor advocacy, and financial-services sector leaders at Ernst & Young LLP (EY US) have seen other steps taken, such as waiving fees altogether. No-fee products and services have also become more prevalent.
A few large financial institutions are making substantial investments through their philanthropic foundations and equity investments in venture capital and public welfare investment (PWI) funds to foster financial-inclusion initiatives in underserved communities. They’re funding community-based programs that provide upskilling and re-skilling for workers to create a pipeline of talent; supporting affordable housing programs that create a path to homeownership and neighborhood revitalization; and providing education and technical assistance for minority- and women-owned small businesses.
In addition, foundations and institutional investors that want to make an impact by directly investing in their communities as part of their burgeoning environmental, social and governance (ESG) principles and investment strategies are investing in community-development financial institutions (CDFIs).
These financial entities provide retail-banking services and investments, loan funds that finance borrowers and venture funds that provide equity to small and medium-sized businesses. According to the CDFI Fund, the industry has experienced a high lending volume during the pandemic, with a 52-percent increase in lending and investment activity through 2020–21.
Cash, trust and the digital divide
However, while progress has been made, much more remains to be done.
One of the largest and most lingering challenges—something EY US has a focused effort toward addressing—is the digital divide. There’s still a lot to do in providing access to financial services and products. This comes with expanding access, and equitable access, to all of the technologies that facilitate financial products and services. A key challenge for closing the digital divide in banking involves the “adoption aspect”—that is, persuading hesitant individuals to adopt these new technologies.
Today, many small retail businesses and their consumer bases in low-income neighborhoods are struggling to determine whether they can trust digital-payment systems. So, many of those businesses, the mom-and-pop shops, have long operated on a cash basis. Persuading these businesses and their customers that digital, not cash, is the way forward is a big part of the challenge. The federal government’s COVID-19 relief payments being made available as debit cards helped. The Consumer Financial Protection Bureau (CFPB) noted that recipients of the COVID-19 relief payments had no-fees access to several benefits of prepaid cards, such as cash withdrawals and online transfers to personal bank accounts. Allowing consumers to pilot this product was one means of building understanding and trust.
Underserved communities are still wary of moving to full-scale digital when it comes to processing payments and transactions. But achieving greater trust is the path to acceptance. Digital-transaction acceptance will go a long way toward expanding financial inclusion and putting society on the right track to continue its journey.
Education is key
Embedding education into processes is worth achieving. To bridge the digital divide, providing outreach on financial literacy is the first step. One such example is through credit unions hosting workshops. Through these workshops, financial literacy is developed, and attendees receive guidance on low- and no-fee offerings. These offerings could have optional digital capabilities, such as peer-to-peer payments. Another such opportunity exists as people engage in transactions. In addition, technology can be added to payment sites, such as a pop-up window giving a user information about what just happened, what will happen next and what it means for him or her in the long term.
At the same time, as more of the underserved community is brought into the financial ecosystem, it can’t be forgotten that cash is still in play. That is, both public and private institutions need to consider a phased implementation of digital solutions. Sellers of products and services would be well served to make sure consumers have the option to use any payment method they want.
Meanwhile, while the financial-services sector is building trust, it can continue with its digital work—and then one day build enough trust into the system that people can move from cash to a cashless society together.
A role for emerging digital currencies and technologies?
We must pay close attention to what’s happening in cybersecurity, data analytics and related emerging technologies. The SEC (U.S. Securities and Exchange Commission) looks at issues such as these and how they affect investors and consumers.
Emerging technologies are seen as an accelerator for financial inclusion. However, the SEC is rolling out requirements for disclosures as well. The sector needs to ensure that there are no biases and that financial systems run on truly inclusive analytics. The maturity of this technology and other changes will introduce new risks that require implementing and strengthening technologies, cybersecurity controls and best practices. Leveraging technology, cybersecurity and big data will facilitate both a short-term rollout and long-term adoption among all populations.
The ultimate goal: financial health
Financial inclusion is the gateway to financial health for the most underserved communities. It starts on an individual basis. But the more people in the ecosystem pulling together, the better. Society can begin to achieve financial health when more of the underserved are included in the ecosystem.
Beyond bridging gaps in the digital divide in the consumer realm, other opportunities for enhancing financial inclusion remain promising at the macro level. On the regulatory side, two considerations are government investment in minority depository institutions and associated infrastructure and programs to promote the creation of minority-owned businesses. Long-term change will be further enabled by the private sector collaborating with public entities on designing enhanced offerings pointed toward historically underbanked populations.
Banks, wealth managers, insurance companies, payment providers and regulators are all working on this effort. It’s a large and varied ecosystem, but by working together and focusing on the right metrics, society can include more people on the journey to true financial security and wellbeing.
The views reflected in this article are those of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.