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Strategy

How community institutions can use technology to build financial inclusion

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Community banks and credit unions have contributed a great deal to furthering financial inclusion in the United States. Much of the progress of the last decade can be attributed to these institutions, and underserved communities are seeing better outcomes as a result. As the banking industry undergoes digital transformation, effective banking technology will be a key enabler to allow this progress to continue, and will lead to unbanked and underbanked Americans attaining greater financial inclusion.

Key insights:

  • Seven million households in the United States don’t have a bank account, and up to 20 million others are underserved by the current financial system.
  • Inequities persist along racial, geographical, and urban lines, indicating an opportunity for local institutions to make an impact.
  • By improving deposit economics, technology can make it feasible for community institutions to bank a wider range of people.
  • Technology also enables unbanked individuals to easily gain access to the financial system.

While the number of unbanked people across the U.S. is in decline and rates of financial inclusion are improving, there is still plenty to be done as an estimated 7 million American households remained unbanked as of 2019. Regional and local inequities, moreover, suggest an opportunity for smaller financial institutions to leverage their local presence to improve inclusion.

But to pursue inclusion effectively, community institutions need sensible processes and cost structures. This is where banking technology comes in. With better tools, community banks and credit unions can operate more efficiently, which in turn unlocks the ability to offer favorable rates and create additional touchpoints for end users. Here’s how your institution can use technology to make a difference.

Who are the unbanked?

The unbanked are those who don’t have an account with any financial institution. In the United States, an estimated seven million households, or 5.4 percent of the population, fall into this category. According to the FDIC, unbanked rates tend to be higher for Black, Hispanic, and American Indian or Alaskan Native households. In addition, the South is home to a greater proportion of unbanked households relative to other regions, and households in urban or rural areas are more likely to be unbanked than those in the suburbs.

The percentage of unbanked households has been shrinking, from 8.2 percent in 2011 to 5.4 percent in 2019. In particular, Black and Hispanic populations achieved greater inclusion during this period. However, at 13.8 and 12.2 percent respectively, they still lag behind White households (of whom only 2.5 percent remained unbanked in 2019).

Meanwhile, a larger proportion of Americans are “underbanked”, meaning they have a bank account but also use alternative financial services like check cashing services, pawnshop loans, or payday loans. More than 20 million households across the U.S. are categorized as underbanked, and like the unbanked, tend to be disproportionately Black and Hispanic. To foster inclusion, financial institutions might do well to recognize how these inequities are reflected in their local communities.

Why are people unbanked?

When polled by the FDIC in 2019, unbanked individuals offered a variety of reasons for not owning a bank account. The single most cited reason was lack of funds to meet minimum balance requirements. Other common reasons included general distrust of banks, privacy concerns, fear of high or unpredictable fees, and lack of branch access. Unfortunately, these reasons have led a majority (56 percent) of unbanked individuals to express no interest whatsoever in obtaining an account, creating an additional hurdle for institutions looking to reach these households.

There is much that community financial institutions can do to counter these objections. Offering simple, understandable products with straightforward fee structures may help individuals perceive the value of a bank account more clearly. Decluttering your product offerings will also build trust, as individuals will feel more confident selecting one product over another when given a few options rather than dozens. But the single most effective step you can take to improve your institution’s ability to assist the unbanked is to invest in the right technology.

What’s tech got to do with it?

The right technology will help your institution reach new customers—including those who currently lack a bank account. It accomplishes this by improving the economics of your institution, allowing you to invest in growth. But technology also offers the unique ability to reach potential customers or members via digital channels.

The economics of customer acquisition in banking are by now well-understood. Institutions that want to grow can either build new branches at a cost of $2 million to $4 million plus several hundreds of thousands per year in overhead for each branch—or build and invest in a digital presence.

For the unbanked, inconvenient branch locations and hours were commonly cited reasons for not having a bank account. What if these individuals could open an account quickly and painlessly via their mobile devices and experience superb support and service without ever visiting a branch? Mobile channels in particular have exploded in popularity in recent years, with 34 percent of banked households reporting mobile as their primary banking channel in 2019—up from 9.5 percent in 2015. Subtracting the requirement for branches from the equation may open the door to inclusion for those who are unable or unwilling to travel to a physical branch.

Ultimately, digital and physical channels are complementary. However, the ability to open accounts online is a comparatively cost-effective way to reach new customers or members. It can also change the cost structure of your bank or credit union through the operational boosts derived from greater automation and effective fraud prevention. With greater efficiency, your institution enjoys greater freedom to waive fees, offer competitive rates, invest in the financial literacy of your community, engage in marketing to target unbanked or underbanked segments, and advance financial inclusion.

With online account opening, banks and credit unions can make a real difference in their communities by creating opportunities for more people, fostering financial inclusion in underserved populations, and building a banking system that works for everyone.