Public & Social Sector Practice The case for accelerating financial inclusion in black communities A lack of financial inclusion for black Americans exists at every level of the financial system. Understanding the sources of exclusion is the first step to fixing the system. by Aria Florant, JP Julien, Shelley Stewart III, Jason Wright, and Nina Yancy © monkeybusinessimages/Getty Images February 2020 As of 2016, the average black American family “Financial inclusion is the bridge between economic had total wealth of $17,600—less than one-tenth opportunity and outcomes” (Exhibit 2).² the wealth of the average white American family, which stands at $171,000 (Exhibit 1).¹ This gap But building that bridge has not been easy. Black leaves many black families at a significant economic families have faced the compounding effects of disadvantage, with less financial security and decades of exclusionary policies and programs that less ability to fully participate in the economy. have contributed to the racial wealth gap (Exhibit Less wealth also means black Americans are 3). This article explores the ways in which the lack of underrepresented in the market for financial financial inclusion contributes to and perpetuates products and services. the racial wealth gap; it also identifies how greater access to financial services could be central in A lack of access to financial services is not just a closing the gap. symptom of the racial wealth gap; it is also a cause. Without the ability to affordably save, invest, and Fundamentally, improving financial inclusion would insure themselves against risks, many black families help address historical challenges and better equip struggle to translate the income they earn into black families for today. Exclusionary policies and wealth. As International Monetary Fund Deputy strategies, from limited access to federal mortgage Managing Director Mitsuhiro Furusawa stated, lending to geographic barriers to physical bank McKinsey PSSP 2020 Financial Inclusion 1 2016 dollars; 2016 Survey of Consumer Finances, The Federal Reserve, September 2017, federalreserve.gov. Exhibit 1 of 6 2 “Financial inclusion: Bridging economic opportunities and outcomes,” International Monetary Fund, September 20, 2016, imf.org. Exhibit 1 A wide and persistent wealth gap exists between black and white American families. Median family wealth by race, 2016 $171,000 $17,600 White Black Source: The Federal Reserve 2 The case for accelerating financial inclusion in black communities McKinsey PSSP 2020 Financial Inclusion Exhibit 2 of 6 Exhibit 2 Financial inclusion is the critical bridge between improved economic opportunity and improved economic outcomes. Financial inclusion McKinsey PSSP 2020 Economic Economic opportunity outcomes Financial Inclusion Source:Exhibit The 3 International of 6 Monetary Fund Exhibit 3 Select events, policies, and practices have made nancial inclusion challenging for black Americans. 1874 1935 The Freedman’s Savings and Trust The Social Security Act provides a social Company collapses because of corrupt safety net for millions of workers but excludes management, with $2.9 million in deposits occupations predominantly lled by black due to more than 60,000 primarily black workers and other minorities. The National depositors, driving a major loss of trust in Labor Relations Act permits unions to exclude 2013–present banks by community members. people of color from collective bargaining. The Aordable Care Act enables states to expand Medicaid eligibility. By 2014, more than 50 percent of all black Americans lived in the 1921 23 states that had not yet expanded Medicaid A vibrant community of black-owned coverage. Among the 14 states that have not yet businesses in Tulsa, Oklahoma, grows expanded or planned to expand coverage in into “Black Wall Street”; however, 2020, the majority are southern states, which violent riots from white residents have some of the largest populations of black destroy this community. Americans (eg, Mississippi and Georgia). 1850 2020 1881 1934 1969–present Insurance companies practice explicit Redlining, the systematic practice of Welfare reform policies exacerbate the discrimination by declaring that policies excluding black homeowners from mortgage racial wealth gap, primarily at the held by black customers are worth 1/3 of lending, formally begins with the passage expense of poor black families, rst the value of equivalent policies held by of the National Housing Act. More than through overt exclusionary policies, next white customers. 98% of $120 billion in federally backed by stigmatizing black poverty through mortgages goes to white homeowners from tropes such as the “welfare queen,” 1934 to 1962. Redlining not only excludes and, since the mid-1990s, through the black homeowners from mortgages but unintended consequences of shifting keeps them from owning properties in from federal responsibility to the current, desirable neighborhoods. state-centered model. Source: The Atlantic; BlackPast; California Newsreel; History.com; JSTOR Daily The case for accelerating financial inclusion in black communities 3 branches, have hindered black economic well-being. if black Americans had the same access to financial For example, nearly half of black households are products as white Americans. If black Americans unbanked or underbanked (Exhibit 4)³—a disparity reached full parity in terms of wealth with white that, over the course of a financial lifetime, can cost Americans, financial services companies could nearly $40,000 in fees.⁴ realize up to $60 billion in additional revenue from black customers each year. Disparities such as these have tangible and far- reaching implications for black families. Improving As the world evolves, financial services companies financial inclusion is not only our collective, societal should view financial inclusion of black Americans obligation to support American families that have as a critical business imperative. In a time of severe too often been historically marginalized but also economic inequality, companies that lead the a critical step in supporting the future economic way in creating solutions for black communities livelihoods of black families. Moreover, increased have an opportunity to build an enduring legacy inclusion of black Americans in the financial system that is aligned with consumer demand; indeed, would benefit the entire economy: black families 64 percent of Americans say that a company’s would have greater opportunities to reinvest and primary purpose should be making the world grow their wealth and, subsequently, support better,⁵ and by 2043, the majority of Americans increased economic activity. will be people of color (POC).⁶ In addition, our present moment represents a meaningful The inclusion of black families in the financial opportunity to counter decades of exclusionary system would also create new opportunities for practices and rebuild trust with black communities. financial services companies. Our research shows Doing so could improve the competitiveness of that financial institutions could realize approximately financial services firms and accelerate financial $2 billion in incremental, additional annual revenue inclusion for black families. McKinsey PSSP 2020 3 “2017 FDIC national survey of unbanked and underbanked households,” FDIC, October 2018, fdic.gov. Financial Inclusion 4 Matt Fellowes and Mia Mabanta, Banking on wealth: America’s new retail banking infrastructure and its wealth-building potential, Brookings Institution, January 2008, brookings.edu. Exhibit 4 of 6 5 Alan Murray, “America’s CEOs seek a new purpose for the corporation,” Fortune, August 19, 2019, fortune.com. 6 Valerie Wilson, “People of color will be a majority of the American working class in 2032,” Economic Policy Institute, 2016, epi.org. Exhibit 4 Nearly half of black households are unbanked or underbanked. Banked rates among black and white households (2017), % Banked Underbanked¹ Unbanked² Black 53 30 17 White 80 17 3 1 Do not have sucient access to mainstream nancial services and products typically o ered by retail banks. 2 Not served by a bank or similar nancial institution. Source: Federal Deposit Insurance Corporation (FDIC) 4 The case for accelerating financial inclusion in black communities © Weekend Images Inc./Getty Images The five pieces of the financial inclusion puzzle The World Bank defines financial inclusion as the to save for big goals or rainy days, and ultimately condition when “individuals and businesses have accumulate long-term wealth. While many families access to useful and affordable financial products take these elements of financial inclusion for granted, and services that meet their needs—transactions, black families face more difficulties gaining access payments, savings, credit, and insurance—delivered to the whole “puzzle.” in a responsible and sustainable way.”⁷ To size the potential impact of greater inclusion, we Many public and private institutions across the globe calculated the additional annual revenue under are actively championing greater financial inclusion two different scenarios that financial institutions in marginalized communities. These institutions would realize if racial disparities in access to financial include nonprofits such as Prosperity Now and products and services were mitigated.⁸ By providing Accion, private institutions such as JPMorgan black customers access to financial products at the Chase’s Financial Solutions Lab and Advancing same rates as white customers (an equal