With COVID-19 wreaking disproportionate havoc on the personal, mental and economic health of Americans of color across the country, we are increasingly looking to the banking sector for help. This is not going well. It’s easier for banks to serve customers that they already have relationships with first, and people of color are significantly more underbanked than white Americans. Because the underserved also typically offer more yield for invested capital, our underserved status (and good old fashioned racial bias) has historically led to exploitation. There is no evidence to suggest that things will be any different this time around.
But why are we here in the era of fintech when there has seemingly never been more choice? Changing your bank in the fintech era should be as easy as changing your cell phone provider. Local Number Portability laws were a boon for customers and placed greater pressure on the carriers to compete on their merits. Inertia is good for incumbents. The harder it is for consumers to leave, the less likely it is that they will.
Switching a bank account requires, at a minimum, finding a new provider, meeting the account minimum and making a meticulous accounting of all your recurring payments, direct deposits, bills on autopay and transfers. Each mistake racks up fees over missed payments. It’s an exercise in financial contortionism that would frustrate the most sophisticated finance Ph.D. And make no mistake, banks benefit from this complexity, resulting in the average life of a checking account holding at around 16 years.
How Banks Get You To Stay
Sticky bank accounts hurt everyone, but they disproportionately hurt people of color.
Let’s start with the basics: Banking while Black is already costly. There are 35% fewer banks in African American neighborhoods than in white neighborhoods, and the banking options available in the first place are more likely to be out of reach. In fact, the minimum balance required to open an account is often higher in Black neighborhoods ($870.50) than in majority-white ones ($625.50). For Black consumers and borrowers, even finding a bank willing to exploit you can be difficult.
While bias is undoubtedly at play, there are several structural and historical reasons for these numbers. To open a bank account and begin saving at all, you need to have money to begin with, and African Americans hold only one-tenth of the wealth of whites. This is due to a myriad of factors and will require honest conversations and a multipronged approach to solving.
On the structural side, banks that serve lower-income communities tend to have more frequent withdrawals and lower average balances. This, in turn, makes them less profitable as they have a legal obligation to protect against a run, and so tend to hold more of their customers’ money back instead of lending it out.
Making matters worse, the Office of the Comptroller of the Currency, which oversees banks’ compliance with the Community Reinvestment Act, has been slow to police large banks to ensure that they are effectively serving low-income communities. Having been burned by financial institutions over and over again, members of these communities are understandably less trusting of financial institutions, often relying on expensive non-banking alternatives like check cashers and payday loans.
The net result is that people of color are severely underbanked. The FDIC estimates that 18.7% of U.S. households in 2017 were underbanked, meaning that they had a bank account, but had used “alternative financial services” in the 12 months prior to being surveyed. Just over 30% of Black households and 29% of Hispanic households reported being underbanked, compared to only 14% of white ones. Almost 17% of Black households did not have a bank account at all.
Underbanked households truly understand the phenomenal cost of being poor in America. The underbanked are estimated to have spent $196 billion in fees for alternative financial services in 2019. And while the 2019 numbers are not yet finalized, a significant slice of that $196 billion is estimated to come from overdrafts, the cost of which has increased 19 times in the last 21 years. Overdraft fees average between $34 and $36 at the 10 largest U.S. banks, all coming from their poorest customers. Fortunately for these customers, overdrafts may be on their way out, thanks to the rising “neobank” — i.e., “new bank” — startups that use cheaper infrastructure and a lower branch footprint to reduce fees and create other benefits while challenging traditional banks.
Make no mistake, the neobanks are better — offering interest rates many times greater than the national average, waiving fees for using outside ATMs and even offering feel-good perks like assurances your deposits won’t be used to back gun companies or fossil fuels. Technology and venture-backed startups have brought instant gratification to almost every sector of our lives. Why can’t it make changing banks anything less than a monumental pain in the ass?
This is a problem seemingly built for fintech to solve. The promise of fintech is that anyone with a smartphone or an internet connection can access banking, tools to protect their accounts and identity, and even loans that are far cheaper than the ubiquitous check cashing and payday lending options. But consumers — particularly overworked and underbanked consumers of color — can only avail themselves of these products if it is relatively easy to make the switch. And by “switch,” I mean genuinely taking your money with you to a better account, not simply abandoning your account and starting from scratch, as is common with the equally arduous process of moving retirement accounts.
Portability would likely set off a virtuous cycle. If there were a system that allowed us to easily transfer our bank account numbers to a new banking platform, then banking services would have to get more competitive. In that brave new world, how would fees change? How would interest rates change?
There is a reason why changing banks remains a challenge. Bank account routing is much more complicated than the routing system between phone SIM cards and numbers. However, these challenges could be overcome if the banking industry works together by, say, establishing a joint database to facilitate the mapping of accounts. The industry has solved far more complicated problems in the pursuit of profits. Change will ultimately come from consumers who are willing to let members of Congress know that this is an issue that is important to them.
The importance of new banking portability requirements will never roll off the tongue as easily as my first phone number. But they are a vital tool in unraveling generations of financial discrimination against people of color. It’s high time we gave the underbanked the tools they need to take their business elsewhere.
Yemi Rose is the Founder of OfColor, a financial services platform on a mission to close the racial wealth gap. Follow him on Twitter @yemirose.