Brett Litzler is a staff writer for Brief Policy Perspectives and a first-year MPP student.
Over the past year, the Covid-19 pandemic has brought millions of Americans into financial hardship and exposed how precarious the lives of so many had been prior to massive unemployment and dampened economic activity. Americans increasingly report that they would find it difficult to cover a $400 emergency expense and upwards of 40 million renters are at risk of eviction due to Covid-19. Many of these same people also struggle to find help or refuge in the financial sector; the FDIC estimated in 2017 that a quarter of Americans are either unbanked or underbanked, largely due to the fact that they don’t entrust their money to banks or simply that they don’t have enough money to keep in an account.
Due to this lack of financial services, many are turning to riskier avenues for savings and investment. According to the same FDIC report, poor households are more likely to rely on alternative financial services like money orders and payday loans. The usage of these alternative financial services is higher among non-white households. The pandemic has also brought about increased reliance on other, riskier, attempts at building wealth; a number of state lotteries (including Ohio, Arizona, and Maryland) have seen record sales in the past year to the tune of billions of dollars, and just last month investors on Reddit were staking their retirement funds and stimulus checks on the chance to beat hedge funds at their own game, and in turn, pay down their debts.
Racial Inequalities in Financial Services
Minority households also face the brunt of the effects of this market failure. Black and Hispanic households make up a significant percentage of those who are unbanked, as well as those who rely on alternative financial services that do little to build their wealth or keep it safe. Part of the problem with underbanking in minority neighborhoods is that Black and Hispanic neighborhoods have fewer banks, regardless of income level. The banks that do exist in these neighborhoods also have higher fees and penalties than those in white neighborhoods. This lack of access also has a significant impact on the credit scores of many Black and Hispanic consumers, leading to what the Consumer Finance Protection Bureau calls “credit invisibility.” This can make it even more difficult to gain access to vital financial services like loans and credit cards, further widening racial and wealth inequality.
Many aspects of the financial sector need reform and regulation, but creating safe and reliable services for the poor is of the utmost importance. Innovations in technology such as Prize-Linked Savings Accounts, which offer lottery-like awards rather than interest, as well as financial literacy education may help to increase the rate of savings and in turn provide some relief, but it is clear that the private financial services industry has little incentive to solve underbanking on its own.
With this in mind, policymakers should consider looking to other countries and to our own past by re-establishing the United States Postal Savings System, a postal banking service that existed in the United States until private banks rose in popularity following the establishment of the Federal Deposit Insurance Corporation (FDIC) and the subsequent recovery of the banking industry in the 1960s. Postal banking would allow the unbanked and underbanked to open bank accounts, cash checks, and receive loans at fairer rates and with less fees than private banks, with the added benefit of automatically creating a bank branch at every post office in the country. Past analysis done by the post office also estimated that it could generate up to $9 billion per year for the United States Postal Service, which could help insure that mail and banking services run smoothly while potentially freeing assistance from the federal budget. Postal banking is not a new or obscure concept, with an estimated 1.5 billion people using postal banking services around the world, but it will need further research and proper management to provide much needed solutions for marginalized groups that the private sector is not currently serving.