Advances in financial technology continue to transform the payments industry, bringing new products that give people more ways to pay bills and manage their money. These technology-enabled payment innovations offer the promise of providing access to financial products and services to consumers who have traditionally been underserved.
While most U.S. adults have a bank account, many lack access to even basic financial services, according to the Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2018.
Table 1: Bank Attachment Levels in the United States
| Unbanked | 6 percent |
| Underbanked | 16 percent |
| Fully banked | 77 percent |
| Note: Data represent percentage of U.S. adults. | |
About 6 percent of adults do not have a checking, savings, or money market account, the Fed report indicates, and roughly 16 percent are considered underbanked, meaning they hold a bank account but also use services outside the banking system such as check cashing, auto title loans, or payday loans.
What's more, those consumers who use banks the least are more likely to have less education and lower income and to be a member of a racial or ethnic minority group. Fourteen percent of black Americans and 11 percent of Hispanics are unbanked, compared with 4 percent of whites, the economic well-being report shows.
Table 2: Banking Status by Family Income, Education, and Race
| Unbanked | Underbanked | Fully banked | |
|---|---|---|---|
| Family income | |||
| Less than $40,000 | 14 | 21 | 64 |
| $40,000–$100,000 | 2 | 17 | 80 |
| Greater than $100,000 | 1 | 7 | 92 |
| Education | |||
| High school diploma or less | 13 | 21 | 66 |
| Some college/associate degree | 4 | 18 | 77 |
| Bachelor's degree or more | 1 | 9 | 89 |
| Race/ethnicity | |||
| White | 4 | 11 | 85 |
| Black | 14 | 35 | 50 |
| Hispanic | 11 | 23 | 66 |
| Note: Data represent percentage of U.S. adults. | |||
Financial inclusion a key to financial betterment
Having access to financial products and services, or financial inclusion, is important to consumers' ability to improve their economic status. Advancing economic mobility and resilience is a strategic priority of the Federal Reserve Bank of Atlanta.
In August, Atlanta Fed president Raphael Bostic addressed a PeachPay forum and said that bolstering financial inclusion is important to help the U.S. economy achieve its full potential. PeachPay, a consortium of companies from the U.S. Payments processing industry, was established in June 2015 by the Atlanta Fed’s Retail Payments Risk Forum. (The forum frequently addresses financial inclusion in its blog, Take On Payments, and it also addressed the topic of financial inclusion in a recent webcast.)
In the Federal Reserve Sixth District, which includes the states of Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee, many residents find the path to economic mobility a challenge. Four states in the Atlanta Fed’s district rank above the national average in the percentage of adults who take out payday loans, according to data from the Pew Charitable Trusts.
Bostic said such statistics show the limitations of economic resiliency for some people. He pointed out that payday loans can carry high finance charges. "As long as we have people who are dependent on those tools, we’re going to have a lot of families who are going to be just on the edge, not using their resources as effectively as possible," he said.
Table 3: Forms of Alternative Financial Services Used
| Alternative financial service | Among adult population | Among those using any alternative financial services |
|---|---|---|
| Money order, not from a bank | 12 | 63 |
| Cash a check, not at a bank | 2 | 17 |
| Payday loan or paycheck advance | 3 | 17 |
| Pawn shop or auto title loan | 2 | 13 |
| Tax refund advance | 1 | 8 |
| Note: Data represent percentage of U.S. adults. | ||
At the PeachPay forum, held at the Atlanta Fed's head office, participants addressed how payment innovations can boost economic mobility. As technology grows more complex, financial technology companies—commonly known as fintechs—are launching services that allow users to send payments online and with mobile devices. The new products include payment apps as well as lending and budgeting tools.
Inclusion and access beyond the region
Financial inclusion is a global issue. Victoria Edison, chief compliance officer for the Americas at Ant Financial, said lessons can be learned from strides made in China, which has a sizable rural population. (Ant Financial is the Chinese technology company that operates the Alipay mobile and online payment platform.) There, digital technology companies have partnered with banks to offer credit and other financial services to individuals and small and medium-sized businesses, for example. The percentage of adults in China who have used digital payments rose to 68 percent in 2017 from 45 percent in 2014, according to the World Bank's 2017 Global Findex database. "What's happened in China is pretty transformative," Edison told attendees at the PeachPay meeting.
As employment evolves, payments must also innovate
The United States employs increasing numbers of people in the so-called gig economy—people working for themselves, frequently in multiple, shorter-term jobs—so some see an increased need for alternative financial services that new companies such as fintechs can provide.
Charles Potts, fintech catalyst at the Advanced Technology Development Center at Atlanta’s Georgia Institute of Technology, said that workers need tools that allow them flexibility in how they are paid and how they spend their money, such as the ability to make payments in installments. The center is working with fintech entrepreneurs who are looking to offer new lending and bill-payment applications to support low- to moderate-income consumers.
The new payment tools, many of which are available through nontraditional channels, can help eliminate geographical barriers to financial inclusion and reduce reliance on title loans and payday lenders, especially by consumers in nonmetro areas that offer less access to traditional financial products, Potts added.
"If there is some digital internet-enabled solution that I can access, then it doesn’t matter where I live,” Potts said. "That geographic restriction goes away as we can tech-enable people’s access to services that aren’t in their own backyard."
Ciciley Nelson, director of industry advisers at Total System Services, or TSYS, a Columbus, Georgia-based provider of payment, processing, and merchant services to banks and nonfinancial institutions, said financial literacy is a necessary component of financial inclusion. She said her company partners with local elementary schools, sending employees to teach students about topics such as budgeting, compound interest, and stocks and investing. "We introduce these children to concepts that they are probably not discussing at the dinner table," Nelson said.
She also said it is important to keep in mind that not all people have access to the computers or smartphones needed to use the emerging fintech applications.
"Advances in technology are great if you have access to a device," Nelson said.
Karen Jacobs
Staff writer for Economy Matters