October 16, 2018


Copious statistics describe the plight of millions of Americans who lack the basic banking relationships that are the financial foundation of most households. Put simply, lack of access to mainstream financial services constrains the ability to build wealth and generally live a financially secure life, according to an extensive body of research.

Banking relationships are a means to establish savings, along with a payment and credit record. Savings and a solid credit score are “remarkably consequential in this economy,” according to Eric Belsky, director of consumer and community affairs at the Federal Reserve Board of Governors.

Eric Belsky, director of consumer and community affairs, Federal Reserve Board of Governors. Photo courtesy of Hope Credit Union Enterprise Corporation

Ultimately, maximizing the number of Americans who use conventional financial services is essential to the well-being of not only those individuals and their households but also the broader economy, Belsky explained during a summer conference at the Federal Reserve Bank of Atlanta’s Birmingham Branch. The conference assembled policy experts and funders from banks and philanthropies.

Limited access to credit can cripple the formation of small businesses and general community development. Those who cannot or do not access traditional financial services often turn to costlier alternatives such as payday lending, car title loans, and pawn shops.

Pursuing the dual mandate

The Federal Reserve has a clear interest in these matters, Belsky emphasized. The Fed's financial regulatory duties, along with its dual mandate from Congress—to pursue maximum employment and stable prices—focus on helping the economy achieve its full potential and ensuring financial markets are fair and transparent.

"So these are very central issues to what the Fed is about constitutionally," he said. Addressing these issues means closing gaps between groups that have ready access to mainstream financial services and those that often do not. A few facts can help put the problem in perspective:


  • About one in four U.S. households are either unbanked—having no relationship with a financial institution—or underbanked, meaning they have a bank account but go outside the traditional banking system for credit and other financial services, according to a 2018 paper by the U.S. Partnership on Mobility from Poverty, a group of academics, financial professionals, philanthropists, and faith leaders.
  • The Federal Reserve's 2017 Survey of Household Economics and Decisionmaking found that among black and Hispanic households earning less than $40,000 a year (classified as low income), 20 percent lack access to a bank account, double the proportion among all low-income households. By contrast, only 1 percent of all families with annual incomes above $40,000 lack a bank account.
  • More than a third of low-income adults have no credit card. Without ready access to credit via a card, people often turn to costlier forms of financing such as payday loans, pawnshops and auto title loans. Belsky added that researchers have identified the lack of a credit card as a common factor among homeowners subjected to rapid foreclosure, which happens with a single missed mortgage payment.
  • Even controlling for age and education levels, the "wealth gap" separating white families and Hispanic and African American families remains wide. In inflation-adjusted dollars, the median wealth (assets minus liabilities) of a white family in 2016 was 10 times that of the median for an African American family and 7.5 times that of a Hispanic family, according to the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis.

The upshot: many low- to moderate-income people lack safe, affordable, government-insured ways to save and otherwise accumulate assets. As a result, instead of gradually building wealth over their lifetimes, they too often end up mired in cycles of borrowing at exorbitant interest rates.

Some 12 million Americans a year take out payday loans, spending a combined $9 billion on loan fees, according to the Pew Charitable Trusts. The average annual interest rate on such loans is 391 percent, because typical payday loan borrowers take out shorter-term loans repeatedly.

Three-quarters of the loans go to people who take out 11 or more such loans annually, according to Pew. And although most states enforce caps on interest rates, payday lending and other very short-term loans often are exempted from such caps or fall into a loophole in the rules. These laws also vary greatly from state to state.


This kind of financing chokes off any realistic chance to build wealth, research shows. In Alabama, annual interest on short-term loans can reach 450 percent, said state senator Arthur Orr, who has championed legislation to reform state lending statutes, unsuccessfully so far.

People who turn to this type of credit are "losing ground, not making ground, all because a child needed some medicine, or because a car had a flat tire…and they needed to get to work," said Orr, a Republican from the Huntsville area.

The implications of some 33 million unbanked or underbanked households ripple beyond those individual families to the broader economy, according to St. Louis Fed researchers. Credit is the lifeblood of small business, communities, and commerce, Belsky said. Lack of credit on fair terms, he adds, can deprive the economy of jobs and innovation.

"When families are economically strong, so is the economy," says Roy Boshara, director of the St. Louis Fed Center for Household Financial Stability.

Community development financial institutions can help

In a recent paper, the U.S. Partnership on Mobility from Poverty suggested various measures to boost access to financial services. One recommendation: increase public and private investment in community development financial institutions, or CDFIs.

CDFIs include nonprofit loan funds, along with credit unions, commercial banks, and a few venture capital funds that serve underserved markets. CDFIs supply capital, mentoring, and financial advice to small businesses as well as affordable housing and nonprofit organizations.

The Partnership on Mobility from Poverty, which includes members from prestigious universities and think tanks, describes CDFIs as "a critical tool to attract and deliver much-needed financial services and investments in low-income and distressed communities."

The CDFI industry began taking shape in the 1960s and 1970s. Over the following two decades, the industry grew steadily but slowly as credit unions and banks emerged to serve low-income communities. Those early CDFIs were funded mostly by individuals and religious organizations, according to a 2017 report published by the Federal Reserve Bank of New York.

CDFIs have grown in number to about 1,100 certified by the U.S. Treasury Department’s CDFI Fund as of November 31, 2017. The fund awards CDFIs grants, totaling $100 million to $200 million annually over the past several years, which the institutions must match with money from a nonfederal source. Money from the CDFI Fund amounted to less than 10 percent of all CDFI lending and investment in 2016.

In recent years, several large banking firms have announced plans to channel dollars into CDFIs to help satisfy Community Reinvestment Act (CRA) requirements that they serve the entire communities in which they do business. In the past five years or so, commercial banks have accounted for about 40 percent of total CDFI funding each year, up from 9 percent in 1994, the year before changes in the CRA allowed banks to count such funding toward their community investment requirements.

The Partnership on Mobility report calls on foundations to create a $1 billion fund to support CDFIs with successful records in "under sourced" areas including the Deep South, Indian Country, and Appalachia. According to the partnership, CDFIs could then use that funding to generate 10 times that amount—or $10 billion—in finance opportunities in "the nation's least mobile communities."

The federal funding outlook for CDFIs appears mixed. Though the Trump administration requested elimination of the CDFI Fund grant programs in fiscal year 2018, Congress budgeted a record-high $250 million for it, according to the Opportunity Finance Network, a national association of CDFIs. The partnership also noted that Congress has shown some willingness to prioritize investments in persistently poor areas through the CDFI Fund and the U.S. Department of Agriculture Rural Development program.

Some larger CDFIs have also begun accessing traditional capital markets. For example, Local Initiatives Support Corporation (LISC), a New York CDFI, recently issued $100 million in bonds. The offering was successful, according to LISC, with most bonds purchased by investors who had not previously backed LISC.

Funding is obviously essential for CDFIs. And although a $250 million appropriation to the CDFI Fund is a record, it’s a fraction of the demand from CDFIs (see the sidebar). To truly amplify the effectiveness of CDFIs in expanding access to financing, Congress should appropriate $1 billion to the fund, said Lisa Mensah, president and CEO of the Opportunity Finance Network (OFN).

CDFIs Are Small Institutions

CDFIs appear to be making a mark, but one limited by the industry’s size. In the 2017 fiscal year, CDFIs that received funding from the U.S. Treasury originated more than $5 billion in loans and investments, financed more than 14,700 businesses and nearly 28,000 affordable housing units, and served 450,000 individuals with financial literacy or other training, according to the CDFI Fund. During the 10 years from 2003 through 2012, 333 CDFIs that received awards from the fund helped create about 63,000 permanent jobs and 48,000 construction jobs.

CDFIs tend to be small. The average CDFI loan fund—the category with the largest number of CDFIs—has assets of about $33 million, and the average CDFI credit union’s assets are $262 million, based on 2015 data from a sampling of institutions. In total, CDFIs account for just 1 percent of the roughly $18 trillion in combined assets of insured banks and credit unions, according to the New York Fed report. So there is room to grow, CDFI boosters say.

CDFIs operate differently from most banks. Because they focus on a generally lower-income consumer base, community organizations, and small businesses that might struggle to secure more traditional financing, they produce different results from conventional banks. Loan delinquency rates at CDFIs tend to be higher than those at conventional banks, according to a study by the Opportunity Finance Network. On the other hand, the ability of CDFIs to be more patient lenders and work with borrowers to weather financial storms has translated into rates of write-offs comparable to those of conventional lenders, the network finds.

To be sure, challenges to expanding access to financial services abound. Look no further than maps that depict locations of counties with high poverty rates, Mensah points out. “They never seem to change,” she said, always identifying locales in Appalachia, the Mississippi Delta, Native American lands in the Southwest, and the Black Belt that runs through central Alabama and Georgia.

This list gives the Southeast an unfortunate prominence. Based on the 1990 and 2000 census and 2011–15 American Community Survey by the U.S. Census Bureau, 30 percent of the counties in the Atlanta Fed's six-state district are classified as persistently poor—having poverty rates 20 percent or higher for three straight decades. That compares to just 9 percent of counties in the rest of the nation.

Reasons for optimism

Plenty of challenges confront those working to broaden access to financial services. Still, there is reason for optimism. Take the case of big banks. At the Birmingham conference, some of those working to make prosperity more widespread expressed skepticism about the role banks can play or even truly want to play.

Yet attitudes among banking executives are perhaps evolving, said Andrew Plepler, Bank of America's environmental, social, and governance executive. Plepler's employer has invested $1.5 billion in CDFIs in all 50 states, according to the bank’s website. Several other large financial institutions have also announced initiatives to invest hundreds of millions combined in CDFIs and other community development funds over the past several years.

Since the financial crisis eroded public trust in financial institutions, large banks are more willing to consider investments that may not significantly affect short-term revenues, such as programs targeted at low-income communities, Plepler said.

A panel spoke on access to financial services at the conference. Left to right: Andrew Plepler, Bank of America; Lisa Mensah, Opportunity Finance Network; Tracy Kartye, Annie E. Casey Foundation; Arthur Orr, Alabama state senator; and Justin Maxson, Mary Reynolds Babcock Foundation. Photo courtesy of Hope Credit Union Enterprise Corporation

"My going to investor meetings five years ago would have been unheard of," he said during the Birmingham event, which was cosponsored by the Atlanta Fed, Hope Enterprise Corporation, Regions Financial Corporation, the Partnership on Mobility from Poverty, and the Mary Reynolds Babcock Foundation. Now, Plepler added, institutions are beginning to embrace the idea that their commitment to issues like economic mobility can influence talent recruitment and investor interest. "I think people realize that long term it will affect the health of the company," Plepler said.

photo of Charles Davidson
Charles Davidson

Staff writer for Economy Matters