Driving Financial Access Among Low-Income & Rural Communities

Map showing the location of the underbanked population.

A huge challenge facing the nation's low- and moderate-income residents is their lack of access to financial institutions such as banks and credit unions. Studies have shown that low-income individuals and families are more than six times as likely as others to be unbanked or underbanked, with younger consumers in particular tending to rely on non-traditional financial options.

As a result, unbanked and underbanked people are not only forced to depend on costly alternatives, but they also find it difficult, if not impossible, to secure affordable credit building options that are required to establish or improve their credit rating and enable them to obtain a loan to buy a home, start a business and build generational wealth. The problem is particularly acute for members of diverse communities. According to a 2021 Federal Reserve report, Black (40%) and Hispanic (29%) adults are more than twice as likely to be unbanked or underbanked compared to white adults (13%).

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It's important to note that while those in lower-income communities typically struggle to obtain credit, the actual data shows that these individuals do not, in fact, present a greater risk to lenders. Rather, numerous factors contribute to the problem.

For example, the lack of banks or credit unions in many rural (and sometimes urban) areas has created veritable "financial deserts." A financial desert is defined as a census tract – a relatively homogeneous area or neighborhood containing about 4,000 people – with no branches within 10 miles of its center. This isn't just a mere inconvenience; it represents an economic burden on those who can less afford it. Households in financial deserts use non-bank services that deplete rather than preserve income and wealth. As a result, households that live outside the financial mainstream spend nearly 10% of their annual income on interest and fees from non-bank services; the same amount that most Americans spend on food each year. Beyond their lack of proximity to traditional banks and credit unions, many low-income individuals simply do not have the resources nor experience to navigate the banking and credit economies, and better manage their financial well-being.

The Path Forward

Improving access to the financial system for low- and moderate-income communities is critical to addressing the racial equity gap that has left so many communities behind. Without access to responsible financial products, this gap will continue to widen and these populations won't be able to create the wealth that's needed for future generations to build from. Fortunately, Community Development Financial Institutions (CDFIs), Minority Depository Institutions and other mission-driven financial institutions have become an effective platform to connect with these communities by providing responsible asset building products that are both affordable to the consumer and sustainable to the institution. CDFIs have already demonstrated they can reach deeper in the marketplace, particularly in communities of color, where there is a justified distrust for the financial mainstream.

In addition to offering affordable and responsible financial products, the success of CDFIs and other mission-driven financial institutions is also explained by the effectiveness of their financial literacy programs – an effort that depends on collaboration among multiple third-party stakeholders, including financial services organizations, non-profits and local governments. Teaming with community development organizations can help financial services organizations connect and support various communities, such as the underserved and disabled, with energy assistance and affordable housing.

While CDFIs have the relationships with community members and understand how to reach them, larger financial services organizations may offer innovative products and solutions, financial literacy programs, and the data and technology needed to drive financial inclusion in low-income areas.

For example, the collaborative effort enables CDFIs and financial services organizations to jointly understand respective service areas by evaluating macro demographic information, which in turn, enables them to ascertain how best to serve local residents with the most appropriate and effective financial products and services.

But it's not just that low-income and rural communities lack easy access to financial resources and tools – there are systemic issues, such as language barriers, creating obstacles to obtaining such information. It's important for CDFIs and financial services organizations to determine the languages that should be used in informational materials, websites, social media and other communications, while identifying those issues – such as budgeting and tips for saving money and applying for loans – that are of greatest practical value to current and prospective customers. Programs such as Juntos Avanzamos, a financial inclusion framework promoted by Inclusiv, provide a roadmap for CDFIs and credit unions interested in serving the Hispanic and immigrant communities, both markets that continue to experience rapid growth and unfortunately remain largely underserved.

Now is the time to double down on our efforts to build a more diverse financial system that more closely mirrors the nation's demographic trends. Many credit unions already operate in majority minority counties, and over the next few years, many more will find themselves in the same situation. Diversity, equity and inclusion is an imperative, and the future and relevance of the financial system as we know it will be determined by how well we transform ourselves to reflect the communities we want to serve.

Realizing that many people in underserved communities welcome the opportunity to learn more about sound financial decision making, it's important that consumers are educated and given the information required to demystify banking and credit economies. Examples of credit education resources include Spanish-language consumer e-books, in-language articles on important products and online discussion blogs.

Tools are also an important part of the equation, especially ones that can help individuals with no credit history establish a credit report through an easy, step-by-step process. There are others that have the potential to help consumers improve their credit scores instantly by recording on‑time payments of routine expenses such as rent, utility and telephone bills.

Helping low- and moderate-income people gain a better understanding of money management not only enables them to build their assets and improve their financial footing, it also benefits the local community. Local financial institutions like CDFIs provide saving opportunities for those living paycheck-to-paycheck or forced to rely on less attractive non-banking. They also offer trusted financial advice, create jobs, stimulate the local economy and typically promote more thriving, vibrant local communities. With the approach to inform the types of financial products and services to offer, CDFIs and financial services organizations can help enable residents in rural, low- and moderate-income communities to start or strengthen careers, build wealth and ultimately achieve greater financial freedom.

Wil Lewis is Global Chief Diversity, Equity & Inclusion Officer with Experian.

Pablo DeFilippi is EVP with Inclusiv in New York, N.Y. Experian and Inclusiv have partnered to increase financial access in communities around the nation.