How the financial services industry can support financial inclusion

By Jamila Abston MayfieldFSO Americas Financial Services Risk Management Partner, Ernst & Young LLP

Joo many of the world’s less affluent could be better served and supported by the financial services industry (consciously or not). The negative impacts of COVID-19 have exacerbated existing divisions in the United States, which therefore disproportionately harm groups that are already underbanked and at risk of poverty.

Documents released by the Bureau of Labor Statistics (BLS) noted that 11.5 percentage points of the unemployment rate of 14.7% in April 2020 was attributable to temporary layoffs. This measure highlights how the first temporary layoffs of the COVID-19 era diminished Americans’ income stability and disproportionately impacted the underbanked. At the same time, responses to the pandemic have been encouraging, particularly the distribution of more than $788 billion in Paycheck Protection Program (PPP) loans, as reported by the Small Business Association (SBA ), showing that more groups are beginning to understand more issues and signs of progress are evident.

Positive change

Changes initiated by public and private institutions have strengthened protections and relaxed restrictive policies to increase access to and retention of financial instruments. For example, governments have stepped up their efforts in areas such as mortgage forbearance. There has also been an increase in government assistance that has allowed for better management, or delay, of mortgage payments, which has been of tremendous help to many people affected by the pandemic.

Moreover, the markets are reacting. Most financial institutions now offer additional training. There has been greater investor advocacy, and financial services executives at Ernst & Young LLP (EY US) have seen other actions taken, such as the abolition of fees altogether. Free products and services have also become more common.

Investments

A few large financial institutions are making substantial investments through their philanthropic foundations and equity investments in venture capital and public welfare investment (PWI) funds to foster financial inclusion initiatives in underserved communities. They fund community programs that enable workers to upskill and retrain to create a talent pool; support affordable housing programs that pave the way for homeownership and neighborhood revitalization; and providing education and technical assistance to minority and women-owned small businesses.

Additionally, foundations and institutional investors who want to make an impact by investing directly in their communities as part of their burgeoning environmental, social and governance (ESG) investment principles and strategies are investing in development finance institutions. community (CDFI).

These financial entities provide retail banking services and investments, loan funds that finance borrowers, and venture capital funds that provide capital to small and medium enterprises. According to CDFI Fund, the sector has seen high lending volume during the pandemic, with a 52% increase in lending and investment activity through 2020-21.

Cash, trust and the digital divide

However, while progress has been made, much remains to be done.

One of the biggest and most persistent challenges — one that EY US is working to address — is the digital divide. Much remains to be done to ensure access to financial services and products. This is accompanied by broad and equitable access to all the technologies that facilitate financial products and services. A key challenge in bridging the digital divide in banking relates to the “adoption aspect”, ie persuading hesitant individuals to adopt these new technologies.

Today, many small retailers and their consumer bases in low-income neighborhoods are struggling to determine whether they can trust digital payment systems. So many of these businesses, the mom-and-pop shops, have been cash-based for a long time. Persuading these businesses and their customers that digital, not cash, is the way forward is a big part of the challenge. Federal government COVID-19 relief payments made available in the form of debit cards have helped. The Consumer Financial Protection Bureau (CFPB) noted that recipients of COVID-19 relief payments had access to several prepaid card benefits at no cost, such as cash withdrawals and online transfers to personal bank accounts. . Allowing consumers to test this product was a way to build understanding and trust.

Underserved communities are still hesitant to go digital at scale when it comes to processing payments and transactions. But achieving greater trust is the path to acceptance. The acceptance of digital transactions will go a long way to expanding financial inclusion and putting society on the right track to move forward.

Education is the key

Integrating education into processes is worth doing. To bridge the digital divide, raising financial literacy awareness is the first step. For example, credit unions hold workshops. Through these workshops, financial literacy is developed and participants receive advice on low-cost and no-cost offers. These offers could have optional digital capabilities, such as peer-to-peer payments. Another such opportunity exists when people engage in transactions. Additionally, technology can be added to payment sites, such as a pop-up giving the user information about what just happened, what’s going to happen next, and what it means for them in the long run.

At the same time, as more and more of the underserved community is integrated into the financial ecosystem, it should be remembered that money is always at stake. In other words, public and private institutions must consider a progressive implementation of digital solutions. Sellers of products and services would be well served if they ensured that consumers had the option of using the payment method of their choice.

Meanwhile, as the financial services industry builds trust, it can continue its digital work and then one day build enough trust in the system that people can move from cash to a cashless society together. .

A role for emerging digital currencies and technologies?

We need to pay close attention to what is happening in the area of ​​cybersecurity, data analytics and related emerging technologies. The SEC (US Securities and Exchange Commission) examines such matters and how they affect investors and consumers.

Emerging technologies are seen as an accelerator of financial inclusion. However, the SEC also puts disclosure requirements in place. The sector must ensure that there is no bias and that financial systems operate on truly inclusive analyses. The maturity of this technology and other changes will introduce new risks that will require the implementation and strengthening of technologies, cybersecurity controls and best practices. Leveraging technology, cybersecurity, and big data will facilitate both short-term deployment and long-term adoption by all populations.

The ultimate goal: financial health

Financial inclusion is the gateway to financial health for the most underserved communities. It starts on an individual basis. But the more people in the ecosystem that come together, the better. Society can begin to achieve financial health when more underserved people are included in the ecosystem.

Beyond bridging the gaps in the consumer digital divide, other opportunities to improve financial inclusion remain promising at the macro level. On the regulatory side, two considerations are public investment in minority depository institutions and associated infrastructure and programs to promote the creation of minority-owned businesses. Long-term change will be further enabled by the private sector collaborating with public entities on designing improved offerings for historically underbanked populations.

Banks, wealth managers, insurance companies, payment providers and regulators are all working towards this effort. It’s a large and diverse ecosystem, but by working together and focusing on the right metrics, society can include more people on the path to true financial security and well-being.

The views expressed in this article are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.

ABOUT THE AUTHOR

Jamila Abston Mayfield is a partner in the EY Financial Services Business Consulting practice, where she provides risk, compliance and regulatory advisory services to key financial services clients. Additionally, she is EY’s Head of Financial Inclusion, helping financial services companies develop strategies, products and services that create opportunities for access, equity and inclusion for communities. underserved.

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