How Equitable Access to Banking Improves Economic Conditions for Everyone

As cities across the country consider ways that they can address the growing inequities throughout their communities, an important element is where a municipality’s money is located and how it is leveraged for greater social impact. As cities begin to set a path for economic recovery post-COVID-19, local leaders should consider their municipality’s relationship with its financial partners as another means towards eliminating economic inequities caused by institutional racism and financial exclusion.

By now, millions of Americans have received their stimulus funds as part of the federal COVID-19 relief CARES Act legislation. This includes 120 million direct deposit payments, 35 million paper checks mailed to residents of cities and towns across the country and 4 million payments via pre-paid debit card. For most of these people, payments were deposited into their trusted financial institution – a bank or credit union. But for many others – particularly low wage “essential workers” such as grocery clerks, childcare workers, security guards, and ride-share drivers who lack access to a bank account – they relied on high-cost alternative financial services. These services include check cashers or pawn shops which they used to access the funds minus a substantial fee many cannot afford.

There are roughly 5,200 FDIC-insured commercial banks and savings institutions in the U.S. Among the five largest are JPMorgan Chase, Bank of America, Wells Fargo, Citibank, and U.S. Bank. These traditional banks offer customers services beyond just checking/savings accounts, they also provide a variety of financial products from home mortgages, car loans, to small business and personal loans. But these institutions and services,  are not typically available in Black, Indigenous, and Communities of Color (BIPoC) because of discriminatory redlining practices authorized by the Federal Housing Administration in partnership with state and local governments, and the private industry. The legacy of redlining has led to decades of disinvestment in social, housing and economic services. As a result, many BIPoC communities have a large share of check cash financial services and are home to thousands of unbanked households – households that do not have an account at a banking institution.

The History Of Unbanked Communities

In 2017, an FDIC study found that approximately 8.4 million households were unbanked and an additional 24.2 million were underbanked (households with a checking or savings account but who also obtained predatory financial services outside of the banking system). Also, nearly half of Latinx (43 percent) and Black (47 percent) households are either unbanked or underbanked. Instead, these households rely on predatory alternative financial services such as check cashers or pawn shops.

Several of the top large banks have racially discriminatory patterns that are well-documented when it comes to locating branches and making loans. These practices include charging Black and Latinx individuals higher fees and rates on mortgages, targeting undocumented immigrants and Indigenous communities to open accounts and lines of credit without their knowledge and even racial discriminatory hiring practices. In addition, the shuttering of Black-owned banks leaves fewer options for financial services particularly for businesses owned by people of color.

The Role of Public Banks

Recently, more cities are looking at the creation of public banks as a potential solution. In 2019, the state of California passed legislation that would allow up to 10 cities or counties to create public banks. This legislation has moved several cities like Long Beach, San Francisco, and others to look at the possibilities. This momentum builds off the state-owned Bank of North Dakota (BND) – currently the only public bank operating in the US. BND prioritizes public access over profit and offers fair banking services to North Dakotans when private banks can’t or won’t. It does this through a partnership with other financial institutions and serving as the backstop for those loans that private banks don’t feel they can offer.

In addition to supporting public banks, cities can play a key role connecting more BIPoC, and low-income residents, to financial services through established financial institutions that prioritize safe, affordable, and wealth-building financial products and services. Community Development Financial Institutions (CDFI) and credit unions are among them.  How to do this?

  • City leaders can connect with these institutions and incentivize them to operate in their community’s bank deserts. More than 80 communities around the country have established Bank On programs that connect residents to affordable options in participating financial institutions that offer safe accounts that meet a set of national criteria.
  • Cities can also raise the profile of these consumer-focused financial institutions by sharing information about the products that they offer or leveraging their municipal loan fund to partner with a local CDFI to help their funds reach more local business owners.
  • Cities can also support efforts to help preserve the legacy of Black banks and help improve economic conditions in communities they serve.

It is important for local leaders to be aware of their city’s financial partners and what they do. Cities can conduct an impact analysis to determine how current financial services affect residents and how such services can improve the lives of BIPOC and low-income people, and as a result – the overall financial health of their municipality. A few questions to consider:

  • How many business loans have financial institutions issued in your jurisdiction? What is the overall amount, and what is the mean loan size?
  • What percentage of the financial institution’s lending is going to businesses of color within your jurisdiction (i.e. SBA 7(a), etc.)?
  • Does the financial institution operate branches or ATMs within your jurisdiction and if so where are they located? For those operating ATMs what are their fees for non-customers?
  • How recently did the financial institution complete an examination of their small-business lending practices to minority and businesses of color and what is their plan to address any obstacles found?
  • What partnerships do they have with CDFIs operating within your jurisdiction?
  • Do they offer a Bank On approved product that your residents can access? How many people within your community have this product?
  • What Community Reinvestment Act (CRA) activities have they done within your jurisdiction and at what amounts?
  • What is the ethnic and racial composition of their staff operating within your jurisdiction? What is the ethnic and racial composition of their senior leadership?

Once you have the collective information you can then see how or if there is an opportunity to leverage your municipal financial activities in a way to build a stronger community for all of your residents.

Now more than ever, city leaders have an opportunity to alleviate unfair and unjust economic conditions that have resulted from years of institutional and structural racism, and an opportunity to build wealth in Black, Indigenous, and Communities of Color. A city’s financial security depends on the financial security of all its residents – through partnerships with community-oriented financial institutions and innovative strategies such as public banking – equitable financial inclusion can become a reality.

About the Authors:

Katherine Carter is a senior specialist with NLC’s Race, Equity And Leadership department. Katherine oversees REAL’s 2020 Cities Responding to Racial Tension National Technical Assistance Cohort, which aims to strengthen local leaders’ knowledge and capacity to sustain community conversations on race relations, justice, and equity.

Patrick Hain is the Program Manager for Economic Opportunity and Financial Empowerment in the NLC Institute for Youth, Education, and Families.