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Black and Brown Americans are chronically underbanked and unbanked. Here’s why that matters

Decades of no or limited access to banks has had major financial ramifications for Black and Brown Americans, who are the most underbanked and unbanked groups in the country

A vacant lot in the Lower Ninth Ward in New Orleans, Louisiana. Photo illustration by Alex LaSalvia.Mario Tama/Getty Images

In March, Silicon Valley Bank (SVB) collapsed after a classic bank run. SVB had taken a nearly $2 billion loss and depositors were desperate to get their money out. At the time, federal regulators strategized on how to stop the contagion, and ultimately announced depositors would receive all their money. The government immediately stepped up to prevent small businesses and others from losing a single penny. The same was true for Signature Bank – the government acted quickly to stop the financial bleeding and calm panicky investors.

This is not new. White wealth and capital is always protected by the nation’s financial systems, but this concern is generally nowhere to be found for the most financially vulnerable Black and Brown Americans, many of whom are chronically unbanked and underbanked.

Today, Black and Brown Americans are the groups most likely to be “underbanked” and “unbanked.” In recent years, Black Americans have dealt with soaring inflation and growing interest rates, alongside long-lasting inequities in housing, wealth accumulation, and educational opportunities pointing to a worsening racial wealth gap.

Unbanked vs. Underbanked

Although only 16% of Americans are “underbanked,” today 27% of Blacks are underbanked, which means that they might have savings or checking accounts, but typically depend on alternative financial services like payday lenders, rent-to-own services, and check-cashing businesses. Additionally, some Black Americans still do not have direct deposit, which is often key to getting free checking accounts. Their lack of access to banks forces them to participate in a range of financially risky behaviors that make it more difficult to close the financial and wealth gaps between minority groups and Whites.

By bringing in unbanked and underbanked Black and Brown Americans more fully into American economic life, we are all better off.

Black adults are also the group most likely to be unbanked. This means they lack any access to a checking or savings account, often because of a lack of trust in America’s financial system, or a belief that their money and privacy are at risk. The reasons are numerous: They’ve seen banks disappear from Black communities. Banks have unfairly denied them home and business loans. Some have witnessed firsthand the abuse, theft, and corruption by the government and private sector. The majority of unbanked adults are low-income and lesser-educated, and they are more likely to come from single-parent homes. Fundamentally, the main reason why “unbanked” Americans do not use banks is because they cannot afford financial services – especially banking fees – associated with bank accounts.

Worse, both the unbanked and underbanked are vulnerable to hidden taxes, predatory lending, and cyclical poverty. These groups incur high fees for routine financial transactions like cashing paychecks, often paying for money orders and stamps at post offices just to pay bills. Some face steep fees even when they reduce check-cashing costs by using prepaid cards. Others became reliant on predatory lenders, such as payday lenders charging fees of nearly 400%, or car title loans with annual percentage rates of about 300%. In Tennessee, these lenders have become increasingly powerful in the last two decades, targeting “the working poor and young people, often in Black and Hispanic communities, because statistically, these demographics lack connections to traditional banking.” They usually have little leeway when emergencies sprout up. These Americans struggle to come up with a few thousand dollars to repair a car, fix the home heating unit, or deal with a medical issue.

Even when Black Americans are fully banked, they are still far behind their White contemporaries. A recent paper shows how Black households have not been able to close the wealth gap since 1990. In terms of the Black-owned banks, they face additional problems of access to less capital, fewer depositors, and fewer resources than highly-capitalized banks that are predominantly White. Additionally, the dearth of minority depository institutions (MDIs) has exacerbated these problems for Black and Brown communities in need of financial resources.

Moreover, Black-owned small businesses are less likely to receive critical assistance from the federal government during national emergencies. For instance, when the government created the Paycheck Protection Program (PPP) during the pandemic to assist small businesses, Black-owned businesses were much more likely to get PPP loans from fintech and online lenders instead of small banks. Researchers said this could be due to a lack of racial biases among automatic online lenders compared to banking officials working face-to-face with their clients.

Invest in Black and Brown Americans to Improve the Economy

Historically, when the enslaved became free in 1865, questions arose about what freedom actually meant to the roughly four million Black Americans. However, at every turn in U.S. history, bankers either turned Blacks away, redlined them, or found some other way to discriminate against them. Equally important, financial institutions played a large role in assisting rich and White Americans of lower and middle socioeconomic status to build wealth, and transfer this wealth to new generations of Americans. The U.S. government also facilitated these disparities with programs such as the GI Bill, which gave some eight million White Americans education, home, and business benefits, but failed to deliver the same benefits to Black Americans.

However, there are steps that can be taken to ameliorate Black and Brown Americans’ financial outlook. First, we should invest in financial literacy on a much larger scale. Second, we must stop the financial abuse of Black Americans by eliminating junk fees and predatory lending. Third, the nation must work much harder to bring Black Americans into mainstream banking and end the abuses which Black Americans have had to live with for so long. Ultimately, by bringing in unbanked and underbanked Black and Brown Americans more fully into American economic life, we are all better off.

Daryl A. Carter is associate dean, director of Black American Studies, and professor of history at East Tennessee State University.