Author: Frank Villavicencio
Chief Product Officer
What is financial inclusion, and why does it matter?
Financial inclusion means that people and businesses have access to financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way. Being able to have access to a transaction account is a first step toward broader financial inclusion since a transaction account allows people to store money and send and receive payments.
As an HR and payroll solution provider, Greenshades has a unique opportunity to provide the employees we serve with access to the financial system, starting with affording them access to a bank account. This is part of our mission as we strive to empower workers and aim to improve their lives and financial outcomes.
The unbanked, the underbanked and financial exclusion.
The unbanked are those individuals who, voluntarily or involuntarily (mainly due to lack of trust in the financial institutions), do not have access to any modern financial services (e.g., they don’t even have a bank account). The term “underbanked” is used to describe those individuals who don’t have access to the full extent of financial services, primarily credit. While these two sets of individuals are different, they are related in that, very often, the main reason for their exclusion is having a low income level.
Based on a 2019 survey by the FDIC, an estimated 5.4% of U.S. households were unbanked in 2019, meaning that no one in the household had a checking or savings account at a bank or credit union. This represents approximately 7.1 million U.S. households. While the data are not yet available, the expectation is that the COVID-19 pandemic has driven up the number of unbanked people to even higher levels.
Though the rates of unbanked people are declining overall, they remain high in communities also experiencing income inequality and systemic injustices. Black (16.9%) and Hispanic (14%) households, for example, are around 5 times as likely to be unbanked as White households (3%). But the strongest indicator of unbanked people is income level. On average, 19% of households with a family income of less than $30,000 are unbanked, compared to just 2.4% of households making more than $30,000 annually.
What happens to an unbanked worker?
According to Pew Research, the unbanked population is heavily reliant on cashing paychecks to live in a mostly-cash society. Their January 2018 survey showed that 41.8% of individuals receive their income by paper check or money order. More than half (58.3%) cash their checks at a check cashing store, and 31.3% cash their checks at a supermarket or local store with check cashing services. More than half (53%) spend between $20 and $40 when cashing a check, and some individuals reported spending nearly $100 at a time on check cashing services. If an average of five checks are cashed each month, that number could total $500 or higher for the average unbanked individual who relies on check cashing for access to funds.
It is also common for these workers to fall victim to predatory lending in the form of payday loans. A payday loan is a short-term loan usually offered in amounts ranging from $100 to $1,500. Also known as cash-advance or check-advance loans, they’re usually referred to as payday loans because the payment deadline is set for the borrower’s next payday. With such a brief repayment period, it’s no surprise that more than 20% of borrowers nationwide default on these loans.
Most payday lenders charge fees ranging from $10 to $30 on average for each $100 borrowed. For example, a consumer taking out $1,000 loan might be required to pay back the $1,000 plus $300 in interest, all within two weeks. This works out to an annual percentage rate (APR) of about 400%. In contrast, most credit cards carry interest rates of well under 30%.
Why should we care?
Because we can make a difference in improving the lives of these workers, which is beneficial for them and for society. Today, 48% of the employees Greenshades manages are being paid by paper checks. In addition, 41% of our client base is concentrated in industry sectors, including General Industrials (25%) and HR & Staffing (16.4%), which typically exhibit high seasonality in their labor needs and a high concentration of deskless, hourly workers with relatively low wages. It’s fair to say that we likely manage a significant portion of unbanked workers. Of course, further research and analysis will be required to validate these assumptions.
What are we doing to advance financial inclusion?
We are pursuing a few strategies to further our goal of empowering workers through financial inclusion. Our goal in the coming months and years is to turn the unbanked into the banked, and we have many ideas for how to make that possible. The options that we are exploring include:
- No-fee, no-minimum debit cards that are fully integrated with the financial system (with the added perks of helping to build the user’s credit score and reduce paper waste)
- Instant paycheck availability, meaning wages are added to the employee account in near real-time instead of after the typical 3-day ACH delay
- Modern payment methods like digital wallets, which also integrate with services like Venmo and PayPal
- Healthcare financial assistance that allows employees to get zero-fee, zero-interest loans for healthcare costs
- Financial wellness in the form of integration with applications that can help employees track their spending, reduce unnecessary costs, and keep a closer eye on their personal finances
Again, these options are all in the exploratory stage, but we hope that ideas like these and others will help us bring financial access and independence to more Greenshades customers than ever. At Greenshades, “employee first” is not just a catch phrase; it’s how we do business.
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