Forbes Advisor Staff
Oct 22, 2020
Millions of Americans don’t have bank accounts, which can create difficulties and hardships in normal times—but until recently, Americans were typically able to pay for goods and services in cash.
However, many businesses have gone cashless in order to simplify their Covid-era operations and reduce risk to employees, even though the risk of transmitting the virus through cash is believed to be low. And while the majority of small business owners (82%, according to a June 2020 report from Square), are still accepting cash payments, those who have gone cashless may present challenges to unbanked individuals.
Many experts believe that Covid-19 has accelerated a trend that was already underway—a shift to a cashless society. What is being done to bridge the financial gaps for unbanked Americans? And what are local, state and federal leaders doing to help these communities who may be left behind in a cashless world?
Who Are the Unbanked?
An estimated 7.1 million American households were unbanked in 2019, according to the Federal Deposit Insurance Corporation (FDIC), meaning these households didn’t have a bank or credit union account. While high, this number has been trending down, declining from 8.4 million households in 2017. FORBES ADVISORThe Costs Of Being Unbanked Or Underbanked
But this improvement, while encouraging, may be temporary. The FDIC states it is “likely” that more Americans will become unbanked because of a loss of income due to the economic shockwaves of Covid-19.
For low-income Americans, minimum balance requirements and inability to afford bank fees are hurdles to getting a bank account, the FDIC report notes. The same report found that 23% of households with income under $15,000 per year are unbanked.
But it’s not just low-income Americans who decline to open bank accounts. Many simply distrust banks, or have had negative experiences with them in the past, and have no desire to open a bank account.
While the number of unbanked Americans has fallen steadily since 2011, there are startling inequalities evident within those 7.1 million American households. Nearly 14% of Black households and 12% of Hispanic households were unbanked, compared to less than 3% of white households. These numbers are improvements over years past, but are a stark reminder of how communities of color are often disadvantaged by the system, contributing to the growing racial wealth gap.
Without traditional banking options, unbanked Americans must rely on high-interest products such as check cashing services and payday loans, which can lead to further financial instability.
Why We’re Rocketing Toward a Cashless Society—And How It Can Hurt the Unbanked
The switch to primarily cashless payments from businesses dramatically increased at the beginning of the pandemic, according to payment processing company Square, which recently published data showing their clients’ move to digital and cashless payments. On Mar. 1, 8% of U.S. sellers using Square were effectively cashless, meaning more than 95% of sales were made with a debit or credit card. On Apr. 23, after the initial lockdowns, 31% of businesses using Square were operating cash-free.
This is a continuation of a trend growing steadily over the last two decades as Americans have embraced spending away from cash. According to the 2019 Federal Reserve Payments Study, in 2018, Americans selected non-cash payments 174.2 billion times, an increase from 143.6 billion from 2015. The value of these payments was $97 trillion in 2018, $10 trillion higher than 2015.
But how does that compare to how many transactions were made in cash? Because cash transactions are difficult to track, there’s little definitive data about them. However, one indicator is activity at ATMs, and since 2012, the number of ATM withdrawals has steadily fallen.
Those in favor of a cashless society, including credit card networks and issuers like Visa and Amex, argue several advantages, including reduced tax evasion and money laundering crimes, fewer violent crimes and less resources consumed to produce and handle physical currency.
(It’s important to remain skeptical of the role that companies like Amex and Visa play in pushing consumers toward digital and card payments as ultimately, this shift leads to more revenue for them.)
But opponents of the movement argue that privacy issues, digital fraud and the marginalizing of unbanked Americans are strong reasons for businesses to keep accepting cash.
What’s Being Done to Increase Banking Access for Unbanked Americans
The movement to a cashless society is creating convenience for some, and unintended consequences for millions of Americans. However, solutions are being developed to ensure Americans can always use cash if needed, and expanding opportunities for underbanked Americans to get bank accounts.
Several states, including Connecticut, Massachusetts and New Jersey have passed legislation mandating businesses to accept cash. Municipalities such as New York City, Philadelphia and San Francisco have also implemented laws to support cash-paying customers.
These laws were largely passed pre-Covid, with Massachusetts passing the first law requiring retailers to accept cash in 1978. It was decades later when other states and municipalities followed suit during the growth in popularity of cashless payments. However, there has been pushback from many retailers, including restaurants, as they find cashless transactions to be a preferred solution for their business.
The Community Development Financial Institutions (CDFI) Fund, established by the U.S. Department of the Treasury in 1994, was created to expand economic opportunity for communities underserved by traditional banking services. One of their goals was to grow the numbers of privately-owned banks that are dedicated to serving low-income areas in underserved and underbanked communities.FORBES ADVISORWhat Is A Community Development Financial Institution (CDFI)?
Hope Credit Union, based in Jackson, Mississippi, is one of over 1,100 CDFI institutions. During the pandemic, Hope Credit Union went into overdrive to provide resources to unbanked community members.
“Membership went up during the pandemic,” said Ed Sivak, executive vice president of policy and communications at Hope Credit Union. Hope Credit Union administered initiatives to get financial assistance to families and assist small business owners applying for PPP funding to weather the pandemic.
While Hope Credit Union launched efforts on multiple fronts to assist their communities, Sivak stressed the need for further effort to continue closing the gap of financial inequities.
“We need strategies to get more people into the financial system,” he said. One strategy is to ensure that banks and credit unions in underserved communities have the resources needed to grow, he said. To help accomplish this, Business Roundtable, a nonprofit association of American business leaders, set a goal of providing over $1 billion in support by 2025 for both Black and Latinx communities.
The funding from Business Roundtable will support Minority Depository Institutions (MDIs) and CDFI initiatives for Black-owned businesses and citizens to gain access to funding for businesses and low-cost banking options. Sivak noted Black businesses are twice as likely to apply for loans at CDFIs, and Black-owned banks originate a higher proportion of mortgages and small business loans to Black borrowers than non-Black-owned banks.
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