The Covid-19 pandemic is exposing long-standing societal inequalities that range from access to healthcare to access to childcare and place our society is under a microscope. One of the biggest challenges is getting stimulus funds to those who need it most, especially in those cases where the individual may lack access to a bank account.
Thomson Reuters technologist and futurist Joe Raczynski explores how the pandemic may end up being the catalyst that eventually solves the financial inequality gap for the unbanked population.
What does it mean to be underbanked or unbanked?
Joe Raczynski: Often employed interchangeably, the Federal Deposit Insurance Corporation (FDIC) classifies those people that underutilize their bank as underbanked, while individuals without any form of bank account are considered unbanked.
Cash is no longer king, and the underbanked and unbanked have struggled during the pandemic as paper and metal currency, their primary medium of exchange, has been dropped out of circulation. The paper money has been shown to carry diseases, further exacerbating a financial disconnect for the unbanked.
The single most salient dilemma, of course, is that the unbanked have less of an opportunity to build a good credit history, and as a result have less of a chance for reasonable loans.
What are some reasons a person wouldn’t have a bank account?
Joe Raczynski: There are a multitude of explanations for not having a bank account. The most challenging from a socioeconomic perspective, are those people without the means to save money. Another highly cited reason is that people simply do not trust banks. Their concerns orbit around the possibility of a bank folding or their money simply disappearing. These concerns are typically more prevalent in people who have experienced such issues in other countries.
Also, a smaller subset of individuals is actively avoiding a system that requires divulging personal information to open an account. These individuals may have more nefarious reasons to remain out of the system, however, and are in the minority.
This phenomenon shows up in certain ethnic communities. For example, African Americans have the nation’s highest rate of unbanked, at almost 17%, compared to other ethnicities. However, they have had a three-year decline in the number of unbanked households, according to the Federal Deposit Insurance Corporation (FDIC). About 14% Latinos are unbanked; and about 3% of whites, based on FDIC statistics.
What financial services do the unbanked use?
Joe Raczynski: While the unbanked are marginalized in a traditional financial capacity, alternative financial services and burgeoning technologies are enabling people to bypass this challenge. Some of these alternative financial services — such as check-cashing services or payday loans — often charge egregious fees and related costs that can be debilitating for an unbanked user. Other services — such as money transfers or the use of prepaid debit cards or gift cards — also pose their own costs and rates, but do offer users more options.
Finally, mobile apps like Square, Venmo, PayPal, and a host of others enable people to send money to others and buy goods and services directly, provided they have money in that app account.
If a person is unbanked, how could they receive Covid-19-related stimulus funds from the government?
Joe Raczynski: The initial phase of stimulus relief was strictly direct deposit for the banked and government checks for others. Recently, the prepaid debit card was used to assist the unbanked. This is the same mechanism that the Internal Revenue Service (IRS) uses for tax refunds; however, while these prepaid debit cards are helpful, they also pose significant risks.
Fraudsters have seized upon the anonymity of these cash-filled cards to steal from the government. In some cases, these criminals are filing up to 100 false personal income taxes via someone else’s social security number. These taxes are surreptitiously submitted with refund expectations, the refund is then loaded onto an untraceable prepaid debit card and sent to a ‘here today gone tomorrow’ P.O. box.
While the unbanked are marginalized in a traditional financial capacity, alternative financial services and burgeoning technologies are enabling people to bypass this challenge.
The rapid implementation of this form of tax fraud has outpaced many traditional fraud scams, and it is surmised that over the past decade, one-time drug traffickers now have opted into this scam instead.
What changes are taking place in the banking industry to appeal to the unbanked?
Joe Raczynski: The single most significant change is the recent proposal of the federal government to issue FedAccounts within the next several years. This possibility would mean that anyone with a mobile phone would have a digital wallet, and money could be transferred from the government to an individual in moments. A person could also use their FedAccount to send money to anyone else, or even to a business with ease.
While that alone is significant, this new digital wallet will likely enable greater use of cryptocurrency, control of personal identity, and the ability to store other property digitally via asset tokenization.
Outside of the government-sanctioned digital wallet and currencies are a pending wave of private companies issuing cryptocurrency that the unbanked could seek out and use as new forms of money. For those civil libertarians among the unbanked who wish to remain outside of future government-issued digital currency, they could rely on Bitcoin, Zcash, Monero coins, or any number of other cryptocurrencies. Some of these cryptocurrencies have at their base, Zero Knowledge Proofs (ZKP) that permit completely anonymous transactions without personal information. While this could help the libertarian unbanked, it creates some headaches for anti-money laundering professionals that will likely be chasing fraudsters in this area very soon.
What final tips can you share to help the underbanked or unbanked?
Joe Raczynski: While I still believe that opening an account at a trusted bank that has low to no fees is the best option, the hope of the FedAccounts is very promising for the unbanked. The idea that a simple digital wallet with digital dollars can allow you to bypass banks and credit card processers could be very appealing.
In a similar scenario, the door for Bitcoin and other cryptocurrencies continues to slowly open. A future fluidity of increased financial ease of exchange for the unbanked is coming into focus, and a host of new options and services are arriving now, which will enable the unbanked to be better positioned for financial inclusion.