A Holiday Wish for Inclusive Financial Institutions

Our mainstream financial institutions are positioned to play a critical role in providing financial inclusion to young Americans and, by extension, expanding their wealth and the wealth of future generations. The question remains: will they collectively rise to the occasion?
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As December comes to a close, so too do the 2014 balance sheets of young American households. On the whole, this was one of the better years for young Americans' balance sheets since the Great Recession. That might not be saying much given that the recession disproportionately affected young Americans; though, their labor market participation and average hourly wages experienced modest improvements in 2014. The unemployment rate of young Americans slowly rebounded, nearing their pre-recession rate and mirroring the unemployment rate's recovery for the rest of the populous. The average hourly wages of college and high school educated workers rose after experiencing respective lows of $16.90 and $9.60 during the Great Recession. These modest improvements perhaps relieved some of the tensions on young Americans' tightly-stretched balance sheets.

However, many young Americans remain on the financial margins and do not own the necessary financial tools that can help translate these labor market and hourly wage improvements into savings and wealth--important components of their balance sheets. The FDIC's survey of unbanked and underbanked households unveils the extent to which young Americans are excluded from mainstream financial institutions and lack basic financial products like checking and savings accounts. Thirteen percent of young Americans ages 25 to 34 are unbanked, many of whom are also from lower-income backgrounds. In absence of basic financial products, about 63% of unbanked young Americans resort to using alternative financial services that charge excessive fees in exchange for providing quick cash. These excessive fees may disintegrate any modest improvements to young Americans' balance sheets.

A simple financial tool--a savings account--plays a critical role in the health of young Americans' balance sheets, providing them with a more affordable option than alternative financial services and helping them build wealth. A savings account is often one of the first financial products that young Americans own and serves as a gateway to opening other financial products and establishing a diverse asset portfolio. That is, young Americans almost always open a savings account before opening money market, stock, or retirement accounts; however, once they open a savings account, they are more likely to open other accounts and diversify their portfolios. Moreover, a savings account combined with a diverse portfolio contributes as much as $5,300 to young Americans' liquid assets--an amount that grows along with their age and income. Unfortunately, many young Americans are unlikely to open a savings account if they don't already have one, potentially missing out on opportunities to diversify their portfolios and build wealth. In a study that examined young Americans' "take-up" of a savings account, only 3% opened an account over four years' time while the remainder either kept the accounts they owned or stayed unbanked.

Without an account at a mainstream bank or credit union, how can we expect these young Americans to save for regular expenses like rent and utilities or for unexpected expenses like a job loss during an economic recession? If they are unable to save even for these expenses, how can we expect them to strengthen their balance sheets and accumulate wealth? And, as the logic follows, how can we expect them to be self-sufficient, pay for their children's educational expenses, invest in homes, or afford reasonably comfortable retirements if they cannot accumulate wealth? Something as simple as not having a savings account--being excluded from the financial mainstream--may have profound implications for the balance sheets of young Americans, especially for those who grow up in lower-income households and may already be on the financial margins.

Opening a savings account is not the sole responsibility of individual young Americans. Mainstream financial institutions share some responsibility for encouraging financial inclusion by making savings accounts accessible and affordable, thanks in part to efforts like the Community Reinvestment Act (CRA) credits, the FDIC's Alliance for Economic Inclusion, and oversight by the Consumer Financial Protection Bureau (CFPB). There are definitely examples of banks and credit unions that strive to be inclusive; but just how inclusive are mainstream financial institutions as a whole? Regrettably, they are not as inclusive as we would like. Almost half (48%) require a minimum balance of $100 or more to open entry-level accounts. On average, institutions require account balances of at least $300 to avoid monthly maintenance fees. Many young Americans who are still finding their financial footing may be unable to afford these costs, putting a savings account--and subsequent opportunities to save and build wealth--beyond their reach. Less than half of institutions (about 40%) develop basic financial products and services for populations on the financial margins, like lower-income young Americans. These examples illustrate that financial institutions may not be in the business of inclusion.

And so, this brings me to my holiday wish for more inclusive financial institutions. As a way to bolster the balance sheets of young Americans and of future generations, mainstream financial institutions may need to be in the business of inclusion. Offering affordable savings accounts with low minimum balances and monthly maintenance fees are reasonable first steps in the direction of inclusion.

Our mainstream financial institutions are positioned to play a critical role in providing financial inclusion to young Americans and, by extension, expanding their wealth and the wealth of future generations. The question remains: will they collectively rise to the occasion?

Notes: The research on the role of a savings account for young Americans' balance sheets was conducted in close collaboration with Dr. Paul Johnson, Professor of Political Science and Acting Director of the Center for Research Methods and Data Analysis at the University of Kansas, and Mr. Robert Hughes, a doctoral student in the Department of Sociology at the University of Kansas. This research was originally prepared for the symposium, "The Balance Sheets of Younger Americans: Is the American Dream at Risk?" presented by the Center for Household Financial Stability and the Research Division at the Federal Reserve Bank of St. Louis and the Center for Social Development at Washington University.

Dr. Terri Friedline is an Assistant Professor of Social Welfare at the University of Kansas. She has published extensively on savings and asset building, with her most recent work focusing on the financial health of young adults. She is the Faculty Director of the Financial Inclusion Project at the Assets and Education Initiative and a Research Fellow at New America's Asset Building Program in Washington, DC. She can be reached for comment at tfriedline@ku.edu or followed on twitter @TerriFriedline.

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