Credit unions are crucial to building racial equity in access to financial services
Underrepresented communities often experience huge inequities when it comes to access to financial services. According to the Federal Reserve, an estimated 22% of adults in the U.S. are unbanked or underbanked—meaning that no one in the household has a checking or savings account at a bank or credit union—and many have no credit and little cash on hand. Many of these unbanked families are from underrepresented groups: A 2019 study from the FDIC found that 13.8% of Black households and 12.2% of Latinx households are unbanked, while only 2.5% of white households are unbanked.
The racial wealth gap and lack of access to fair and equitable financial services existed long before the COVID-19 pandemic, but it’s been exacerbated over the past year. Without access to mainstream financial resources, people in these communities are at a perpetual disadvantage. For many, their only choice is to use predatory lending options, such as payday loans and high-cost check-cashers that have high interest rates and charge exorbitant fees—making it nearly impossible to get out of debt.
These are credit-worthy entrepreneurs, families, and individuals who may look like a risk on paper, but have credibility in their communities, and should have the same access to fair financial resources as people in wealthier parts of the country.
Traditional banks aren’t incentivized to solve this problem. Their business models depend on generating large deposits from big companies and higher-net-worth individuals who have pristine FICO scores and strong collateral.
Fortunately, an alternate solution already exists. There are hundreds of credit unions across the country that are focused on serving underrepresented communities, are federally insured, and are built to get affordable capital into the communities that need it most.
In addition to providing low-income individuals access to loans at fair rates, these credit unions have something else that larger banks don’t: boots on the ground. They understand the unique challenges that people in underrepresented urban, rural, and reservation-based communities face. They also offer financial education, counseling, and the ability to fairly assess risk of members who may have limited or no credit.
Despite all that they do to support underrepresented communities, community-based credit unions need more resources and support to have an even greater impact. That’s where corporate America can help. Companies of all sizes can make a meaningful difference by doing the same things they’re already doing today, just slightly differently. They can transfer a portion of their banked dollars into credit unions that fairly support people in low-income communities.
At NerdWallet, we’ve transferred $2 million from our traditional bank account into a Certificate of Deposit (CD)—a low-risk savings tool—at Self-Help Federal Credit Union, which serves low-income working families in California, Washington, Illinois, and Wisconsin. To encourage other companies to make similar investments, we’ve partnered with Inclusiv, a nonprofit network of community development credit unions, that can help companies identify a national credit union to support. Credit unions in the Inclusiv network serve 12.5 million residents of low-income communities and hold almost $160 billion in community-controlled assets.
Most importantly, these kinds of investments benefit both individuals and whole communities at once. For example, Self-Help Federal Credit Union provided a Paycheck Protection Program (PPP) loan to Brighter Beginnings, a Bay Area nonprofit that offers affordable medical care and family support programs to young families in resource-poor neighborhoods, building stronger, more prosperous communities in the process. Self-Help also provided a PPP loan to Employ Milwaukee, a workforce development board, which was able to keep its staff on payroll and continue to provide job counseling and training to hundreds of job seekers during the pandemic.
Moving banked dollars into credit unions is a smart financial move for companies. They get competitive interest rates and the same asset protections offered by traditional banks with the added benefit of making a positive impact on deserving communities. Especially now, as more companies are being called on by their employees and consumers to create positive change in the world, this is a seamless way to make a tangible difference in the lives of communities in need.
By making this one simple change, corporate America can help make a difference in underserved communities by enabling equitable access to the financial products people need.
Tim Chen is cofounder and CEO of NerdWallet.