Unbanked Individuals' Deposits Aren't Safe

It should be discussed how to make banks more inclusive of the 25 million Americans who rely on riskier alternative financial institutions as well as how to make companies safer for clients.

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With the collapse of Silicon Valley Bank, there has been much discussion over deposit insurance and the reliability of banks as safe places to leave money. The underbanked, often known as people without bank accounts who rely on different financing services such payday or vehicle title borrowers and check cashers, are not mentioned in this discussion. Compared to banks and credit unions, those products are less regulated, uninsured, and more expensive. The recent claims of permitting fake accounts versus Block Inc. 1 (formerly known as Square Inc.), which provides a digital wallet touted for the underbanked, serve as a reminder that they can also be risky. 

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According to the Federal Deposit Insurance Corp.'s biennial study, around 6 million People lack access to banking services, while another 19 million have insufficient accounts. But, those who don't use the conventional financial system differ greatly from one another. Three times as many households of color—Black, Hispanic, and Native American—are unbanked or underbanked than those of white people. There are comparable differences in education, income, and disability status.

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Strong Disparities

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Less people of color and people of other ethnic minorities use traditional banking.

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Why don't households just use banks given the expenses and risks of doing business elsewhere? Some people are unable to. The FDIC survey found that "Don't have enough cash to afford minimum balance requirements" was the most frequent reason for being unbanked. The additional income from stimulus checks, unemployment insurance, and the robust labor market loosened that restriction: there have been 1.2 million fewer un - banked families in 2021 than in 2019. Yet after the slow wake of the Great Recession, there are 5 million fewer people than there were in 2011. But in order to make financial services "work" for all Americans, we can't just rely on sound fiscal policy. It necessitates additional strategies.

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Fintech companies, which use digital sites or digital apps to send and receive money fast, have become a more and more well-liked alternative to traditional banking. Examples include PayPal, Venmo, and Cash App. These products are being used much more frequently than in previous years. In 2021, roughly 12% of the unbanked and close to 30% of banked individuals utilized them to send or receive money. The FDIC does not safeguard consumer funds held by fintech companies, and their regulatory scrutiny is noticeably less than that of banks. Customers are responsible for performing their own thorough research because safety and efficiency are not guaranteed. As a consequence, a vulnerable population may occasionally become even more so. But, because these services rely on the Internet, certain populations, such the elderly from those without dependable, high-speed connections, won't be served.

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Real-time transactions for the financial system would eliminate the need for pricey money exchange services and prevent overdraft fees by making money deposited at a bank immediately usable. Money from a check usually becomes accessible two different business days after it has been deposited, but in other circumstances it may take up to a week. For people who live paycheck to paycheck, this is frequently too long. The existing banking payment structure penalizes individuals who require access the most and forces them to choose more expensive solutions. According to Ellen Merry, an analyst at the Federal Reserve, having trouble accessing one's money at the bank is substantially correlated with income that varies significantly from month to month, which is frequently the situation for low-wage or gig workers.

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FedNow, a payments program that will enable users of participating banks to send and receive money instantly, will be introduced by the Fed later this year. By keeping its enhanced consumer protections, this would place banks on a level playing field with non-bank e - wallets and phone applications in terms of convenience. It will take some time for the underbanked and underbanked to become aware of this option because bank adoption is voluntary.

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Those who operate on the periphery of the financial system require special bank accounts. The FDIC has been in charge of the #GetBanked effort to assist people in opening bank accounts since the outbreak started. Making ensuring that families received their entire stimulus payment rather than losing some to check cashing costs was one driving force for the initiative. Bank On from the nonprofit Cities for Financial Empowerment Fund is one of the initiative's partners. They certify bank and credit institution account that have a $5 or lower needed monthly fee, a minimum initial amount of $25, and other common characteristics including FDIC bank deposits. There are currently 340 accounts in the program, the majority of which are at small and regional banks or credit unions. Larger institutions' participation would significantly increase the program's reach. The cashless transaction is a structural issue that necessitates structural adjustments in bank products.

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The topic of making banks more inclusive should be discussed alongside how to make them safer for customers. Everyone deserves to have financial security.