While having access to a robust, well-functioning financial services ecosystem may feel like a given for most Americans, nearly 20% of U.S. adults rely on services such as payday loans to manage their finances or do not have a banking account. As part of the Biden Administration’s Comprehensive Framework for Responsible Development of Digital Assets, the White House is taking steps to improve access to banking accounts, instant payment systems, and other aspects of the digital financial services ecosystem.
Efforts to improve access to financial services could improve employees’ financial wellness and affect the way employees engage with their employers’ retirement plans. According to Morgan Stanley at Work’s State of the Workplace Financial Benefits Study, 91% of employees surveyed reported having faced personal financial issues this year, with the top three being difficulty with household budgeting (47%), debt reduction (42%) and emergency and short-term savings (30%). The study further states that more than half (59%) of employees said they needed to reduce contributions to savings, debt, or loan payments that occurred across 401(k) savings accounts (29%), long-term savings (28%), emergency and short-term savings (25%), and debt and loan payments (25%). These percentages outline the approximate impact to 401(k) plans and savings; however, plan sponsors need to recognize that workers’ personal financial issues negatively impact employee work productivity.
We examine the issue of financial inclusion in the United States and look at how increased access to bank accounts and faster payment systems could affect financial wellbeing for some if not most Americans.
Banking gaps in the U.S.
More than 80% of U.S. adults are “fully banked,” according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2021. The report defines “fully banked” Americans as those who have a bank account and didn’t use alternative financial services (such as payday loans, pawn shop loans, and tax refund advances) in the past 12 months.
This means that nearly two of every 10 U.S. adults lack full access to banking services. The Federal Reserve found that 13% of U.S. adults are “underbanked” (i.e., have a bank account but used alternative financial services) and an additional 6% are “unbanked” (i.e., don’t have a bank account). The report also found that underbanked and unbanked rates are higher among adults with lower income, adults with less education, and Black and Hispanic adults.
More than 90% of unbanked Americans had income levels below $50,000. In addition, those who have bank accounts but make less than $50,000 annually were three times more likely to pay overdraft fees compared to people making $100,000 or more, according to the report.
White House actions to address gaps
As part of an executive order, the Biden Administration laid out four steps federal agencies will take to expand access to digital financial services:
Federal agencies will promote the continued adoption of instant payment systems like Zelle and PayPal. This effort includes the Federal Reserve launching its FedNow instant payment platform in 2023 and federal agencies using instant payment systems to process government-to-consumer payments, such as disaster relief payments.
To help curb fraud and manipulation, the Biden Administration will look at ways to regulate nonbank payment providers, such as pawn shops and payday loan services.
Cross-border payment providers can be slow, expensive, and less-than-transparent. The Administration will look at ways to improve efficiency and transparency of cross-border payment systems, while integrating instant payment systems.
The National Science Foundation will sponsor behavioral economic and other socio‑technical research to make sure that digital financial services are equitable, inclusive, and accessible by all groups of Americans.
Insight: Increased access could strengthen participants’ financial wellness
With inflation surging and the early signs of a recession looming, the number of Americans living paycheck-to-paycheck increased to 61% in June 2022, up from 55% 12 months earlier, according to a survey by LendingClub Corporation. The survey also found that Americans’ average savings decreased more than $500 from the previous month.
Having savings accounts and access to instant payments systems could help many Americans navigate financial hardships without using 401(k) hardship distributions, retirement plan loans, or tapping directly into their retirement plan savings and incurring penalties and taxes.
Just as importantly, it’s not just the federal government that is looking to enhance financial inclusion. Many banks, asset managers, and insurance companies are working to expand access to financial services to more Americans. Plan sponsors should keep a close eye on governmental and private sector efforts to increase financial inclusion and understand how the issue affects their employees’ financial lives. Additionally, plan sponsors should evaluate their financial benefits package as a majority of employees are presently struggling.
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