Even before the COVID-19 pandemic, many Americans lacked equal access to financial products and services — from tapping into affordable banking services to credit cards to financing a home purchase. The global pandemic likely exacerbated those existing issues and inequalities.
That reality makes financial inclusion — a concerted effort to make financial products and services affordable and accessible to all consumers — more crucial than ever.
The playing field wasn’t level before the pandemic
The Federal Reserve reported that in 2019, Black and Hispanic/Latino families had median wealth that was just 13 to 19 percent of that of White families — $24,100 and $36,100, respectively, compared to $188,200 for White families. That inequity is also reflected in credit score disparities.
While credit scores, income, and wealth aren’t synonymous, the traditional credit scoring system leads marginalized communities to be disproportionately labeled unscoreable or credit invisible, and face challenges in accessing credit.
New research from Experian shows that in over 200 cities, there can be more than a 100-point difference in credit scores between neighborhoods — often within just a few miles from each other.
Marginalized communities bore the financial brunt
Minority communities were also disproportionately impacted by COVID-19 in terms of infections, job losses, and financial hardship.
In mid-2020, the Economic Policy Institute (EPI) reported Black and Hispanic/Latino workers were more likely than White workers to have lost their jobs or to be classified as essential workers — leading to economic or health insecurity.
Government initiatives — including the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Paycheck Protection Program (PPP) and the American Rescue Plan — created expanded unemployment benefits, paused loan payments, eviction moratoriums, and direct cash payments. These helped consumers’ immediate financial well-being.
The National Bureau of Economic Research found that, on average, U.S. households spent approximately 40 percent of their first two stimulus checks, with about 30 percent used for savings and another 30 percent used to pay down debt.
In some communities highly affected by COVID-19, consumers were able to pay down nearly 40 percent of their credit card balances and close more than 9 percent of their bank card accounts, according to recent data. Stimulus payments have been credited with reducing childhood poverty and helping families save for financial emergencies.
That being said, people on the upper end of the income scale were able to improve their financial situation even more. Their wealth grew at a much faster pace than people at the bottom end of the income distribution scale, according to data from the Federal Reserve.
How the pandemic deepened financial exclusion
Although hiring has picked up in low-wage industries, research indicates that low-wage jobs have been the slowest to return.
According to a survey by the Pew Research Center, among respondents who said their financial situation worsened during the pandemic, 44 percent believe it will take three years or more to get back to where they were a year ago. About 10 percent don’t think their finances will ever recover.
Recent Experian data shows that consumers in certain communities that were already struggling to pay their debts fell into an even bigger hole. These consumers missed payments on 56 percent more accounts in the period between spring 2019 to spring 2020 compared to the year prior.
Credit scores in these neighborhoods fell by an average of over 20 points during the first 18 months of COVID-19. That being said, U.S. consumers overall increased their median credit scores by an average of 21 points from the end of 2019 to the end of 2021.
When consumers with deteriorating credit encounter financial stresses, often their only recourse is to pile on additional debt. Even worse, those who can’t access traditional credit often turn to alternative credit arrangements, such as short-term loans, which may charge significantly higher interest rates.
READ MORE: More Than a Score: The Case for Financial Inclusion
What can the financial sector do?
Without access to affordable financial services and products, subprime or credit invisible consumers may not get approved for a mortgage or car loan — things that might come much easier for consumers with better scores. This is just one reason why financial inclusion is so important — and why financial services companies have a big role to play in driving it. One place to start is by taking a broader view of what makes a creditworthy consumer.
In addition to traditional credit scoring models, new tools can leverage artificial intelligence and machine learning, along with alternative data, to analyze the creditworthiness of consumers. By qualifying for credit, more consumers can access affordable mortgages, car loans, business loans and insurance – freeing up money for other expenses and allowing them to grow their wealth..
READ MORE: What Is Alternative and Non-Traditional Data?
Marginalized communities were already struggling economically before the pandemic, and the impact of COVID-19 has made the wealth disparities worse. With the pandemic waning, now is the time for financial institutions to take action on financial inclusion. Not only does it help improve your customers’ lives and make them better prepared for the next crisis, but it also fuels your business’s growth and bottom line.