As Black History Month comes to a close, the relationships between the history of race, poverty, affordable financial services, and modern American life are hard to ignore. Over the past two years, surviving a pandemic has taught us that unpredictability and constant readjustments are stressful and expensive. COVID and variant surges have made everyday decisions, both big and small, extremely difficult to plan in advance. But this costly unpredictability does not come as a great shock to families living paycheck to paycheck. Further, for many families of color, still enduring the negative impacts of redlined money access and other forms of discriminatory treatment, these struggles are definitely not new.
COVID has also exacerbated pre-existing financial insecurity and new research from last month offers a glimpse at the virus’s uneven physical and economic impacts, racially and demographically. It's the latest data point that shows how lower-income Americans and Americans of color have been enduring the worst of the pandemic's effects, just like they have in previous economic downturns.
In order to help with a multitude of expenses, all Americans working today deserve affordable access to their own money as they earn it. Childcare payments, utility bills, and car loan or car insurance premiums rarely align with payroll schedules. Plus, unexpected costly repairs needed for a large appliance or a vehicle, or a health insurance deductible never occur on a schedule and can take weeks or even months to pay off for families without ample savings.
These situations are particularly acute for Black families. Historically, public policies segregated access to affordable financial products based on race by redlining certain neighborhoods. The inability of most African Americans to access money at a reasonable rate in order to purchase a home or acquire assets and begin to build generational wealth, directly relates to many problems facing people of color today. Research from 2018 shows that four out of five of these neighborhoods where lending was prohibited because of racial demographics between 1935 and 1939 are still struggling today. A plethora of interconnected legacy problems still remain because if you were denied equal access to financial products in the past, even access to your own money is far harder to achieve on equal terms compared with others.
Thankfully, the United States has made some improvement in mitigating inequality in our culture and our financial systems. But over the past several decades, while great strides have been made, many programs that exist to correct the discrimination of the past fall short of eradicating the generational poverty it created. Plus, unfortunately, sustainable, responsible, reasonably priced access to money remains essential to dealing with misaligned paycheck schedules and surviving financial emergencies.
The concentrated use by African Americans to make ends meet by extremely expensive payday loans that must be repaid in one lump sum is an example of a legacy problem directly resulting from generations of unequal access to financial products and services. Research shows that more than all other races or ethnicities, payday loans disproportionately impact African Americans. Black people make up roughly 13% of the total American population, but constitute 23% of all storefront payday loan customers. At best, these lenders make money available to people who can’t secure funds from a traditional bank. At worst, they target and trap people in unending debt, making economic advancement all but impossible. Research from the CFPB showed that four out of five payday loans with average fees of $15 to $45, are rolled over after just 14 days and on average people end up paying $520 in fees on a $375 loan. What’s most troubling is that payday lenders operate in communities populated by people who can least afford the repayment requirement or these excessive fees. The majority of borrowers who use payday loans make less than $30,000 per year and need 5 months to repay.
People of color who avoid payday loans and these loans' ruinous cycle of debt will still, unfortunately, experience disproportionately high costs to bank with more traditional financial institutions. Black people pay the most in bank fees each year and Black families are 1.9 times more likely to overdraw their bank accounts than white families. Despite the increased scrutiny of overdraft fees, most financial institutions today have not reformed their overdraft policies, with the exception of a select group of banks.
The disproportionate use of these alternative financial products and the high costs of traditional banking by communities of color explain why low-cost, responsible alternatives like employer integrated earned wage access (EWA) are needed today more than ever before. On- demand payroll technology offers a new, inexpensive alternative without discriminatory hurdles. On-demand pay is made available to every employee without regard to credit history or any other personal factor. Employer-integrated EWA products and services give working people access to pay they have already earned, to pay bills or use for emergency expenses. There are no interest payments, late fees, or overdraft charges. On-demand pay is available on the same terms for everyone, regardless of income level, credit score, skin color, gender, or any other personal or financial characteristics.
Employer-integrated EWA is also very inexpensive, with many platforms providing free access or charging as little as a $3 nominal processing fee for expedited (instant) delivery. This solution requires employers contracting and aligning payroll systems with EWA platforms. DailyPay is one such company and DailyPay research has shown how and why it’s a payday loan killer and overdraft fee eliminator. While no fintech or new industry will ever be perfect, millions of Americans each year already trust and are turning to EWA during these uncertain times and benefiting from greater financial stability. Access to affordable financial products like these play an important role in achieving the racial equity goals the private sector made during the summer of 2020, when the entire country began a new reckoning with how people of color are treated in the United States.
Today, we are at an inflection point where fintechs are helping to open doors to affordable financial products and services previously shut for specific, targeted reasons based on race. EWA in particular works to swing these doors wide open and build a bridge to the equitable financial future so many have been working towards. As new innovations continue to help reverse the overlapping wrongs of the past, we encourage all tech industry partners to join us in this important mission.