[co-author: Nicole Hill]
As Black History Month draws to a close, it’s hard to overlook the connections between racial history, poverty, affordable financial services and modern American life. Surviving a pandemic over the past two years has taught us that unpredictability and constant readjustment are stressful and expensive. COVID and variant surges have made everyday decisions, both large and small, extremely difficult to plan ahead of time. But that costly unpredictability doesn’t come as much of a shock to paycheck-to-paycheck families. In addition, many color families are still suffering from the negative effects drawn in red Access to money and other forms of discriminatory treatment, these struggles are definitely not new.
COVID has also exacerbated existing and new financial uncertainty research from last month offers a glimpse into the uneven physical and economic impact of the virus across racial and demographic lines. It’s the latest data point showing how low-income Americans and Americans of color have endured the worst of the pandemic, just as they have in previous economic downturns.
To help with a variety of expenses, all Americans working today deserve affordable access to their own money when they earn it. Childcare payments, utility bills, and auto loan or auto insurance premiums rarely match payslips. Also, unexpected costly repairs required for a large appliance or vehicle, or a health insurance deductible, never occur as planned and can take weeks or even months to pay for themselves for families without adequate savings.
These situations are particularly acute for black families. In the past, public policies segregated access to affordable financial products by race redlining certain neighborhoods. The inability of most African Americans to access money at a reasonable cost to buy a home or acquire assets and begin building generational wealth, relates directly to many of the problems people of color face today. Research from 2018 shows that four out of five of those neighborhoods, where lending was banned in 1935-1939 due to racial demographics, are still struggling today. A a plethora of interconnected legacy issues remain because if you have not had equal access to financial products in the past, equal access to your own money is also far more difficult to achieve compared to others.
Thankfully, the United States has made some improvements in reducing inequality in our culture and financial systems. But while great strides have been made in recent decades, many programs that exist to correct past discrimination are failing to eradicate the generational poverty that created them. Also, unfortunately, sustainable, responsible, and affordable access to money remains essential to dealing with misaligned paycheck plans and surviving financial emergencies.
The concentrated use of extremely expensive payday loans that must be repaid in one lump sum by African Americans to make ends meet is an example of a legacy problem that results directly from generations of unequal access to financial products and services. research shows that payday loans disproportionately affect African Americans more than any other race or ethnicity. Black people, however, make up approximately 13% of the total American population make up 23% of all payday loan customers. At best, these lenders make money available to people who cannot secure money from a traditional bank. At worst, they target people and trap them in endless debt, making economic progress all but impossible. research by the CFPB showed that four out of five payday loans with average fees of $15 to $45 are renewed after just 14 days and on average people pay $520 charges for a $375 loan. Most worryingly, payday lenders operate in communities populated by people who can afford the least the repayment obligation or these excessive fees. The majority of borrowers who take advantage of payday loans earn less than $30,000 per year and need 5 months repay.
Unfortunately, people of color who avoid payday loans and the ruinous cycle of debt that these loans bring will still incur disproportionately high costs of banking with more traditional financial institutions. black pay the most in bank charges every year and black families are 1.9 times more likely to overdraw their bank accounts than white families. Despite the increased scrutiny of overdraft feesmost financial institutions have not reformed their overdraft policies today, 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 labor access (EWA) are needed now more than ever. On-demand payroll technology offers a new, cost-effective alternative without barriers to discrimination. On-demand payment is made available to every employee without regard to creditworthiness or other personal factors. Employer-integrated EWA products and services allow working professionals to access wages already earned, pay bills, or use for emergency expenses. There are no interest payments, reminder fees or overdraft fees. Pay-on-demand is available to everyone on the same terms, regardless of income level, credit score, race, gender, or any other personal or financial characteristics.
Employer-integrated EWA is also very cost-effective, as many platforms offer free access or only charge a nominal processing fee of just $3 for expedited (instant) delivery. This solution requires employers to contract and align payroll systems with EWA platforms. DailyPay is one such company and DailyPay Research has shown how and why it is 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 turn to EWA during these uncertain times and benefit from greater financial stability. Access to affordable financial products like these plays an important role in meeting the racial justice goals set by the private sector in the summer of 2020, when the whole country began a new reckoning of how people of color are treated in the United States.
Today we are at a tipping point where fintechs are helping to open doors to affordable financial products and services that were previously closed for specific, well-aimed reasons based on race. The EWA in particular is working to throw those doors wide open and build a bridge to the just financial future that so many have been working towards. As new innovations continue to help reverse the overlapping mistakes of the past, we encourage all technology industry partners to join us on this important mission.