Generational wealth can only occur if previous generations were able to effectively save and develop equity. Most of this saving typically occurs through bank accounts and equity development occurs through mortgages and other types of loans. Now, since this is the case, one would hope that Americans would rush to the banking industry to try to create generational wealth. For white Americans this is relatively true, as the percentage of unbanked sits at 4%. However, for African American households, this percentage sits at 21%.
This is alarming. The FDIC, citing numerous studies, states that being unbanked is associated with higher transactional costs and poor saving behavior. And, if African Americans are unbanked at a high rate, then a good portion of the group will be unable to move up the American social ladder via mortgages or general saving.
But, why does this occur? For one, small entry barriers, such as minimum balances and service charges coax African Americans to not establish bank accounts. Banks also require deposited checks to clear after two to three days, resulting in customers opting to use check cashers, who provide the full value of a check at a fee – between 2-3%. For these customers, they often need to pay bills on time, and a check clearing period may prevent this from occurring. In turn, they have to pay late fees for their bills or they need to pay an overdraft fee on their accounts. These payments encourage people to avoid banks entirely, resulting in a loss of saving.
Interestingly enough because African Americans do not buy into the banking system, there is a disproportionate number of banks in their communities compared to White communities because it is less profitable to have banks in these areas. Of course, this leads to the groups in these areas to move away from banking. Other financial institutions take up the mantle of banks bringing African Americans into their services.
Clearly the issue of banking disparities are more than the simple choice of not opening bank accounts. So, this begs the question “how can we fix this problem?” Well, one method would be to improve the financial literacy of this group. If they understand the costs and benefits of banks compared to other financial institutions, then the likelihood of them creating a bank account will increase. Another method, proposed by University of Pennsylvania professor Lisa Servon, would require financial institutions to have the costs and benefits they provide clearly labeled, as well as a rating given by the local government informing residents of the value of that financial institution.
It is clear that bank accounts are pivotal to a successful financial life, so it is important that many citizens have these accounts. Thus, if you, or someone you know, does not have a bank account, go out and get one to start a successful financial life.