Black Americans have historically had a challenging relationship with the financial services industry. From less access to financial institutions in their communities, to lower approval rates for credit applications, to less participation and satisfaction across a range of financial products and services, Black consumers face a variety of inequities that affect their ability to build and maintain their wealth.
These disparities have a significant human cost as well as an economic cost. Today, Black Americans hold about 1.5% of the nation's wealth, and the average Black family has just one-eighth of the wealth of the average white family. This impacts everything from ability to invest in children's education to buying a home or starting a business.
Despite being underserved, a 2021 McKinsey study found, more than half of Black consumers, higher than their non-Black counterparts, are looking to increase spending and explore new financial services products. At the same time, Black consumers are still much less likely to be satisfied with their financial service options. This presents a $225 billion cumulative spending opportunity by 2030 for providers that offer more accessible and more equitable products and services to Black consumers.
There are a number of strategies that retail banks and wealth managers can implement to help Black consumers build economic security — while also building value for their organizations.
Developing innovative products that emphasize continuing financial education and take a comprehensive view of customers' financial profiles can help Black consumers make savvy decisions. One Black-founded fintech reports rent payments to credit agencies to help build credit histories; this can help lower-income consumers who are demonstrably financially responsible but may have difficulty building a typical credit history. Another approach by providers has been to devise alternative fee structures to replace charges like overdraft fees that disproportionately affect Black consumers.
Black Americans comprise 13.6% of the U.S. population — and 23% of storefront payday loan customers. Some of these institutions offer poor service at high cost — as much as a 400% annual rate — and are typically found in low-income and minority neighborhoods. To meet the demand for short-term cash, financial services companies can market different solutions, such as buy now/pay later programs and minority-focused lending programs. They can also look into connecting consumers with peer-to-peer lending platforms.
In every sector of the financial industry, Black Americans report higher dissatisfaction and greater inconvenience. Streamlining processes could widen access generally and be particularly helpful to Black consumers. In addition, high account minimums and maintenance fees can deter Black Americans from signing up. Simplifying loan applications to eliminate any documents that are not strictly required to assess creditworthiness could improve access to lower-income applicants.
Inclusive marketing and customer service programs have become more common, but can be reinforced and expanded by working with Black-owned marketing and media companies. The same premise applies beyond traditional media. Black consumers are 10 percentage points more likely than other consumers to discover new financial products through social media and seven percentage points more likely to listen to recommendations from peers. Finally, companies should use customer feedback to inform employee diversity and work with trusted community organizations to improve employee and customer engagement.
Banks and wealth managers also need to go where their potential customers are. The presence of some predatory payday loan storefronts and check-cashers in majority-Black neighborhoods prove there is unmet demand for financial services. If consumers can pay for these services, they can certainly afford to use banks. But between 2010 and 2019, the number of banks in those neighborhoods fell almost 15%. Having a visible, bricks-and-mortar presence is strongly correlated with more mortgage originations and small-business loans. Bank branches, in short, are community assets — and Black communities do not have enough of them. Almost a third of Black consumers were underbanked as of 2019 — and such Black households stand to lose $40,000 over the course of a lifetime in higher fees.
Providing good digital options can help to narrow the banking gap, particularly since Black consumers are more likely to own a smartphone and use it more frequently than white consumers. Financial institutions could partner with digital platforms that have credibility within Black communities and offer service to improve financial literacy.
Many financial institutions are investing more to address these issues, but overall, the sector is still falling short. When McKinsey analyzed more than 50 financial institutions, it found that only six were meeting the needs of Black consumers at scale based on key satisfaction metrics. By focusing on these strategies, financial services companies have an opportunity to better serve this consumer segment, advance equity and grow their bottom lines.
