Study Calls for Financial Inclusion Efforts to Address U.S. Inequality

Study Calls for Financial Inclusion Efforts to Address U.S. Inequality

As economic inequality in the United States widens, financial security challenges faced by low-income individuals are becoming more like those seen in developing nations, a report from the Aspen Institute finds.

The report, The Great Convergence: Toward a Global Strategy for Financial Inclusion (11 pages, PDF), argues that financial inclusion efforts, once considered a solution largely for the developing world, are now highly relevant to the U.S. context. According to the report, while inequality has declined globally over the last two decades, it has increased significantly in the U.S., due in part to income volatility, the lack of steady, well-paying jobs, inefficient labor markets, widening income and wealth gaps, lack of economic mobility, resource-starved educational systems, and unaffordable postsecondary education — all elements that are common across the U.S. as well as in many developing countries. The share of people in the lower 40 percent of the U.S. income distribution pyramid lacking funds to cover an emergency, for example, is essentially the same as it is in middle-income countries such as Brazil, Kenya, and Malaysia.

The study also found that while financial inclusion efforts have resulted in significant progress in many middle-income countries, such efforts now face the same challenges as they do in the U.S., including limited access to financial accounts that provide good value for lower-income households, the need to balance access to financial resources with consumer protection, and the difficulty of reaching "the last mile" of the unbanked and underbanked, which in the U.S. has remained steady at around 7 percent and 10 percent of the population, respectively, over the last decade.

The report highlights lessons the U.S. could learn from global financial inclusion efforts, including the value of facilitating small person-to-person transactions; the need to ensure that fintech actually lowers financial service costs for lower-income households; the benefit of short-term small-value savings; the importance of business models focused on serving low-income households and not profit from high-cost credit; and the value of managing liquidity and risk. Lessons developing nations could learn from the U.S. experience include the pros and cons of expanding consumer credit, the importance (and challenges) of ensuring consumer protection, and the need to address persistent discrimination.

The common challenges in both the U.S. and middle-income countries make clear, the report argues, that a shared global strategy would lead to greater progress than the efforts of individual governments working on their own.

"[Nonprofits] focused on financial inclusion or consumer rights tend to be either exclusively domestic or exclusively international. Philanthropic funders rarely organize their grant programs in ways that cross borders between the [U.S.] and middle-income countries," the report concludes. "But all this could change with a platform for linking participants in the global financial inclusion world together."

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