.
A

s COVID-19 continues to spread globally, we are witnessing the largest non-wartime mobilization of government resources in history. On March 27, the CARES Act was signed into law, providing the U.S. economy with over $2 trillion in response to the economic distress caused by the pandemic. Discussions are already underway in Washington for additional economic relief and recovery support in the coming months. And while we have yet to comprehend the long-term impact of this pandemic on individuals, communities, and our national economy, the current large-scale response efforts provide a near-term opportunity to enable inclusive finance in ways unlike never before.

For example, Division B of the CARES Act provides for $1,200 direct payments to Americans making $75,000 or less annually. The Act notes that this relief is to be paid “as rapidly as possible,” which is absolutely essential to the 39% of U.S. adults that recently reported difficulty in covering an unexpected $400 expense. But our ability to reach those who need economic relief most—and fastest—is hindered by their lack of access to even basic checking accounts. According to a recent FDIC report, 25% of U.S. households are unbanked or underbanked, and their banking options are decreasing: between 2014 and 2018, there was a net loss of almost 2,000 branches in lower-income areas, creating a vast patchwork of “banking deserts” across the nation. Individuals in these areas are outside of the system, and it is retreating further from them every day.

Without immediate, innovative solutions, we will not be able to deliver rapid economic relief to our fellow Americans who are most in need, and the economic fallout of COVID-19 will be much worse.

This is where I remain optimistic: America can innovate.

In addition to being the largest economic stimulus in U.S. history, the CARES Act provides an opportunity for public-private partnerships to not only deliver government payments, but also to provide on-ramps for unbanked customers to establish basic checking accounts. There is precedence for this type of effort: in 2012, the U.S. Treasury Department ran a pilot to test linking tax refunds to low cost account opening. Implementing a 2020 version of this program to fulfill the mandate of the CARES Act is too big an opportunity to ignore.

Consider three potential outcomes of delivering $1,200 payments to the unbanked: (1) the government fails to deliver payments; (2) the government mails paper checks or prepaid cards; or (3) the government delivers electronic payments via newly-opened checking accounts at private sector financial institutions. Avoiding the first scenario is paramount: we must get relief payments to those who need them most. And while the second scenario is feasible, it leaves underbanked customers in need of alternative financial institutions such as check cashing or expensive payday loan services in order to cash the check or withdraw the funds, potentially breaking social distancing requirements. The need to reach every individual, and quickly, is an opportunity to realize the third scenario, bringing private-sector banking solutions to those currently excluded.

In deploying $1,200 payments to many underbanked Americans, we can simultaneously address a primary hurdle to opening a bank account: cost.

The average customer acquisition cost for retail banking products in the U.S. is $350-$1,500. Even at the bottom of this range, banks do not earn enough revenue on low balance accounts to recoup even their account opening costs. With direct government payments, we have the opportunity to not only help banks to identify and reach these customers, but can provide an opening account balance of $1,200. Allowing banks to “piggy-back” on the government’s customer due diligence process, it becomes much cheaper for banks to open accounts. And given this market size—up to 25% of U.S. households—banks can benefit from economies of scale as they onboard these customers.

The leverage of this type of federated public-private approach is difficult to understate. In the immediate-term, it enables faster, cheaper, and more secure delivery of economic relief to those most in need. In the medium term, it extends the coverage of existing private-sector infrastructure to readily handle additional economic subsidies should they be necessary during this pandemic. And in the long term, it onboards millions of Americans to the financial sector, increasing their economic mobility and enabling them to better participate in our shared prosperity as we recover from COVID-19 and restart our economy.

This opportunity is only available because of the rapid response necessary to abate the economic distress created by the COVID-19 pandemic. If we do not act on this now, we will not have another opportunity until the next national emergency. And at that point, wouldn’t we rather have this solution implemented so that it requires no additional mobilization during a future crisis?

I hope we do not miss this opportunity. It is a rare silver lining in a time of such overwhelming difficulty and could help our response and recovery efforts benefit those most in need.

About
Matthew Davie
:
Matthew Davie is chief strategy officer at Kiva, a global non-profit organization that has facilitated over $1.5 billion in micro-lending in more than 80 countries. He is also a board member of the Libra Association.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.

a global affairs media network

www.diplomaticourier.com

Use Our COVID-19 Response to Drive Financial Inclusion

May 12, 2020

As we provide direct economic relief, we can ensure that everyone has access to a bank account.

A

s COVID-19 continues to spread globally, we are witnessing the largest non-wartime mobilization of government resources in history. On March 27, the CARES Act was signed into law, providing the U.S. economy with over $2 trillion in response to the economic distress caused by the pandemic. Discussions are already underway in Washington for additional economic relief and recovery support in the coming months. And while we have yet to comprehend the long-term impact of this pandemic on individuals, communities, and our national economy, the current large-scale response efforts provide a near-term opportunity to enable inclusive finance in ways unlike never before.

For example, Division B of the CARES Act provides for $1,200 direct payments to Americans making $75,000 or less annually. The Act notes that this relief is to be paid “as rapidly as possible,” which is absolutely essential to the 39% of U.S. adults that recently reported difficulty in covering an unexpected $400 expense. But our ability to reach those who need economic relief most—and fastest—is hindered by their lack of access to even basic checking accounts. According to a recent FDIC report, 25% of U.S. households are unbanked or underbanked, and their banking options are decreasing: between 2014 and 2018, there was a net loss of almost 2,000 branches in lower-income areas, creating a vast patchwork of “banking deserts” across the nation. Individuals in these areas are outside of the system, and it is retreating further from them every day.

Without immediate, innovative solutions, we will not be able to deliver rapid economic relief to our fellow Americans who are most in need, and the economic fallout of COVID-19 will be much worse.

This is where I remain optimistic: America can innovate.

In addition to being the largest economic stimulus in U.S. history, the CARES Act provides an opportunity for public-private partnerships to not only deliver government payments, but also to provide on-ramps for unbanked customers to establish basic checking accounts. There is precedence for this type of effort: in 2012, the U.S. Treasury Department ran a pilot to test linking tax refunds to low cost account opening. Implementing a 2020 version of this program to fulfill the mandate of the CARES Act is too big an opportunity to ignore.

Consider three potential outcomes of delivering $1,200 payments to the unbanked: (1) the government fails to deliver payments; (2) the government mails paper checks or prepaid cards; or (3) the government delivers electronic payments via newly-opened checking accounts at private sector financial institutions. Avoiding the first scenario is paramount: we must get relief payments to those who need them most. And while the second scenario is feasible, it leaves underbanked customers in need of alternative financial institutions such as check cashing or expensive payday loan services in order to cash the check or withdraw the funds, potentially breaking social distancing requirements. The need to reach every individual, and quickly, is an opportunity to realize the third scenario, bringing private-sector banking solutions to those currently excluded.

In deploying $1,200 payments to many underbanked Americans, we can simultaneously address a primary hurdle to opening a bank account: cost.

The average customer acquisition cost for retail banking products in the U.S. is $350-$1,500. Even at the bottom of this range, banks do not earn enough revenue on low balance accounts to recoup even their account opening costs. With direct government payments, we have the opportunity to not only help banks to identify and reach these customers, but can provide an opening account balance of $1,200. Allowing banks to “piggy-back” on the government’s customer due diligence process, it becomes much cheaper for banks to open accounts. And given this market size—up to 25% of U.S. households—banks can benefit from economies of scale as they onboard these customers.

The leverage of this type of federated public-private approach is difficult to understate. In the immediate-term, it enables faster, cheaper, and more secure delivery of economic relief to those most in need. In the medium term, it extends the coverage of existing private-sector infrastructure to readily handle additional economic subsidies should they be necessary during this pandemic. And in the long term, it onboards millions of Americans to the financial sector, increasing their economic mobility and enabling them to better participate in our shared prosperity as we recover from COVID-19 and restart our economy.

This opportunity is only available because of the rapid response necessary to abate the economic distress created by the COVID-19 pandemic. If we do not act on this now, we will not have another opportunity until the next national emergency. And at that point, wouldn’t we rather have this solution implemented so that it requires no additional mobilization during a future crisis?

I hope we do not miss this opportunity. It is a rare silver lining in a time of such overwhelming difficulty and could help our response and recovery efforts benefit those most in need.

About
Matthew Davie
:
Matthew Davie is chief strategy officer at Kiva, a global non-profit organization that has facilitated over $1.5 billion in micro-lending in more than 80 countries. He is also a board member of the Libra Association.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.