How is wealth defined? In addition to savings, wealth is all about assets -- many of which are inherited over generations. And as the saying goes, wealth begets wealth (ie, having wealth allows for the accumulation of more wealth). This truth is core to understanding the racial wealth gap in the United States, where the median Black family has approximately $17,000 in net wealth compared to $171,000 for the median white family. Even for families with the same income, this discrepancy remains – one result of centuries-long systemic racism in the United States.
A BRIEF HISTORY OF THE RACIAL WEALTH GAP
Black Americans have been barred from building wealth for generations, beginning with chattel slavery. Social Security, for example, initially excluded a large proportion of African-Americans, and many Black World War II veterans were denied benefits guaranteed to them through the GI Bill. Additionally, the New Deal’s “redlining” and the FHA’s historic discriminatory practices have denied (and in some cases, continue to deny) Blacks homeownership and segregate communities.
Still, with this discrimination, a recent study showed that Black Americans actually pay, on average, 13% more in property taxes per year than white property owners. Given that most middle-class American families gain their wealth from equity they have in their homes, housing discrimination plays a major role in the racial wealth gap in that it contributes to barriers to wealth accumulation over time.
From taxation, to student loans, to salary discrepancies (Black college grads will earn 20% less than their white counterparts with college degrees, for instance), clearly there are countless factors that perpetuate the racial wealth gap. According to the Institute for Policy Studies, if white families’ average wealth stopped growing, it would take 228 years for the average wealth held by Blacks to catch up. So what is the innovation ecosystem doing about it?
THE OPPORTUNITY FOR FINTECH
Government action, such as reparations, baby bonds, wealth tax reform, and student loan forgiveness, is largely essential to correct for the compounding effects of systemic racism. Still, fintech and financial services also have the opportunity to address some of the barriers to financial inequity -- and strengthen the United States economy as a whole. McKinsey & Company predicts, for example, that taking measures to close the racial wealth gap could increase the GDP by 4-6% by 2028. How can the industry take action? Here are two ways.
1) Collaborating between Fintechs and Enterprises
The opportunity for fintechs and financial institutions to work together to address this challenge is considerable, from rethinking lending, to credit scores, to investing. Several Black-founded fintech companies, such as MoCaFi and FS Card (acquired in 2018), have partnered with banks to provide less expensive and more flexible banking and credit solutions for low- and moderate-income consumers. MoCaFi, which works with Mastercard and Sunrise Banks to offer a customized debit card, recently launched an upgraded banking platform with features and services designed to address financial inequality in Black, Hispanic, and historically disenfranchised communities.
Additionally, while financial literacy has been proven to not be a main driver of the racial wealth gap, helping Americans build emergency savings is also a key support in long-term wealth accumulation. Over 40% of Americans are unable to cover a $400 emergency expense, and a 2019 study by partner AARP found that 3 in 5 African American adults age 30 and over experienced an unexpected financial challenge in the past year.
These statistics are increasingly dire in light of COVID-19, which has disproportionately affected BIPOC. In an April 2020 study by the Pew Research Center, for instance, 73% of Black adults surveyed said they did not have emergency funds to cover three months of expenses, compared to 47% of white adults in the study.
In light of this challenge, several fintechs (Digit, Flourish, and SaverLife, to name a few), financial institutions, and nonprofits (such as MCFT partner Commonwealth) are partnering to help Americans build savings through strategies such as prize-linked savings, employer-sponsored savings programs, and no-fee liquid savings accounts. Studies show promising results in regards to these strategies -- both for the consumers and the financial institutions themselves. For instance, Commonwealth and EARN recently released a report on digital prize-linked savings tools as part of the Blackrock Emergency Savings Initiative, which showed that these tools not only motivated users to save, but also increased digital engagement rates for the financial institutions.
2) Increasing BIPOC Representation and Leadership
Inequity in the innovation sector is pervasive, with Black entrepreneurs receiving less than 1% of venture capital dollars in the United States (the number is even lower for Black women), and with Black VCs making up less than 5% of venture investors in the U.S.
In financial services, too, there is opportunity to increase BIPOC representation. According to McKinsey, Black employees account for only 7 percent of director-level roles in financial services institutions, with only 2 percent at the executive level. Moreover, 82 percent of loan officers are white, and only 9 percent are Black (this lack of diversity even extends to the Federal Reserve). Inarguably, diversity in the financial, tech, and innovation sectors must increase in order to evolve and ultimately reflect fintech’s original promise: to disrupt the existing system and truly democratize financial services.
WHAT’S AHEAD FOR FINTECH AND FINANCIAL SERVICES
Addressing decades of racial inequity is not a task that startups alone can solve. While the public sector must lead in implementing actionable solutions, startups can work with enterprises to begin to drive change by addressing the symptoms of the racial wealth gap. Fintech has the agility, creativity, and technology to reimagine how financial services can shape the lives of its consumers, and large financial institutions have the knowledge, network, and scale to amplify those solutions and bring them to reality. Together and with the support of the innovation community, startups and enterprises can leverage innovation for real change.