Speech by Governor Barr on financial inclusion – Federal Reserve Board (.gov)

Report on Financial Inclusion as a Catalyst for Sustainable Development

This report analyzes strategies for enhancing financial inclusion, framing them within the context of the United Nations Sustainable Development Goals (SDGs). Financial inclusion is a critical enabler for achieving a safe, fair, and stable financial system, which directly contributes to broader economic and social objectives, including SDG 1 (No Poverty), SDG 8 (Decent Work and Economic Growth), and SDG 10 (Reduced Inequalities).

Foundational Banking Access and the Goal of Reduced Inequalities (SDG 10)

The Imperative of Basic Bank Accounts

Access to basic bank account services is the cornerstone of financial inclusion and a prerequisite for economic participation. These accounts are essential for:

• Receiving direct deposits of wages, benefits, and tax refunds.
• Connecting to digital payment systems.
• Serving as an entry point for accessing credit for households and businesses.

Persistent Disparities in Account Access

While the number of unbanked Americans has reached its lowest point since 2009, significant disparities remain, undermining progress toward SDG 10. Data from the 2023 FDIC National Survey of Unbanked and Underbanked Households reveals that certain groups face disproportionate barriers:

• Households with a working-age person with a disability are three times more likely to be unbanked.
• Hispanic households are five times more likely to be unbanked than White households.
• African American and American Indian/Alaskan Native households are six times more likely to be unbanked than White households.

Primary reasons cited for not having a bank account include:

1. High or unpredictable fees.
2. High minimum balance requirements.
3. Costs associated with opening an account.

Strategic Partnerships and Innovations for Inclusive Finance

The Bank On Program: A Model for Partnership (SDG 17)

The Bank On program, supported by the Cities for Financial Empowerment Fund (CFEF), exemplifies a successful multi-stakeholder partnership (SDG 17) to overcome barriers to banking access. Key features of this initiative include:

• Coalitions of financial institutions, community organizations, and local governments working collaboratively.
• CFEF certification for accounts that meet standards for affordability, such as low fees and low minimum opening deposits.
• Long-standing partnership with the Federal Reserve System for engagement, outreach, and data collection via the Bank On National Data Hub (BOND).

Faster Payments and Technological Infrastructure (SDG 9)

Advancements in payment technology are crucial for building resilient financial infrastructure (SDG 9) and serving the needs of financially vulnerable populations. Real-time payment systems offer significant benefits:

• Provide immediate access to funds for cash-strapped households and businesses.
• Enable better control over payment flows, helping to avoid overdraft fees.
• Facilitate just-in-time payments for essential expenses.

Global and domestic examples highlight this progress:

• India’s Unified Payments Interface (UPI): This digital instant transfer system has demonstrably increased financial inclusion, particularly in rural areas.
• The Federal Reserve’s FedNow Service: Launched in 2023, this interbank system allows for instant, secure money transfers, 24/7. Early applications, such as instant wage access for gig workers, directly support household cash flow management.

Addressing Poverty and Economic Vulnerability (SDG 1)

Responsible Small-Dollar Lending

Access to affordable small-dollar credit is a critical tool for helping households manage income volatility and avoid poverty traps (SDG 1). The Federal Reserve’s 2024 Survey of Household Economics and Decisionmaking found that nearly 20% of adults could not cover an unexpected $400 expense without resorting to high-cost credit or selling assets. This figure rises to 46% for households with incomes under $25,000.

To address this, regulatory guidance issued in 2020 promotes principles for responsible small-dollar loan programs offered by banks:

1. Products should be designed for successful repayment, indicating appropriate underwriting.
2. Terms and pricing must minimize adverse outcomes like cycles of debt.
3. Program structures should enhance a borrower’s financial capabilities and credit history.

Leveraging Alternative Financial Data for Broader Credit Access

The use of alternative financial data is an innovative approach to promoting more equitable access to credit, aligning with SDG 10. This method helps lenders evaluate individuals with limited or no traditional borrowing history by:

• Analyzing cash-flow data, such as steady income and consistent bill payments, to assess creditworthiness.
• Providing a “second look” for consumers who would otherwise be denied credit based on traditional scores.
• Utilizing technologies like Application Programming Interfaces (APIs) to facilitate automated and faster loan decisions, which is critical for low-income borrowers facing unexpected expenses.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 1: No Poverty

  The article directly addresses poverty by focusing on financial inclusion for low-income individuals and families. It discusses how access to affordable financial services can help “low-income customers” and “underserved families” build more secure lives. The text highlights the struggles of households with incomes under $25,000, linking financial exclusion to economic vulnerability, which is a key aspect of poverty.

• SDG 8: Decent Work and Economic Growth

  The article connects financial inclusion to broader economic health, stating that “access to credit for low-and-moderate income households and small businesses helps the economy to grow.” It also mentions support for “minority entrepreneurship” and the benefits of instant payments for “gig-economy workers,” which relates to promoting entrepreneurship and supporting new forms of work, contributing to overall economic growth.

• SDG 9: Industry, Innovation, and Infrastructure

  This goal is addressed through the article’s extensive discussion of technological advancements and innovation in the financial sector. It highlights the development of “faster payments services” like the FedNow service in the U.S. and the Unified Payments Interface (UPI) in India. The use of “alternative data,” “application programming interfaces (APIs),” and other technologies to improve financial services represents an upgrade of the financial infrastructure to be more inclusive and efficient.

• SDG 10: Reduced Inequalities

  The article explicitly points out the disparities in financial access among different demographic groups. It states that “there remain groups that struggle with low account access, including those who are disabled, those without a high school diploma, and minority groups.” It provides specific data showing that households with a disabled person, as well as “Hispanic and African American households and American Indian and Alaskan Native households,” are significantly more likely to be unbanked. The initiatives discussed aim to reduce these inequalities by expanding access to these specific underserved populations.

• SDG 17: Partnerships for the Goals

  The article emphasizes the importance of collaboration between different sectors to advance financial inclusion. The “Bank On” program is presented as a prime example, described as being “led by coalitions of regional financial institutions, community groups, and local governments working together.” The text also notes that the “Federal Reserve System has long been a partner of the Bank On Initiative,” showcasing a public-private partnership model to achieve a common goal.

2. What specific targets under those SDGs can be identified based on the article’s content?

• Target 1.4: Equal rights to economic resources and access to financial services

  This target aims to ensure the poor and vulnerable have access to financial services. The article’s entire theme revolves around this, focusing on providing “access to basic bank account services,” “responsible small-dollar lending,” and other financial tools for “low-and-moderate income households” to help them “build more secure lives.”

• Target 8.10: Expand access to banking, insurance and financial services for all

  This target calls for strengthening domestic financial institutions to expand access to banking for all. The article details efforts to achieve this, such as the Bank On initiative, which works to “bring households into the financial system” by offering certified, low-cost bank accounts. The discussion on using alternative data to “promote credit access” for those with limited borrowing history also directly supports this target.

• Target 9.3: Increase the access of small-scale enterprises to financial services

  This target focuses on increasing access to financial services, including affordable credit, for small businesses. The article highlights that “access to credit for… small businesses helps the economy to grow” and discusses how innovations like faster payments and alternative data can benefit “small businesses that need to tightly manage payment inflows and outflows.”

• Target 10.2: Empower and promote the social, economic and political inclusion of all

  This target seeks to promote the inclusion of all, irrespective of disability, race, or economic status. The article directly addresses this by identifying the financial exclusion of “those who are disabled,” “minority groups,” and “low-income customers.” The programs and innovations discussed are explicitly aimed at including these marginalized groups in the formal financial system.

• Target 17.17: Encourage effective public, public-private and civil society partnerships

  This target promotes multi-stakeholder partnerships. The article provides a clear example with the Bank On program, which is described as a “coalition model, which involves establishing relationships with local and state governments, public officials, and community organizations” in partnership with financial institutions and with support from the Federal Reserve.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Indicator: Proportion of population with a bank account

  The article explicitly refers to the “decline in the rate of people who are unbanked” and cites the “Federal Deposit Insurance Corporation’s 2023 National Survey of Unbanked and Underbanked Households.” It provides disaggregated data, noting that “Hispanic and African American households… are five and six times as likely, respectively, to be unbanked as White households.” This directly measures access to basic financial services (Targets 1.4, 8.10, 10.2).

• Indicator: Number of bank branches or access points offering inclusive services

  Progress in partnerships and service availability can be measured by the reach of inclusive programs. The article states, “Over 46,000 bank branches nationwide offer a certified Bank On account,” providing a concrete metric for the expansion of accessible banking options (Targets 8.10, 17.17).

• Indicator: Proportion of adults who can access emergency funds

  The article implies an indicator of financial resilience by citing the “Fed’s 2024 Survey of Household Economics and Decisionmaking.” It notes that when faced with a “$400 expense, nearly 20 percent of adults” would struggle to pay, a figure that “increases to 46 percent” for households with incomes under $25,000. The availability and use of “responsible small-dollar loan programs” can be tracked to measure improvement in this area (Target 1.4).

• Indicator: Adoption of digital and innovative financial services

  The article suggests that the adoption of new technologies is a measure of progress. It mentions the launch of “FedNow, an interbank payment system” and notes that the Reserve Bank of India has seen “an increase in financial inclusion” since the implementation of its Unified Payments Interface (UPI). Tracking the number of institutions using FedNow or the volume of instant payments would serve as an indicator of infrastructural improvement and innovation (Target 9.3).

SDGs, Targets, and Indicators Summary

Source: federalreserve.gov