More than half of a century of financial regulation is grounded in this idea: If you give someone fair access to the financial system, you open the doors to a more promising future for him or her.
Our research at BBVA Compass has found that giving Internet access to isolated families has the potential to increase the number of individuals with a bank account by 10%. While race and education levels are still major factors in determining financial inclusion, Internet access is what matters most in a fast-moving and digital economy.
Financial inclusion is on par with education, health care access and property rights as an influencer of economic opportunity. Policymakers have tried to guarantee that the most vulnerable groups in society have fair and equitable access to financial services by lowering barriers to participation, increasing financial literacy, eliminating discriminatory practices and improving the regulatory landscape.
The results of these efforts have been mixed. The U.S. has the largest and one of the most advanced financial systems in the world in both absolute and relative terms. Yet, its benefits do not extend to the entire population if one considers that most basic of measures — ownership of a bank account. In fact, according to the World Bank, the U.S. ranks 23 out of 38 high-income nations in the percentage of people with a bank account. And for adults in the poorest 40% of households, the share of those without a bank account in the U.S. is more than eight times higher than in the United Kingdom, Canada or Australia.
Lawmakers and the private sector rightly created ways to address the fact that a person's race, income, gender, age and other factors could act as barriers to accessing the traditional banking system. But factors that are correlated with financial inclusion are also associated with poverty, education levels and race. They leave significant challenges for researchers and policymakers in determining where to focus resources and where to find opportunities for collaboration.
The policy implications of our findings are substantial and also immediate. Society needs to embrace the notion that access to the Internet is as important as having clean drinking water and adequate sanitation. Just like previous generations understood that these services were essential, our job today is to ensure widespread access to the Internet so that the next generations can benefit from increased connectivity. This will not only lift education and productivity standards but it will also make a significant contribution to lowering inequality, alleviating poverty and boosting economic growth.
Addressing cost is paramount. More than a quarter of households with income below $30,000 aren't using the Internet. Broadband in the U.S. is among the most expensive in the developed world, a stark irony considering it is the birthplace of the Internet. Half of American homes have only two options for Internet service providers for basic broadband, according to the Federal Communications Commission. This could explain why costs reach $100 a month for basic Internet in many places. In fact, the cost of broadband in the U.S. is almost twice as that in Finland, Denmark and Sweden — where 100% of the adult population has a bank account.
Boulder, Colo., which ranks at the top of our Financial Inclusion Metropolitan Index, is one of a few areas in the U.S. with financial inclusion levels that rival those of the Nordic countries. Interestingly, the city once owned miles of fiber that its residents could not take advantage of because of laws limiting municipal broadband. But the city challenged the telecommunications industry at the polls in 2014 and won. In doing so, Boulder has become one of a growing number of municipalities that have voted to allow their local governments to increase competition by offering Internet service to residents. This speaks to the mindset of a community that has embraced technology as a way to lift up everyone that calls Boulder home. The other communities that round out the top five in our index are San Francisco, Seattle, San Jose, Calif., and Washington, D.C. — all of which have had robust efforts to increase access to technology.
The FCC proposal to give low-income individuals a $9.25-a-month subsidy for broadband Internet service could also move the financial inclusion needle. At an estimated cost of $1.7 billion per year, the program is expected to reach 12 million households.
Still, subsidies are not the only way forward or even the best tool. Greater competition could also reduce prices while fostering innovation. In addition, collaboration between Internet providers, financial institutions, information and communication technology companies, and local government is important.
One option could be for banks to contribute to the cost of broadband or mobile Internet access based on the clients' usage of banking apps. Not surprisingly, the Federal Deposit Insurance Corp. concluded that mobile financial services have the potential to address the challenges of reaching the underserved. According to the FDIC, 90% of households that are underserved by the banking industry are likely to have mobile phones and 32% of them are likely to use mobile banking as their main banking method.
Delivering digital technologies yields a bigger bang for the buck than financial inclusion policies that target race or education. With the proliferation of the virtual economy and the need to keep up with progress, the shortest road to financial inclusion is a fiber-optic one that's paved by both the financial industry and nonbank stakeholders.
Nathaniel Karp is chief economist for BBVA Compass, and Boyd Nash-Stacey is a senior economist at BBVA Compass. They can be reached on Twitter @BBVAResearchUSA.