Published on October 8, 2020

Financial Services and Wealth Creation are Causally Connected

Lack of access to financial services is not just a symptom of America’s racial wealth gap; it is also a cause. Without the ability to efficiently save, invest and insure against risks, many Black families struggle to translate the income they earn to genuine generational wealth.

Based on data from the Federal Reserve’s Survey of Consumer Finance, the typical Black family has only 10 cents for every dollar held by the typical white family. This wealth gap dates back to the decades after emancipation and has remained stubbornly persistent. Redlining, a practice that designates Black communities as unfavorable for home loans and business investment, reduces property values and increases interest rates in many neighborhoods — trends that have impacted African Americans for a century. Largely excluded from the generous financial incentives of The New Deal, the Black community was boxed out of the country’s post World War II boom that vastly expanded the American middle class.

Despite laws prohibiting loan discrimination on the basis of race, the Congressional Black Caucus still calls on regulatory agencies to improve enforcement at a national level. Black and Latino homebuyers are significantly more likely than whites to be turned down for a conventional mortgage loan. A recent analysis from Zillow shows that in 2016, nearly 21% of Black applicants were denied a conventional loan, while 15.5% of Latino were. In 2016, Asian applicants were denied a conventional loan in 10.4% of cases — slightly more than the national average — and whites in only 8.1% of cases.

According to a New America report, many banks also hinder Black wealth creation with discriminatory practices in service offerings. In communities of color, banks charge more for opening and maintaining basic, entry-level checking accounts. The minimum opening deposit is higher in majority Black neighborhoods ($80.60) and in neighborhoods without a racial majority ($97.00) than in white neighborhoods ($68.50). Also, it is less expensive to maintain a checking account opened in a white neighborhood. A minimum balance of only $625.50 is required to avoid fees in majority white neighborhoods, compared to $870.50 in majority Black neighborhoods.