Exploring Causes Effects and Solutions to Financial Illiteracy and Exclusion among Minority Demographic Groups Abhinav Shanbhag

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Exploring Causes, Effects, and Solutions to Financial Illiteracy and

Exclusion among Minority Demographic Groups

Abhinav Shanbhag

October 2022

Abstract

Americans across demographic groups tend to have low ﬁnancial literacy, with low-income people and minorities at

highest risk. This opens the door to the exploitation of unbanked low-income families through high-interest alternative

ﬁnancial services. This paper studies the causes and effects of ﬁnancial illiteracy and exclusion in the most at-risk

demographic groups, and solutions proven to bring them into the ﬁnancial mainstream. This paper ﬁnds that immi-

grants, ethnic minorities, and low-income families are most likely to be unbanked. Furthermore, the causes for being

unbanked include the high fees of bank accounts, the inability of Americans to maintain bank accounts due to low

ﬁnancial assets or time, banking needs being met by alternative ﬁnancial services, and being provided minimal help

while transitioning from welfare to the workforce. The most effective solutions to ﬁnancial illiteracy and exclusion

include partnerships between nonproﬁts, banks, and businesses that use existing alternative ﬁnancial service platforms

to transition the unbanked into using products that meet their needs, educating the unbanked in the use of mobile

banking, and providing proﬁtable consumer credit products targeting unbanked families with features that support

their needs in addition to targeted and properly implemented ﬁnancial literacy programs.

1 Introduction

Over the years, the importance of ﬁnancial literacy has grown tremendously throughout the world as ﬁnancial respons-

ibility is increasing. Today, many people have to pay off their student debt and mortgages, plan for their retirement,

and manage investment accounts. Financial literacy ranges from budgeting and investing to taxes and insurance.

However, while people are increasingly aware of the importance of ﬁnancial literacy, ﬁnancial literacy rates have

remained relatively low, even in one of the most technologically advanced and educated countries in the world: the

United States. A study conducted by The National Council on Economic Education was designed to evaluate adults’

and students’ understanding of basic economics as outlined in the Voluntary National Content Standards in Economics

(Markow and Bagnaschi, 2005). 3,512 U.S. adults aged 18+ and 2,242 U.S. students in grades 9-12 completed the

survey. Additionally, the data was weighted to represent the total U.S population of adults 18 and over and the total

U.S population of 9th – 12th grade students. The results were disappointing as, although progress had been made

over the past years, a majority of high school students did not understand basic concepts in economics that are integral

to function ﬁnancially in the real world. In fact, 28% of adults and 60% of high school students got an “F” on the

economics quiz, while just 34% of adults and 9% of high school students got an “A” or “B”(Markow and Bagnaschi,

2005).

These results not only depict the lack of ﬁnancial literacy and ﬁnancial education in high schools, but also the

inability of most high school students to make sound ﬁnancial decisions in the real world after graduating high school.

Without basic knowledge of ﬁnancial concepts, people have little awareness of the importance of paying back debts

and loans, planning for retirement, and managing mortgages. This lack of knowledge is extremely problematic as

Americans have to learn ﬁnancial concepts through failure, which leads many into chronic debt or ﬁnancial instability.

Table 1 details that economic understanding increases with age, which suggests that Americans tend to learn economic

concepts through experience, rather than knowledge they gain during high school - an educational institution whose

ﬁrst priority is to prepare students for the real world (Markow and Bagnaschi, 2005).

The percentages of Americans that received an “F” on the economics quiz, as reported by the study, are listed

below: (Markow and Bagnaschi, 2005).

arXiv:2210.11403v1 [econ.GN] 20 Oct 2022

Table 1: Scores on the Financial Literacy Quiz by Age Group

Age

18-34 35-49 50-64 65+

A 12% 18% 18% 20%

B 13% 16% 19% 22%

C 25% 23% 24% 27%

D 14% 13% 14% 13%

F 35% 30% 25% 18%

Average Score 66 70 73 76

- 66% of 9th - 10th graders got an “F”

- 53% of 11th - 12th graders got an “F”

- 35% of 18 - 34 year olds got an “F”

- 30% of 35 - 49 year olds got an “F”

- 25% of 50 - 64 year olds got an “F”

- 18% of 65+ year olds got an “F”

Learning ﬁnancial concepts through experience and failure can be detrimental to the lives of Americans. To learn

about credit card debt, Americans have to experience the impact of racking up high debt through high-interest credit

cards. To ﬁle taxes correctly, Americans have to experience facing penalties from the IRS for ﬁling taxes incorrectly

or failing to pay taxes entirely.

The national ﬁnancial literacy rate has been reported to have either declined, stayed stable, or grown slightly

over the past 2 decades. The National Financial Capability Study in 2018 indicates that ﬁnancial knowledge has

been trending downwards. The study, in fact, found that respondents who answered four or more questions correctly

declined from 44% in 2015 to 40% in 2018 (Lin et al. 2018). Some surveys, such as the Jump$tart Coalition Survey

of High School Seniors and College Students, done bi-annually by the Jump$tart coalition for ﬁnancial literacy, have

reported that ﬁnancial literacy rates even declined in the early 2000s (Mandell, 2008). Multiple other studies have

also documented the low ﬁnancial literacy rate in the United States (Bernheim, 1995; Bernheim, 1998; Lusardi and

Mitchell, 2007b; Lusardi and Tufano, 2008).

To improve the ﬁnancial education high schoolers receive, national economic and ﬁnance organizations - the Coun-

cil for Economic Education, for example - have pushed for laws and set national standards. The Council for Economic

Education has set notable standards including the National Standards for Financial Literacy. Additionally, 45 states

have included personal ﬁnance in their K-12 standards. The website of the National Conference of State Legislatures

details various ﬁnancial legislation in 2021 and 2022 as well (Morton and Lesley, 2021; Morton and Lesley, 2022).

However, the effectiveness of ﬁnancial education across the country has not been proven due to mixed results from

various studies measuring the effectiveness of high school ﬁnancial literacy and personal ﬁnance programs in high

school. This may come across as surprising to many Americans, especially with the increasing awareness and legis-

lation for ﬁnancial literacy over the years. Low national ﬁnancial literacy rates and the ambiguity in the effectiveness

of high school ﬁnancial education programs have prompted national organizations - committed to improving ﬁnancial

literacy and education - and the government to create new policies in an effort to mitigate ﬁnancial illiteracy.

Table 2: Financial Literacy Scores by Banked Status

Full Sample Unbanked Banked

Financial Literacy Score (out of 5) 3.007 2.026 3.062

Savings Question Correct 0.782 0.619 0.791

Inﬂation Question Correct 0.649 0.408 0.662

Bond Question Correct 0.278 0.195 0.283

Mortgage Question Correct 0.761 0.498 0.775

Stock Diversity Question Correct 0.537 0.306 0.55

As this research paper focuses on both ﬁnancial illiteracy and ﬁnancial exclusion, it is important to show the

correlation between both topics. The data set in Table 2 is used from the 2009 Financial Capability in the United

States survey created by the Financial Industry Regulatory Authority (Lusardi, 2011). A State-By-State survey was

used because of the large number of observations (28,146 American adults with a minimum of 500 adults from each

state). The questionnaire asked respondents 5 questions relating to ﬁnance to gauge relative ﬁnancial literacy rates

in different demographic groups; unbanked respondents consistently scored lower than banked respondents on all 5

questions (Lusardi, 2011). The average score on the test for banked participants was a little more than 1 point higher

than unbanked participants (Lusardi, 2011). The fact that unbanked participants have consistently lower scores goes

to show that ﬁnancial literacy does, in fact, reduce the likelihood of being unbanked.

I am currently conducting ﬁnancial literacy workshops with organizations in the Bay Area including but not limited

to YMCA, Peninsula Bridge, and DreamCatchers, in addition to partnering with the parks and recreation departments

of Bay Area cities such as Los Altos and Mountain View. This small-scale initiative is aimed at teaching integral

personal ﬁnance concepts - budgeting, taxes, and credit to name a few - to middle school and high school students.

Hands-on activities and online simulations have proved to have the largest impact on students’ education in personal

ﬁnance. This research paper also serves the second purpose of investigating these observations further. These data and

corresponding studies fueled my motivation to further research the speciﬁc demographics at risk for being unbanked

in addition to the causes, effects, and solutions to ﬁnancial exclusion and illiteracy. This paper will be split into 4

categories, with each category diving deep into each of these topics.

2 Demographics of Unbanked and Financially Illiterate Americans

Figure 1: Financial Literacy Index by Gender, Education, and Ethnicity

The data from Figure 1 was collected from the National Financial Capability Study in 2009 (Lusardi, 2011). The data

are average scores of certain demographic groups on a ﬁnancial literacy quiz consisting of 5 questions. As shown in

Figure 1, many demographic groups have low ﬁnancial literacy. Average ﬁnancial literacy scores are drastically lower

among some demographic groups in the US, including women, those with lower education, and African-Americans

and Hispanics. African-Americans scored an average of 0.7 points lower than Caucasians, while those with lower than

a high school education scored an average of an astounding 1.75 points below college graduates (Lusardi, 2011). Al-

though these scores are reported in single demographic characteristics, we can imagine Americans, who identify with

multiple minority demographics (a female African-American with lower than a high school education for example),

scoring much lower and thus being at higher risks of ﬁnancial problems later down the road.

These demographic groups are the most at risk groups for ﬁnancial illiteracy, which can later be detrimental to

their ﬁnancial stability. These trends have been corroborated by many researchers (Lusardi and Mitchell, 2007, 2009;

2011a; Lusardi, Mitchell, and Curto, 2010; Lusardi and Tufano, 2009a,b). Therefore, solutions to relieve the burden

of ﬁnancial illiteracy need to remain a top priority if we wish to increase ﬁnancial inclusion.

Table 3 (data from a 2019 survey by the Federal Deposit Insurance Corporation (FDIC)) details which demographic

groups are most at risk of being unbanked (Kutzbach et al. 2019). The deﬁnition we will use for unbanked will

be “Adults who do not use or do not have access to any traditional ﬁnancial services, including savings accounts,

credit cards, or personal checks” (Downey, 2022). Demographic groups including low-income Americans (and their

families), those with lower education, minority races, and younger Americans tend to be at a higher risk of being

unbanked. The demographic groups shown to be most at-risk for being unbanked/ﬁnancially illiterate, as per Figure

1 and Table 3, are the same. This implies that there is a correlation between certain demographic groups and being

unbanked/ﬁnancially illiterate. Americans with a family income less than $15,000 are 50 times more likely to be

unbanked than Americans with a family income of $75,000 or larger (Kutzbach et al. 2019). African-Americans

are 6 times more likely than white Americans to be unbanked. This is signiﬁcant because these differences highlight

the stark contrast between minority groups and other demographic groups’ access to indispensable ﬁnancial services

and resources. It is also important to highlight the trends of unbanked rates from 2017 to 2019. Unbanked rates are

undeniably getting better for most demographic groups, but a problem still remains: although unbanked rates have

improved for minority races, they are still well above the unbanked rate of the white and high-income populations. In

short, the change in the unbanked rates cannot be attributed to the impacts of targeted ﬁnancial inclusion and literacy

campaigns or laws but rather to the general growth in the standard of living in the United States. I am not stating that

there has been no impact by non-proﬁt organizations, the government, and ﬁnancial institutions, but rather that the

impact is not signiﬁcant enough, especially since inclusion in the ﬁnancial system is integral in this day and age.

Table 3: Unbanked Rates by Household Characteristics and Year

Characteristics 2015 (Percent) 2017 (Percent) 2019 (Percent) Difference (2019 - 2017)

All 7.0 6.5 5.4 -1.1

Family Income

Less than $15,000 25.6 25.7 23.3 -2.5

$15,000 to $30,000 11.8 12.3 10.4 -1.8

$30,000 to $50,000 5.0 5.1 4.6 -0.5

$50,000 to $75,000 1.6 1.5 1.7 0.3

At least $75,000 0.5 0.6 0.6 0.0

Education

No High School Diploma 23.2 22.4 21.4 -1.0

High School Diploma 9.7 9.4 8.1 -1.4

Some College 5.5 5.1 4.3 -0.9

College Degree 1.1 1.3 0.8 -0.5

Age Group

15 to 24 Years 13.1 10.0 8.8 -1.2

25 to 34 Years 10.6 8.5 6.9 -1.6

35 to 44 Years 8.9 7.8 6.3 -1.5

45 to 54 Years 6.7 6.9 5.1 -1.8

55 to 64 Years 5.8 5.9 5.5 -0.5

65 Years or More 3.1 3.9 3.3 -0.6

Race/Ethnicity

Black 18.5 16.8 13.8 -2.9

Hispanic 16.3 14.4 12.2 -2.2

Asian 3.9 2.6 1.7 -1.0

American Indian or

Alaska Native 15.3 18.0 16.3 -1.7

Native Hawaiian or

Other Paciﬁc Islander 10.3 2.8 NA NA

White 3.1 3.0 2.5 -0.6

Two or More Races 7.9 8.5 4.9 -3.5

Disability Status

Disabled, Aged 25 to 64 17.6 18.1 16.2 -1.9

Not Disabled, Aged 25 to 64 6.5 5.7 4.5 -1.1

Immigrants are another demographic group that is at a higher risk of being unbanked. Immigrants typically seek

opportunities, employment, or education for their children in the United States. Access to ﬁnancial services has

numerous beneﬁts for immigrant families. These include safety against theft or loss through depositing paychecks in

transaction accounts in addition to bill paying, debit transactions, savings accounts for retirement, savings accounts for

education/college, and electronic transfers. Electronic transfers are especially important for immigrants because they

tend to send money to their families in their home country: this feat is risky and hard to accomplish without access

to electronic transfers. Access to ﬁnancial institutions enables immigrants to establish creditworthiness (important

for convenience and debt consolidation), shield consumers from discriminatory or illegal lending practices through

consumer protection laws, and provide help for managing personal/household ﬁnances (Rhine and Greene, 2006).

The absence of these beneﬁts leads immigrants to Alternative Financial Services (AFS) which can be disastrous. As

shown in Table 4, immigrants are more likely to be unbanked than U.S born Americans (Rhine and Greene, 2006).

Furthermore, Mexican immigrants are more likely than other immigrants (from Latin America, Asia, and Europe) to be

unbanked. This is critical because Mexicans are the largest proportion of the immigrant population. In other words, a

large number of immigrants are unbanked because they do not have the knowledge to make complex ﬁnancial decisions

regarding cashing paychecks, paying living expenses, and transferring money back home. With the continuous inﬂux

of immigrants into the United States, it is crucial to ﬁnd solutions to transition immigrants into the ﬁnancial mainstream

in the United States or provide ways to increase their ﬁnancial literacy. Otherwise, just like high school students that

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ExploringCauses,Effects,andSolutionstoFinancialIlliteracyandExclusionamongMinorityDemographicGroupsAbhinavShanbhagOctober2022AbstractAmericansacrossdemographicgroupstendtohavelownancialliteracy,withlow-incomepeopleandminoritiesathighestrisk.Thisopensthedoortotheexploitationofunbankedlow-incomefamil...

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Exploring Causes Effects and Solutions to Financial Illiteracy and Exclusion among Minority Demographic Groups Abhinav Shanbhag

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