Banking deserts are an ongoing problem for tribal communities and their citizens. Prepaid cards are one of the ways governments can support citizens living in banking or credit deserts.
Many of us take for granted easy access to financial services. They help us to own our homes, purchase cars, develop financial literacy, and more.Yet, many U.S. households live in banking deserts, rural or isolated areas that don’t have access to traditional financial services.This lack of access to banking and credit systems is a significant barrier to financial security.
The Federal Reserve estimates that around 5% of the population are unbanked, with a further 13% being underbanked. While there may be other reasons for these citizens not having bank accounts or relying heavily on alternative finance options like payday loans, proximity to financial services is key. This is particularly true with respect to Native communities.
As well as the systemic barriers to financial health that citizens living on reservation communities face (bringing with them poverty and other consequences), the long-term impact of living in a banking desert includes inferior financial literacy and an endemic distrust of financial services.
The Challenges of Banking Deserts
A report from the Native Nations Institute uncovered a lot of specific challenges that manifest in Native Communities living in banking and credit deserts. Documenting how access to capital has grown in Native Communities since 2001, the report shows that around half of the reservations surveyed in 2001 didn’t have a financial institution within 30 miles of their community.
More recent figures show that the distance between tribal communities and financial institutions has improved, with the average now being 12.2 miles (in a straight-line distance). However, this is still over the 10 miles that define an area as a banking desert.
This means that tribal communities face a number of specific challenges, including:
Lack of Low-Cost Credit Options
One of the effects of living in a banking desert is a distinct lack of affordable credit. Inadequate banking services mean citizens are limited in their credit options. Having little to no credit to choose from leads to lower credit scores and living off an informal economy, which in turn means that they have to rely on high-cost lending options. Research suggests that tribal citizens who qualify for a conventional rate mortgage would pay 5% more on their borrowing.
High Delinquency and Subprime Credit Rates
Predatory lending is another clear financial problem that tribal communities face. High levels of delinquency in the credit they are able to get, plus the poor credit health as mentioned above, means people often feel like they have no choice but to use predatory lenders.
Lower Financial Literacy
Growing up in a banking desert leads to lower financial literacy as people don’t have experiences of financial products and services, and lower financial literacy can have a harmful impact on financial health, credit scores, budgeting, and more.
The experience and understanding that comes with having access to financial services support a healthy financial future. Tribal citizens who don’t have that solid financial literacy are put in a vulnerable position.
According to a Money Geek survey of Natives, 75% of the natives surveyed wouldn’t be able to come up with $2,000 to pay emergency expenses, and 63% reported not being able to meet their financial obligations.
Increased Check Costs and Risk of Check Fraud
As well as an increase in the need to use alternative finance options like payday lenders (and the costs that come with that), citizens living in an area with limited access to financial services are more vulnerable to check fraud.
Actionable Solutions for Overcoming Banking Deserts
Although the wider issue of banking deserts in tribal communities isn’t one that Tribal Governments can tackle on their own, though big-picture institutional solutions such as Community Development Financial Institution (CDFI) funds and changes to federal policies are very valuable.
What they can do to support tribal citizens with their financial health is implement certain strategies and best practices, such as:
- Opt For an Online Financial Institution
While banking deserts are lacking in physical bank branches, you can encourage tribal citizens to access online financial institutions.
This, of course, requires internet access. As many Native communities suffer from a lack of broadband access and instead rely on public computers with an internet connection, make sure citizens are aware of where they can access high-speed internet, and what online institutions are available.
- Avoid Payday Lenders and Check Cashers
Tribal payday loans are specific to tribal communities, with the lenders being situated on reservations. Other than the lender’s location, there really isn’t a difference to non-tribal payday loans, and the interest rates are typically even higher.
As with any type of payday loan, tribal payday loans are risky to borrowers, who have a higher chance of delinquency and damaging their credit health even further. If you can, it’s best to avoid allowing either tribal payday lenders or check cashers, another alternative source of finance with often dangerously high fees, to operate on tribal land.
- Focus on Financial Literacy
To help tribal citizens build a financial future for themselves, it’s crucial to boost their financial literacy. By giving them the knowledge they need to go ahead and make informed, measured decisions about their finances, they’ll find it easier to achieve their financial goals.
An education on everything from understanding the range of financial products available, to how to select the best one for their own needs, is a valuable place to start. You can also teach things like setting goals, saving, budgeting, and managing Individual Indian Money (IIM) accounts.
- Consider Prepaid Cards for Disbursements
Prepaid disbursement cards for Tribal Government payments allow citizens to have their paycheck directly deposited. They also offer the ability to withdraw cash fee-free at certain ATMs, and the ability to make payments online through a convenient mobile app.
dashDisbursement for Tribal Governments
The dash card prepaid payment solution makes tribal government payments easier and more secure. By removing cash and paper checks you can eliminate the risk of check fraud, streamline payment processes, and make sure funds are reaching tribal citizens as and when they need them.
Give Prepaid Technologies’ prepaid disbursement cards a try today, or speak to one of our experts in tribal disbursements to find out more.