America’s nagging racial wealth gap has been the focus of many research reports and economic policy debates. Now, new research analyzes the strong connection between disproportionate wealth and financial services and products that are either shared with or denied to consumers of color.
“The economic impact of closing the racial wealth gap” by the McKinsey Global Institute (MGI) identifies key sources of the nation’s socioeconomic inequity and accompanying racial and gender dynamics along with family savings, incomes and community context.
“Black families are underserved and overcharged by institutions that can provide the best channels for saving,” states the report. “For instance, banks in predominantly black neighborhoods require higher minimum balances ($871) than banks in white neighborhoods do ($626). Unsurprisingly, 30 percent of black families are underserved by their banks and 17 percent are completely disconnected from the mainstream banking system because of a lack of assets and a lack of trust in financial institutions.”
Additionally, the nation’s overall economy is affected by racial wealth gaps. The report estimates that between 2019 and 2028, economic losses to the general economy will be $1-$1.5 trillion.
Black America’s “racialized disadvantage” was created through historical forces — including private business practices and public policies that together advantaged white consumers while often excluding or relegating black Americans. For example, the National Housing Act of 1934 limited housing options for black Americans by assigning a “D” rating to neighborhoods in general decline and occupied by lower-income residents.
Fast-forward to more recent times: In 2017, the Federal Reserve found that black consumers are 73 percent more likely than whites to lack a credit score due to “credit redlining,” in which where a consumer lives is the central determining factor in whether to approve credit, rather than the actual credit profile.
Among other findings:
- Black Americans can expect to earn up to $1 million less than white Americans over their lifetimes.
- Black men with no criminal records are less likely to receive job interviews than are white men with criminal records.
- The median wealth of a single black woman is $200, while that of a single white man is $28,900.
Center for Responsible Lending EVP Keith Corbett said, “With today’s black homeownership rate hovering around 40 percent, while 73 percent of similarly situated whites own their homes, access to responsible mortgages remains more of a dream than a reality.”
When student loan debts and criminal incarcerations are factored into the racial wealth divide, an even more bleak scenario emerges.
“Incarceration is estimated to reduce annual wages by 40 percent —not including the lost wages during the time served — for the formerly incarcerated,” states the MGI report.
For black women, gender brings a dual wage penalty, according to the report. Median earnings for black women are only 65 percent those of white men and 89 percent of median earnings for black men. Black women typically borrow more in student loans, so lower earnings bring stronger financial challenges in loan repayment years. As a result of these and other factors, the median wealth of single black women lags far behind that of single white men.
Both male and female black college graduates often have greater family support responsibilities than their white college classmates. The financial assistance to older family members reduces the amount of disposable dollars that might have contributed more to paying down student debt or beginning other financial investments.
“Education, while quite beneficial to those who attain it, is not an equalizer,” said Aracely Panameño, CRL’s director of Latino affairs. “And financial innovation and debt, even if well underwritten, can never undo historical racial discrimination that results in financial marginalization. Moving forward this situation can only be addressed through bold federal and state laws and policies that create equity of opportunity for all.”
Authors of the MGI report would likely agree.
“A number of simultaneous and mutually reinforcing initiatives will likely be necessary,” states the report. “This work will be neither simple nor easy, but targeted, productive efforts will likely strengthen the economy, increase economic and social equity and improve the quality of life for families.”
Charlene Crowell is the Center for Responsible Lending’s communications deputy director.
