As Americans dig out from the economic distress wrought by the COVID—19 pandemic, U.S. banks are making plans that could transform the credit and banking systems, create a more inclusive banking system, and help alleviate childhood poverty.

Indian Country could be transformed as well and has much to gain from this trio of pursuits with careful planning and collaboration with Native American financial institutions.

Transforming the Banking System

The Wall Street Journal recently announced that ten large U.S. banks (such as JP Morgan Chase, Wells Fargo and US Bankcorp) have agreed to launch a pilot program that would extend credit card services to people with low credit scores or no credit history, which are generally lower-income families and individuals.

Instead of using credit scores, banks will look at an applicant’s bank balance and overdraft histories to increase their chances of getting a credit card. The main idea is to focus on customers who do not have credit scores but are deemed financially responsible.

This announcement comes at a time of unusual consumer activity, in which consumers have been paying off their credit card balances and not spending as much. In fact, credit card balances plunged $49 billion in the first quarter of 2021, the second-largest decline in more than two decades.

This suggests that the CARES act stimulus checks, enhanced unemployment insurance, and perhaps consumer confidence is helping borrowers reduce expensive revolving debt balances. With the economy opening up, we’re already seeing an uptick in consumer spending and we’ll see whether this trend lasts over the summer.

Consumer borrowing drives two-thirds of the country’s economic activity and is used as a general measure of the country's economic health. About 75 percent of Americans have at least one credit card, usually, a bank-issued general-purpose card, that equates to unsecured debt and comes with a high-interest rate on unpaid balances. About 45 percent of cardholders carry an average balance of $6,000.

Access to such credit is a consumer mainstay. It facilitates an array of financial transactions, smooths household financial risk, and for many budding entrepreneurs, a source of business capital. It also is an important vehicle for consumers to establish a credit history, which can open the door to homeownership and long-term economic mobility.

About 53 million adults do not have credit scores. The credit industry and banking system’s reliance on credit scores have created stark economic inequities—it locks out consumers otherwise worthy of credit and drives them into high-interest debt traps and cycles of financial hardship.

They cannot secure a mortgage to buy a house or get a loan for emergency needs. A more equitable view of creditworthiness, already employed by Native American financial institutions across the country, considers a wider range of consumer data, something as simple as consistent payment of rent and utilities. Such reform would help create a more inclusive credit system where all Americans have a right to affordable, safe, and sound financial services.

Banking the Unbanked

A good measure of whether the credit and capital needs of Indian Country are being met is the distance between the community and the nearest bank. Credit deserts, or areas with little access to credit, are an unfortunate reality for Native communities.

According to recent research, many reservation residents may have to travel more than 60 miles to reach the nearest bank or ATM, compared to an average 0.01 miles for off-reservation communities.

Limited access to banks is a persistent barrier to economic development throughout Indian Country. Currently, 18 percent of American Indians and Alaska Natives are unbanked, higher than both Black households (14 percent) and Latino households (12 percent); only 2 percent of white households are unbanked. Given that most Native people have experienced long periods of asset deprivation born of colonization, these figures are not surprising.

Other strains on consumer credit for American Indians and American Indian communities include lower usage of credit cards within reservation communities and relatively limited or poor credit histories among reservation residents (varies over geographies); lower credit card limits; and discrimination and redlining both on and off-reservation. Being Native appeared to matter the most for card credit outcomes, according to these studies.

Credit card reform starts with a direct banking relationship. In Indian Country, the best credit outcomes are achieved when there is a meaningful cultural fit with the financial institution.

To bank the unbanked and serve Indian Country’s credit needs, Native American financial institutions (NAFIs) such as banks, credit unions, and community development financial institutions (CDFIs), have emerged as significant providers of financial services to Native communities.

These financial institutions are well ahead of the major banks in using non-traditional data to make credit decisions. Beyond making loans and selling financial products, Native American financial institutions also help tribal citizens transition from being unbanked to traditional banking through credit counseling and financial education. They also focus on the customer’s personal situation to establish a personal basis for “creditworthiness.” 

In particular, according to a recent Federal Reserve Bank study, Native community development financial institutions have demonstrated a direct and positive impact on an individual’s credit score through more direct customer engagement and tailored financial services.

Major banks should take note of Indian Country’s simple, successful model of providing credit to low or no credit consumers: the best way to create a more inclusive and successful banking system is to establish trusting relationships and to serve their needs.

Alleviating Childhood Poverty

Reforming the banking system and banking the unbanked could have an even bigger and lasting impact in alleviating childhood poverty. Before the COVID-19 pandemic, children were the poorest age group in America.

Nearly 73 percent of poor children in America are children of color: Native American, Black, and Hispanic children continue to face the highest poverty rates, all hovering around 30 percent. The poverty rate for white children is about 9 percent.

The American Rescue Plan, signed into law by President Biden in March, provides economic relief to Americans and businesses. For children and families, the American Rescue Plan also makes three major tax reforms: the Earned Income Tax Credit, the Child Tax Credit, and the Child and Dependent Care Tax Credit. These tax reforms will also help address the economic inequities exacerbated by COVID-19 and tackle head-on our nation’s shameful child poverty crisis. Under the Child Tax Credit plan, for example, low and middle-income families with children will receive a yearly total of $3,000 per child aged 6 to 17 and $3,600 per child under 6 years of age.

Not only will the American Rescue Plan benefit millions of children and families, but it also will change the way we think about providing government assistance. For instance, the success of even the best policy innovations, such as the Earned Income Tax Credit, will only be as effective as the strategies to implement them, which should incorporate a system of transferring these benefits in a way that is simpler, more cost-effective, and easier for families to navigate.

As the pandemic demonstrated, state and federal governments struggled to get the funds to many American families and businesses, sending out over 70 million paper checks and plastic debit cards. On the receiving end, people need quick access to the funds. But many unbanked households, including many in Indian Country, had to wait and figure out how to cash the checks. They often incurred service fees, diminishing the value of the benefits.

We can fix this bureaucracy and smooth the transfer of federal benefits through direct deposit of funds into individual bank accounts. In Indian Country, we already have many good examples of financial institutions supporting their communities with basic, low-cost bank accounts. We need many more Native American financial institutions and Native serving banks throughout Indian Country. Not only would they open up economic opportunities and expand credit capacity, they also would play a critical role in their communities by helping to reduce childhood poverty and enhance family well-being.

Reforms and opportunities come with potential unintended consequences along the way. For example, more lenient underwriting criteria will open up credit, but there will be a cost. For the unprepared borrower, the cost of credit cards and bank accounts could be realized in high rates and upfront fees or merciless collections on the backend, thus causing more distress to an already precarious situation.

New cardholders would benefit from some financial education on how to manage a card, especially a subprime card. Native community development financial institutions and other Native American financial institutions are perfectly situated to provide such services and have a proven track record of improving financial capabilities in Indian Country.

Vision for Long-Term Solutions

Vine Deloria, Jr. often framed the centuries’ old Native American experience as a pull between pervasive negative experiences and inherent determination to repair and rebuild. He urged tribal leaders to conceive big visions for long-term solutions. The vision needed now involves much more than reforming the banking system and banking the unbanked—it encompasses fostering the well-being of our children and families for many generations.

Reducing poverty and enhancing creditworthiness will go a long way to alleviating further hardship and harm, but we need more economic reforms and deeper investments to really redress historic inequities and disparities that have held Native people back for generations. While we can turn to Native American financial institutions to help solve the bank account problem and get benefits to Native people faster, we need many more of them.

We need to encourage the development of these institutions throughout Indian Country and other banks to engage more closely with their native neighbors. As importantly, the federal government needs to fundamentally change the way it interacts with tribes on a government-to-government basis, particularly the manner in which it funds trust services and programs. This requires replacing the century-old discretionary and erratic budgeting process with a mandatory funding stream to tribal governments.

Finally, Indian Country’s growing population, steady economic growth, and acute need for infrastructure development present a momentous opportunity for tribal communities, lenders, and the federal government to build better systems through a bold vision, distinctive cultural values, and inspired leadership. If we can land a spacecraft on Mars, we can—and should—alleviate child poverty.