Being poor in America is expensive. Low-income households pay hundreds to thousands of dollars more per year for the same goods and services that wealthier families access at a lower cost – a phenomenon known as the poverty premium.¹ This systemic disadvantage, where those with the least pay the most, is not new. Even the term “poverty premium” is decades old; it was coined in the early 2000s, but is still relevant today.²

Nowhere is this premium more evident than in financial services. 

The United States has roughly 5.6 million unbanked households,³ and another 14.2% of households are “underbanked,”⁴ meaning they have a bank account but still rely on costly alternative financial services. Many of these families are not avoiding banks out of a personal preference, but are unable to participate in the U.S. financial system because of policies that make traditional banking unaffordable or inaccessible (e.g., minimum balance requirements, monthly fees, slow execution, and overdraft charges).

• Without access to a bank account, for instance, cashing a paycheck can cost between 1% and 5% of its value; these fees alone total over $1,000 annually for the average unbanked household.⁵ 
• The cost of money orders has increased 45% since 2014.
• Low-income houses pay an average of 7.1% (about $1750) of their annual income in financial service fees, compared with 0.2% (around $400) for high earners. 

Americans Frustrated with the U.S. Financial System

A recent national survey conducted by Ipsos on KnowledgePanel confirms Americans’ widespread frustration with the financial system.⁶ Only 23% said they believe banks charge reasonable fees, and 39% identify high fees as the most pressing problem in traditional finance. As one underbanked New York resident put it: “You’re being scammed out of your money with fees. You’re being scammed out of your money through fraud. You know? So it’s…a lot.”⁷

Interview participants shared their personal stories and experiences with financial services – from getting denied access to their own funds when trying to initiate routine transactions, to being forced to create complex workarounds to move money between their own accounts, to experiencing multi-day delays and more. There’s a near-universal feeling that change is needed to ensure the financial system is set up to serve “ordinary” Americans. 

Americans Are Open to DeFi’s Possibilities 

DeFi — short for Decentralized Finance — is a system of financial applications built on public blockchains that allow individuals to execute their own peer-to-peer financial transactions without involving intermediaries (like banks or credit card companies) and while custodying their own funds.

While only 3% of Americans are very familiar with DeFi currently, there is substantial openness to its core proposition. A majority of American adults find DeFi features appealing: 56% value having full personal control over their money at all times, 54% want full personal control over the security of their personal and financial data, and 53% want to see their full financial history at all times.

The poverty premium persists because the current, layered, antiquated financial infrastructure makes it expensive to serve low-income customers profitably. Nothing is free, and DeFi doesn’t eliminate costs entirely, but by removing intermediaries and leveraging software rather than outdated financial systems, we can dramatically reduce the cost of financial services for everyday people and give them greater control of their finances. 

Research suggests DeFi infrastructure could reduce remittance costs by up to 80%, potentially saving unbanked and underbanked individuals $30 billion annually worldwide.⁸ (For a worker sending $500 monthly, that’s more than $300 per year saved, or nearly a month’s worth of remittances back in their pocket.)  Recent work from Paradigm shows the concrete ways in which DeFi has helped make managing their finances easier and cheaper for a diverse group of people. 

Building Toward A Better Financial System

It should concern all elected officials that technology continues to advance, but progress on addressing the poverty premium has all but stalled. We need innovative solutions to solve this decades-old problem. DeFi is a possible solution. At its core, DeFi is a technological innovation that can help improve the state of the financial system – bringing down costs, alleviating privacy and security risks, and creating tools and solutions that meet modern consumer needs. 

As policymakers build digital asset rules and regulations, we should strive to preserve what makes DeFi valuable: permissionless access, low-cost infrastructure, and the elimination of discriminatory gatekeeping. The 42.8 million Americans living in poverty⁹ cannot afford to wait multiple more decades for incremental improvements to a financial system that systematically disadvantages them; they should not be paying a premium for outdated financial services, especially when tech-forward, lower cost alternatives exist and will expand as we continue to get guidance from policymakers and rulemakers. 

We have the opportunity to create a better, fairer, more modern financial system where those with the least do not have to pay the most. We should be open to learning about it. We should embrace it. 

Infographic with stats mentioned above and more available here.

This piece was authored by Jennifer Rosenthal, DEF’s Chief Communications Officer. Infographic by Tyler Rihn, DEF intern.

Notes

1. https://hbr.org/2013/04/the-problem-with-the-poverty-premium ↩︎
2. https://hbr.org/2013/04/the-problem-with-the-poverty-premium ↩︎
3. https://www.fdic.gov/household-survey ↩︎
4. https://www.fdic.gov/household-survey ↩︎
5. https://obamawhitehouse.archives.gov/blog/2016/06/10/financial-inclusion-united-states ↩︎
6. https://www.defieducationfund.org/demystifying-defi/
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7. https://www.defieducationfund.org/demystifying-defi/
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8. https://www.circle.com/blog/on-chain-foreign-exchange-and-cross-border-payments ↩︎
9. https://www.congress.gov/crs-product/R48279 ↩︎

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