Financial inclusion and sustainable, inclusive growth in action

Millions of Americans remain underbanked, and roughly half report that they would not be able to cover more than two months of expenses in the event of job loss. In this episode of the Future of America podcast, McKinsey senior partner André Dua talks with Michael Froman, Mastercard’s vice chairman and president for strategic growth, about the challenges of financial inclusion and the opportunities to build “financial health and wellness” for all Americans, as well as how businesses can follow through on their commitments to sustainable, inclusive growth. An edited transcript of their conversation follows.

André Dua: Welcome to episode seven of McKinsey’s Future of America podcast, where we explore how we can build a future that drives sustainable and inclusive growth. Join us in this conversation with leaders who are accelerating progress to grow, broaden, and sustain prosperity for more Americans.

I’m your host for today, André Dua. Today I’m joined by Mastercard’s Mike Froman. Mike leads the Mastercard Center for Inclusive Growth and is a member of the company’s management committee. Mike, welcome and thanks for being here today.

Mike Froman: Thanks for having me.

André Dua: Before we get into the details of topics such as inclusive growth and financial inclusion, I wanted to start with a little personal background. You’ve held a variety of absolutely fascinating roles in your career, across both the public and private sectors, and it’d be great if you could tell our listeners a bit about your background.

Mike Froman: I’ve been a recidivist in government going back and forth between government and the private sector. I served in the Clinton Administration at the White House and at Treasury, focusing mostly on international economics. I then went to Citigroup, where I ran a number of different businesses, and then went back [to the public sector] during the Obama administration, also working on international economics and trade. And now I’m at Mastercard, where I focus on financial inclusion, inclusive growth, and a variety of other topics.

I’d have to say, I feel very privileged to have had the opportunity to go into government twice. And when I was thinking back on my career recently, I realized what attracted me was that nexus of the public and the private sectors and what each could bring to the table to deal with significant economic and social issues, and how they can work together to do that.

When I was in government, I was thinking about how the private sector could play a role. When I was in the private sector, I was thinking about what it could do to support government in its efforts. And that has really been a major motivator for me.

André Dua: Would you say you feel that to solve the bigger issues of our time, we actually need the private and public sectors to work together?

Mike Froman: Absolutely. And I’d say the social sector, the nonprofit sector, philanthropy. Each has a very important role in trying to address these issues. None can do it completely on their own. And in the best circumstances, it really does take drawing on all three in their particular areas of expertise to be able to achieve the optimal objectives.

André Dua: The world is pretty turbulent at the moment. Given your background and some of the roles you had in government, and given the moment we’re in, I wanted to get your reflections on a few things: What is all this turbulence and what are all these different cross-currents in the world? What do you think they mean for the average American family? What are the kinds of things that you see?

Mike Froman: It is certainly, I think, probably the most complex time in my lifetime with all of these things coming together at once. And for all the talk about deglobalization, I think, in fact, one thing that we’re seeing is just how interconnected we are, how the well-being of a family in the United States is inextricably linked with what’s going on halfway around the world with COVID-19, with economic trends, with the war in Ukraine, and that all of this affects us here back at home. And we don’t always see that in our day-to-day lives, but I think, if anything, these crises have pulled us closer together in many respects.

André Dua: I think a common theme in your work—and this is relevant to the American family, as you say—has been trying to expand access to financial services. We’ve been doing some surveys of consumer sentiment, including an American Opportunity Survey.

One of the things we found is that a number of Americans think that their access to financial services is a barrier to them accessing economic opportunity. And by our calculation, about half a million Americans feel that not having access to financial resources is directly linked to the opportunities they have in the workforce. How pervasive an issue do you think lack of access to financial services is in America?

Mike Froman: Oftentimes, when we talk about financial inclusion, people focus on what needs to be done in developing countries and the base of the pyramid, and there are vast challenges there. But you don’t have to go that far to see 30 million unbanked or underbanked Americans here.

And even those that are banked may not be able to get access to the kinds of financial services they need, for example to grow their small business. So there’s a lot of work to be done here in the United States. One thing that we’ve looked at is just how expensive it is to be poor in the US.

People at the lower income levels end up paying oftentimes twice the fees to get access to basic financial services than the rest of us do. And that’s just to get access to their own money in the time and the way that they want to have access to it, or to be able to move their money to members of their family here or abroad.

So there’s a lot of work to be done to focus on bringing those people who are marginalized from a financial services point of view in the United States into the mainstream, into the digital economy, so that they can fully benefit from the tools that are there. And so that they can put themselves on a path toward greater financial security and, ultimately, prosperity.

André Dua: Mike, you briefly touched on small business. In the last couple of years, the plight of small businesses and the role they play in our economy has really come to the fore through COVID-19, right? I’d love to hear you say more about how a lack of access to financial services affects small business and the ability it has to contribute to the American economy.

Mike Froman: Small businesses are really the backbone of any economy. It tends to be where the growth is, it tends to be where the job creation is, and it’s a key part of any community. COVID-19 really shone a spotlight on that, as we saw many of our neighborhood small businesses close down, some of which have reopened, and some of which have not.

There had been a trend toward greater digitization that predated COVID-19, but, as in so many areas, COVID-19 accelerated that preexisting trend. And it underscored just how important it is to be connected to the digital economy, whether you are a government trying to get resources into the hands of individuals or loans into the hands of small business to keep them alive and let them survive and thrive at the end of COVID-19, or a small business that might have been a mom-and-pop, brick-and-mortar business that now needed to go online to stay in touch with its customers and suppliers.

And the importance of helping those small businesses do that was absolutely paramount.
And now, of course, hopefully coming out of COVID-19, they’re in a stronger and more resilient position going forward, because they have both an online business and an in-person
business, and they’re much better suited to deal with whatever interruptions of business they
might see in the future.

André Dua: You mentioned that maybe 30 million Americans are underbanked or underprovided as it relates to financial services. What are the biggest barriers to bringing more people into having access to the full set of services they need?

Mike Froman: In some cases, people have a distrust of the financial system and just don’t feel comfortable interacting with it in a formal way. But also mainstream financial institutions have not reached out to help, and some affirmatively avoid banking some cohorts in the economy.

Now, with the advent of fintech and of community development financial institutions and microfinance institutions, steps are being taken toward bridging that gap and bringing more people into the financial system. But you still have a lot of people who are dependent on payday lenders to get access to their wages a few days or a week in advance, and people who are dependent on expensive check cashers and paying very high fees to get access to the money that they’ve earned.

You’ve got people who are sending money to their friends and family and are dependent on expensive remittance providers. And all of those services can be provided more affordably, but it really involves financial institutions, networks, and others finding ways to reach that market and making those services available in an affordable manner.

André Dua: What would a fully inclusive financial system would look like? And how would it balance access to services on the one hand with risk on the other?

Mike Froman: It oftentimes starts with payments. People’s initial foray into the digital economy is often through electronic payments, and then getting paid when and how they want to be paid—particularly as we see more gig platforms, gig economy workers, and freelancers who may not be looking to a paycheck twice a month but rather looking to be paid for the work that they do every other day and being able to access that money when and how they want.

So it’s first and foremost being able to pay and get paid where, when, and how you wish. And then that becomes a path toward being able to save money, access microinsurance, access portable benefits—if you’re not getting benefits from your employer—and building pathways toward greater financial security and resilience that are made possible when you are part of the digital economy.

Traditionally, credit agencies and credit decisions were very backward looking. Did somebody have a loan before and did they pay it back? Now, particularly with open banking, we have the ability, with consumers’ consent, to see their cash flow, to look at their rent payments, to take no-file or thin-file credit applications for people who otherwise wouldn’t get credit and be able to make assessments about their creditworthiness that we were not able to make before, now that we have AI, algorithms, and other capabilities.

And we’ve got more players in the economic and financial systems today who are willing to service that market and provide credit. I’m optimistic that between open banking, the advent of AI, the ability to take more behaviors into account when it comes to making credit decisions, and more players in that blending market that more people will be able to get access to the financial services they need provided they can be part of that digital economy.

André Dua: You mentioned financial security. I want to mention the flip side of that. Firstly, there are a number of measures, which suggest Americans have a good amount of financial security, and chief among them is the very significant increase in savings. American families have $6.7 trillion in savings overall.

But even though at the macro level savings are up, there is also a great deal of financial precarity. Let me give you one statistic: when we surveyed 25,000 Americans recently, what we found is just half said that if they lost their job, they would be able to cover expenses for more than two months.

That’s happening in one of the wealthiest countries in the world. And some of these people may actually have access to financial services, so that might not be the problem.

That brings me to another concept: you often use the phrase “financial health and wellness,” which I assume is a little bit different from financial inclusion. Can you say more about what you mean by financial health and wellness?

Mike Froman: I think financial inclusion, traditionally, has been about access, giving people the on-ramp to the digital economy, to the financial system. But it’s really just step one. The ultimate goal is to ensure that this access helps those individuals achieve financial health and wellness, greater resilience, and have savings for a rainy day so that they can deal with unexpected healthcare expenses, natural disasters, and other events that you can’t necessarily plan for but you want to be able to self-insure against.

So there’s a lot of work to be done in helping move people from access to financial health and wellness. We’re still in the process of going through a test case of this, which is COVID-19, and seeing people whose jobs were shut down, their employers had to shut down, they were sent home.

If you were a knowledge worker and could work from home, that was one thing. But if you had the kind of job where you had to be there in person it was different—for a long time, many of those frontline workers couldn’t go back to work.

We saw help from the government and how important that was, and child tax credits and how important that was. We saw savings rates go up and people rely on their savings. They couldn’t spend the money that they were spending before. Now we’re seeing people draw down on those savings as they sort through what they want to do with their employment: the “Great Reordering,” the “Great Resignation,” and all the rest that we’re now experiencing with COVID-19.

So I think we’re in the midst of something. I’m not sure it’s fully settled down and whether we’ll see families in the same situation when we get beyond COVID-19 that we saw prior to COVID-19. But to me, the key is getting people access within the financial system, into the digital economy, and then making sure they’ve got the tools and the services they need to create that pathway toward financial health and wellness. And that should be our collective objective.

André Dua: This comes back a little bit to your experience in government, too. We saw during the pandemic just how anxious many governments were about financial health and wellness; there were one-time payments made to many Americans.

In other countries, governments went as far as covering large portions of salaries and wages for huge portions of the entire country. That is truly an indication of how citizens of different countries aren’t prepared for any significant financial shock. So I think it only reiterates your point about the need to focus on financial health and wellness.

What do you see as the most significant ways in which we might do a better job of promoting financial health and wellness? Are there things you think need to be done? Or are there things
that Mastercard is doing or that you’ve seen others do that promote financial health and wellness in this way?

Mike Froman: First is moving toward greater digital provision of government services. We are one of the few countries in the world that still is dependent on checks. We sent out 100 million checks during COVID-19 to families. Whether they got to the right people, whether there was fraud, whether they were stolen out of people’s mailboxes, we just don’t know.

But being able to create digital social safety nets, as many other governments have, so that you can push money when needed to the people most in need, is important. Whether it’s because of a pandemic like we’ve just been going through or a natural disaster that hits one part of the country, we need to be able to put in place that digital social safety net so you can deliver government services efficiently when you need them.

And I think the private sector can play a role. Over the course of COVID-19, we ended up working with about 100 governments around the world—state, local, and national governments—on helping them disperse funds to their population or to their small businesses to keep them alive during COVID-19.

In Los Angeles, we worked with The Mayor’s Fund both to raise money through our donations platform and then to disperse that money with Angeleno Card to 75,000 families in Los Angeles that were in need. And now that this infrastructure is in place, the City of Los Angeles is using it for rental relief, and they’re discussing using it for student support. So being able to create those mechanisms by which we can really support our communities in times of need is critical.

André Dua: Let’s talk more broadly about Mastercard’s efforts to promote sustainable, inclusive growth. By inclusive, I mean that we provide more opportunities for Americans to broadly participate in that growth. And by sustainable, I mean we’re addressing climate and resiliency to ensure we have something to pass to the next generation.

You’ve talked a bit about financial inclusion. Can you talk more broadly about sustainable, inclusive growth?

Mike Froman: We too are focused on sustainable, inclusive growth. What we’ve tried to do, as we do in financial inclusion, is look at how we would use our assets best to achieve that objective. We’re not a fossil fuel company. We’re not an electric-vehicle company. We don’t make solar panels.

What we are is a network: a network with about three billion cardholders, 80 million merchants, and more than 20,000 banks in our network. And what we have been focused on is the notion of conscious consumerism. So, for example, we worked with a fintech company in Sweden to come up with a carbon calculator, which allows consumers to see their carbon footprint as they spend money on their card and then not just to see it, but to take action.

And we created something called the Priceless Planet Coalition with more than 100 of our partners [banks, merchants, governments, and others] committed to planting 100 million trees—so, a nature-based solution as part of our efforts to deal with climate change.

And with the carbon calculator and our donation platform, consumers can both see their carbon footprint as they consume and take action by planting trees to offset their consumption and their carbon footprint. And that’s how we feel we can bring our assets to the table.

It’s using our network. It’s using our data. It’s using our reach to banks, and merchants, and consumers to achieve this goal of addressing climate change, of helping them achieve their net-zero objectives, and, at the same time, helping to support those consumers who want to engage in conscious consumerism to be able to take action accordingly.

André Dua: Conscious consumerism brings to mind the concept of conscious, or long-term, capitalism: the idea that there are a broader set of concerns we should have. And I think that’s very much in this notion of sustainable, inclusive growth.

I think we see this already on the climate side, where the financial sector is stepping up and getting involved in ways that have really accelerated the push to address climate change, the path to net zero, and so forth. But, from your point of view, what are the biggest areas of opportunity for the private sector here?

Mike Froman: I think, at its best, the private sector can bring innovation and technology, and very importantly, integrate these objectives into their business strategy. So give kudos to Mark Carney [a United Nations special envoy for climate action and finance and the head of impact investing at Brookfield Asset Management] and all the work that he’s done with financial institutions to mobilize them to use their balance sheets for positive climate impact, and to focus on green investments and add some concreteness into those overall objectives.

I think there’s a lot that the private sector can do in that area. I also think we each have our assets that we can bring to the table most effectively. One of the assets we have is our data scientists. So, for example, and something that has nothing to do with payments but just our data and analytics capabilities, we’ve partnered with cities like St. Louis to evaluate their 911 diversion program.

That’s a program that they put in place so that, when somebody called 911, rather than just sending out a police officer and an ambulance and taking somebody to an ER, which might not be necessary, a lot of those calls could be dealt with by mental-health professionals. They paired police departments with mental-health professionals so that the city could save money, and police could be redeployed toward more pressing criminal activity, and most importantly, the individuals who called 911 get better outcomes.

We were able to use our data analytics to track that program and demonstrate those kinds of outcomes: how the money was saved, how the police were able to be redeployed, and the better outcomes for the individuals calling in. That’s just one example.

Other companies will have other things to bring to the table. But whether it’s a bank with its balance sheet or a company like ours with its data analytics capability and its network, each company needs to look at what long-term capitalism looks like and think through how we integrate these ideas into the core of our business strategy.

André Dua: There’s a big discussion and debate about how to embed ESG [environmental, social, and governance] priorities into businesses. And I think you hit it directly by saying these things need to be integrated into business strategy.

One of the critiques is that ESG is often set off to the side. What has Mastercard been doing to make ESG criteria more central to the business strategy?

Mike Froman: Ultimately, ESG only works if it is fully embedded and integrated across the corporation. Sustainability is too important to leave to our chief sustainability officer. It needs to be owned by everybody in the management committee if we’re going to be effective.

Now, one way of doing that is to make sure that the ESG issues you’re focused on are genuine
and authentic to the company and make sense for the company to be involved in. For us, that is financial inclusion or use of our network and our capabilities to address climate change and conscious consumerism.

But, ultimately, there’s nothing more important to motivating activity than compensation. And we recently announced that for all of our employees, their bonuses will be tied in part to our ESG objectives. And those ESG objectives are very specific and quantitative.

There’s an environmental one. There’s a social one around financial inclusion. There’s one around gender pay equity. And the result is electric, in that immediately when we announced it—we’ve done it for one year just for senior executives to try it out, but now we’re doing it for all of our employees—we’re receiving dozens and dozens of phone calls from employees asking, “What can I do to be helpful? What can I do to help us meet our financial inclusion goals, our net-zero goals, our gender pay equity goals?” And that’s ultimately how you make sure that these ESG issues aren’t just kept over on the sidelines but are integral to the business and are ultimately scalable.

André Dua: I think that’s an interesting explanation—that tying compensation to these metrics is also signaling to your employees how important this is. In a way, it’s unleashing their creativity to share ideas about how to make progress.

Mike Froman: Absolutely. And we’re getting some great ideas from them, and from people who are in completely different parts of the business. They may not have anything to do with ESG issues in their daily life, but they’ve come up with an idea for dealing with climate change or another idea for how to bring individuals into the financial system and provide financial health and wellness to them. So it has unleashed a lot of creativity, a lot of innovation.

André Dua: This discussion has involved really helpful framing with great takeaways. First, a significant opportunity exists for collaboration between the private sector, the public sector, and civil society to tackle some very, very pressing issues that we face.

Second, despite the opportunities we have in this country, there remains a great deal of financial precarity, and it’s going to be important for all of us to think about ways to include more people in the opportunities that this economy can generate.

One thing really interesting thing you said was about the extent of the assets that the private sector can bring to bear to solve some of these problems and to contribute to these challenges. Using data science in the City of St. Louis was one of many great examples of assets that the private sector can bring to bear.

And finally, if you’re serious about these issues of sustainable, inclusive growth and of long-term capitalism, then you have to come up with measures that demonstrate you’re making progress, and you have to integrate those into your business strategy.

Thank you for sharing these thoughts with us. We wrap each Future of America episode with a few quick questions. And the first is, Mike, is there a book or article that you’ve recently read that excites you about the prospect for a more sustainable, inclusive future?

Mike Froman: There are a lot of them out there. I really go back to Jonathan Morduch and Rachel Schneider’s book, The Financial Diaries, which really explains and makes real the situation of American families and how they’re coping, as they say, in a world of uncertainty.

And it helps give texture to what could otherwise be kind of a dry and statistics-oriented conversation, where you can really see, to some of your earlier questions, how this affects an American family and what they are struggling to do to create financial health and wellness. It really helps inform policy on one hand and things that the private sector can bring to the table on the other.

André Dua: What makes you optimistic that we can achieve a better future, a more sustainable and inclusive one, in this country?

Mike Froman: I think there is more attention now, by CEOs and boards, to these issues than ever before. It has really grown dramatically in the last few years. It was happening before COVID-19, but COVID-19 and the other recent crises—whether it’s the climate crisis or what’s going on in Ukraine—have just brought that to a head even more so.

I’m not sure every company knows exactly how to deal with that and how to integrate that into their business strategy, but it’s on the agenda, and they are working through it, and we’re all learning together how best to integrate these issues into our business.

So that gives me cause for optimism, because at least we’ve hit that first step of identifying the problem, identifying the importance of the private sector playing a role, and beginning to work to integrate those issues into what we do as companies.

André Dua: What’s the one thing you think listeners can do today to help promote this more sustainable and inclusive economy?

Mike Froman: There’s a lot of survey data out there about consumers saying they prefer brands that care about the same values that they care about, that are addressing climate change. There’s oftentimes a gap between their stated intent and their action. To me, the real impact will be when consumers turn that intent into action and start supporting those brands that they feel do reflect their values, are taking these issues seriously, and send that message to the market. And I think that will really have a very positive and a powerful impact on companies who are working through these issues.

André Dua: Thank you, Mike. You’ve been listening to McKinsey’s Future of America podcast series. Thanks for joining us.