Bridging the financial inclusion gap among U.S. employers: Opportunities and challenges to fostering greater financial inclusion in small businesses

According to the Global Financial Inclusion Index, the United States boasts a high level of financial inclusion support from employers for their employees.  It’s in many ways an outlier, especially among other developed markets in the Index, scoring well across all aspects of financial inclusion measured.  

However, this headline coming out of the employer support pillar research masks a key challenge facing financial inclusion in the U.S.—specifically that, the smaller the business, the less support available to employees.

Putting the challenge into perspective 

This is no small issue, especially since small businesses employ such a significant proportion of U.S. workers. According to the U.S. Small Business Administration’s (SBA) latest count, in December 2021, there were 32.5 million small businesses (about 6 million with one or more employees) in the U.S. compared to just 20,516 large businesses.⁸ These businesses comprise 99.7% of firms with paid employees and create millions of new jobs. From 1995 to 2020, small businesses created 12.7 million net new jobs while large businesses created 7.9 million.⁹  

Considering the number of people employed by small businesses in the U.S., the challenges this group faces in providing financially inclusive support systems to their staff start to look more complex. The largest U.S. employers score far higher for providing guidance around financial issues, employee pension contributions, insurance coverage, and pay flexibility. Scores fall markedly as businesses get smaller.  

The reasons for the drop off are varied. Some of the most challenging examples include a combination of a lack of resources (whether financial or personnel-related) and a tendency to overestimate the cost to provide employee benefits. There’s also more work needed to help small businesses better understand support available at a government level and empower them to make use of these initiatives—for example around tax breaks and wider employer incentives. These issues demand more creative solutions—and holistic financial system and government support.

These complex issues are without a doubt frustrating to small business owners, many of whom are understandably more focused on the day-to-day running of their business rather than employee benefits packages. Small business owners need a starting point. There are three opportunities that stand out.

1. Employees’ trust in their employer can play an important role.
According to the 2022 Edelman Trust Barometer, business, generally, is the most trusted global institution, ahead of non-governmental organizations (NGOs), government, and media.¹⁰ On top of that, 77% of global respondents trust their employer. The trust in the employer-employee relationship is incredibly strong and is a driving force behind greater financial inclusion. This suggests that if employers were to proactively encourage their employees to take advantage of the benefits resources available, many would be likely to do so. 

2. Small businesses need more information and education. 
There's an untapped opportunity to better equip small businesses with the right information to support employees in their financial security. 

In small enterprises, often management teams are acting as employers for the first time. When beginning in this new human resources (HR) role, their first focus is payroll and then usually health insurance. As they consider additional benefits, they often significantly overestimate the cost per employee and may shy away from providing more benefits as a result.¹¹ Perceptions around cost, coupled with the daunting task of narrowing which benefits to offer and a provider to work with, can deter many of these businesses from pursuing more comprehensive support. 

There’s a huge education gap that must be filled within the small business community in order for smaller employers in the U.S. to become greater enablers of financial inclusion. Better professional training and support is a key solution to the problem, but there’s also a need for the financial services industry to simplify the process for employers. Simple, intuitive, and easy-to-understand solutions can help small businesses prioritize employee benefits and build a comprehensive foundational package, which combines income protection, insurance coverage, and retirement savings options.

3. Public-private partnership is key. 
The public sector has a significant role to play in creating and promoting solutions which help employers bridge these gaps in the U.S. At the federal, state, or local levels, initiatives such as the SECURE Act, the American Rescue Plan, the Paycheck Protection Program, small business tax credit programs, the Restaurant Revitalization Fund, and SBA debt relief, along with an additional 60 plus grants, loans, and programs, offer a variety of options for the unique needs of business owners.¹²

However, small businesses are often not fully aware of the help available and how to access it. As a result, many smaller businesses do not fully maximize the support that’s available and are not able to deliver the best possible benefit packages to their workforce. This is where the financial system, particularly financial services providers, can play an important role in amplifying the good work of the government to drive awareness for these programs and help facilitate uptake. 

It’s only through the combined efforts of the financial system, government, and employers that employees can get the education, solutions, and services they need to build long-term financial security. The public and private sectors must work in tandem to improve the state of financial inclusion within U.S. small businesses.

What does better financial inclusion mean for economies and their populations? 

Financial inclusion is positioned prominently by the United Nations (UN) as an enabler of other developmental targets within the 2030 Sustainable Development Goals (SDGs), where it is featured as a component of eight of the 17 goals:¹³ 

• SDG1 on eradicating poverty

• SDG 2 on ending hunger, achieving food security, and promoting sustainable agriculture

• SDG 3 on profiting health and well-being

• SDG 5 on achieving gender equality and economic empowerment of women

• SDG 8 on promoting economic growth and jobs

• SDG 9 on supporting industry, innovation, and infrastructure

• SDG 10 on reducing inequality

• SDG 17 focuses on strengthening the means of implementation, suggesting there’s an implicit role for greater financial inclusion through greater savings mobilization for investment and consumption, which can spur growth. 

As such, we considered the correlation between the Global Financial Inclusion Index and several other indices which demonstrate how advanced different markets are in relation to various economic and social objectives.

For example, there's an opportunity to analyze—and to measure over time—the relationship between financial inclusion and productivity. Do financially inclusive economies typically have a higher output? Similarly, are financially inclusive economies more resilient to market downturns? Are they home to happier populations? And is there a link between better financial inclusion and a market’s ability to adapt to, and mitigate the effects of, climate change?

The analysis does not seek to imply any causal link between higher financial inclusion and the ability of economies to meet wider socioeconomic challenges. However, the fact that the UN acknowledges the connection between them suggests that improving financial inclusion can accelerate progress toward meeting the SDGs and combatting global challenges around hunger, climate resiliency, economic resilience, productivity, and overall health and well-being. 

This report therefore analyzes the relationship between the Global Financial Inclusion Index and other indices that best reflect the aims of these SDGs.

Results overview

The correlations between the Global Financial Inclusion Index rankings and the rankings of the same markets in the other indices listed below are strongly positive and significant. 

Rankings are compared using Spearman’s rank correlation coefficient and scored between –1 and 1 where 1 is a perfect positive correlation.  

All correlations show a strong, positive relationship between financial inclusion and other factors which shape a resilient and thriving society. 

Correlation does not imply causation and it’s likely that the relationship between financial inclusion and other indices is driven in large part by other factors these economies have in common. For example, developed economies tend to rank highly across all of the indices to which we compared our own results. 

• More developed markets are more likely to have the structures in place to promote financial inclusion and have larger budgets (public and private) to spend on requirements around food security, health care, climate change, etc. 

• One way of reading these correlations is as a reflection of a market’s stage of development.

The strongest relationship is between financial inclusion and climate change adaptation which has a correlation coefficient of 0.81.

• The high correlation may be explained by the fact that more advanced economies are further along the path in addressing the climate crisis—and have the financial means to do so—just as they are further along the path to addressing financial inclusion. 

• By contrast, extensive existing research suggests that emerging economies need trillions of dollars of investment to allow them to meet net-zero targets while continuing to grow and prosper.¹⁴

• India, China, and Indonesia, for example, all rank far higher for financial inclusion than they do for climate change adaptation. 

• The U.S. also exhibits a large gap, ranking second for financial inclusion but 16th for climate change resilience. 

The correlation between financial inclusivity and economic resilience is also strongly positive at 0.78.

• Research from the World Bank demonstrates not only that “access to financial services is essential for resilience and economic recovery” but also that economic shocks, such as COVID-19, disproportionately impact lower income households, small businesses, and individuals in predominantly emerging markets without, for example, easy access to credit, digital payments, and microfinance.¹⁵

• The top five largest market gaps where the Index rankings are higher than the economic resilience rankings are all in emerging economies (China, Hong Kong, Thailand, India, and Vietnam). 

• Equally, four out of the top five markets which rank better on economic resilience than financial inclusion are European (Germany, France, Italy, and Spain). 

When comparing the rankings for financial inclusion and happiness, the correlation stands at 0.68, which although lower than the other relationships we explored, is still a strongly positive relationship.

• The markets with the largest ranking gaps are Hong Kong and Singapore which rank fourth and first for financial inclusion but 35th and 19th respectively for happiness.

• By contrast, Italy, Saudi Arabia, and Argentina rank significantly higher for happiness than financial inclusion.

Gain more insights from the Global Financial Inclusion Index.

The graphic only represents 7 out of the 17 UN SDGs