This August at The Fintech Times, we’re looking to highlight some of the amazing things fintechs are doing around the world. We are always hearing about the ‘latest groundbreaking innovation doing good for the community’, but are these innovations doing good for those in an already advantageous position, or are they helping make the financial world more accessible?
Great strides have been made toward financial inclusion yet close to one-third of adults – 1.7 billion – are still unbanked, according to The World Bank. Research by The Inclusion Foundation shows that 1.23 million of the UK’s citizens are unbanked.
In the second part of our focus on how to improve access to affordable financial services to all, we share more industry insight on the topic. You can read part one here.
Neobanks are the ‘way forward’
Raghunandan G. is co-founder and CEO at Zolve, the cross-border neobank. Unsurprisingly, he sees neobanks are one of the emerging solutions to help the unbanked become banked as they can ‘help consumers address their individual financial needs better and plan for improved spending habits going forward’.
He says: “Neobanks have grown in popularity in recent years because of technological advances and offering flexibility that is not found with traditional banks. They are also in line with what consumers have come to expect, thanks to advances in places such as restaurants and retail outlets, where technology makes the user experience easier.
“Speaking of flexibility, traditional banks operate at normal business hours. This means easy access to the banks becomes limited to ‘banking hours’. In addition, these institutions pose geographical challenges to their customers. People must come to branches and sometimes make multiple visits to complete tasks.
“On the other hand, neobanks are really built around customers’ needs. They take a customer-centric approach to developing technologies, solutions and tools that provide customisation from a laptop or phone.
“Customers no longer need to visit brick-and-mortar bank branches to complete tasks. Instead, they find greater financial freedom that better fits with their lifestyle and schedules. They can take charge of their finances and use simple tools to plan for everyday expenses and big purchases in the future.”‘
Focus on identity
One of the main reasons why people are unbanked is due to an inability to formally prove their identity, says Gus Tomlinson, identity and fraud product director EMEA at GBG, a provider of digital identity and fraud solutions.
“Today, digital identity isn’t equal for everyone,” she says. “Credit history and physical documents, like passports and driving licences, are currently used to verify an individual. But in the UK, many people don’t have these documents – more than 11 million Brits do not have a passport, for example. And this leads to people, often the most vulnerable people in society, being excluded.
“As we begin to rely more on online services, it is fundamental that digital identity is made equal and accessible for all. To do that, the government needs to open up access to the data it holds – school records, National Insurance Number, medical records – so that we can more easily identify everybody in society. In addition, regulators need to work to adapt the requirements for identity based on the advancements in technology that allow companies to take a risk-based approach to identity online.”
Understand digital barriers
Much of the conversation has focused on how best to widen access to existing financial products, or on how to improve products and services to appeal to underserved communities. While focusing on these factors have been beneficial, we must also focus on the barriers preventing people from becoming banked in the first place, suggests Nabeel Irshad, VP, government & public sector, fintech ESG UK & Ireland, Mastercard UK and Ireland.
“These barriers consist of a lack of digital skills and confidence many have in going online. In fact, according to the Lloyds Bank 2021 UK Consumer Digital Index there are two million households that struggle to afford internet access in the UK today, and resultingly 10 million adults lack the most basic digital skills.
“Widening the debate to discuss these ‘digital barriers’ alongside financial inclusion is crucial if we are serious about ensuring the unbanked become banked.
“It’s no good if banks and fintechs have the most beautifully designed, intuitive websites and app user journeys if people cannot access the internet in the first place or have never learnt how to browse the web. It’s like having a high street with great shops and products that only those with advanced map reading skills can find.
“Education is key. So, banks and other providers must improve the digital skills of those who lack them by providing better, more inclusive access to information on financial services. The banking world must also offer consumers practical tools to improve accessibility for those who are unbanked. Failing to address this as an industry risks us failing to tackle an underlying cause of exclusion.”
Open banking can help the unbanked
The unbanked refers to individuals that do not have access to traditional bank services or do not have an account at a bank, while the underbanked pertains to people who do have an account but prefer to use alternative financial services, argues Rolands Mesters, CEO and co-founder of Nordigen, the open banking API.
“Open banking can have a profound impact on allowing unbanked and underbanked individuals to access financial services and bringing financial inclusion to these underrepresented groups,” he says. “One way in which open banking can help the unbanked is by creating alternative solutions that can be more easily accessed than traditional financial services through digital means and technology.
“Traditional banking and loan firms frequently only offer lending products to people with established credit histories, which they source from credit bureaus. Not only is this data often out of date, it also relies on the consumer having an extensive record for utilising traditional financial services and products, such as credit cards. This isn’t feasible for the unbanked.
“Open banking, on the other hand, enables customers to become eligible through alternative financial data, such as through timely utility bill repayments. Not only does this enable more consumers to benefit from financial services, but it also allows financial firms to maintain more variety in their product offerings, with varying solutions tailored to the specific needs of their clients.
“Open banking also gives users more power over their personal finances, as consumers are able to use tools, such as personal finance management applications, that are powered by data and AI algorithms to give users a better understanding of their financial status as well as solutions to assist them with making better decisions.”
There needs to be more understanding
Lisa Fischer, chief growth & lending officer at fintech Mission Lane, thinks low-income Americans are often blamed for their financial problems and the underbanked has been historically avoided by most financial institutions.
She say: “At Mission Lane, we’ve built our business around having empathy for low-income consumers and recognising who they really are – conscientious people who typically live within their means but may have hit a bump in the road.
“For example, maybe a customer wants to pay their bills, but their computer broke so they are unable to pay them online. Companies can engage with customers to see what’s wrong and work with them to fix it – a win-win for all. Mission Lane is a fintech that looks beyond the stereotypes to meet customers’ individual financial needs.
“We believe that people shouldn’t be defined by their mistakes. Rather, they should be empowered with tools, products, and guidance that can help them get on a better path and achieve their financial goals – without the hidden fees and confusing terms that many customers in this segment are forced to deal with.
“It’s also more than just about getting access — many people in this population do have access to mainstream financial services, yet the service and products they are offered are not high quality, not engineered for their specific needs, and can be incredibly costly. These consumers face hidden fees, minimum deposit requirements, and other expenses, making it difficult to afford basic financial services, including the ability to open a bank account.”
Mistrust of financial systems
Also addressing access in the US is Nick Elders, CEO of SPARK a cloud-based loan origination company specialising in helping banks and credit unions support the small business ecosystem. He suggests some unbanked and underbanked don’t even begin to engage with banking institutions because of the lack of trust in the systems that have been established over years and years of abuse.
He comments: “Woven throughout America’s long and difficult history with race is also a story about unequal access to capital and resources located within the banking sector.
“Fintechs play a crucial role in correcting these disparities, and the technology can help banks create deeper connections for community outreach and engagement; take human bias out of lending by utilising automation and artificial intelligence (AI) to create simplified ways to assess creditworthiness; and provide opportunities for increased economic development in underserved areas.
“By continuing to ignore underserved markets, the lending industry is missing out on the opportunity to build a more inclusive, accessible, and thriving economy. When institutions like mission-driven lenders have the right fintech partners, they will not only drive more engagement with underserved communities but increase mainstream participation in these markets.”
Not everyone wants a bank
While financial status is the main reason people choose to remain unbanked, it’s not the only one, says Chirag Patel, CEO, digital wallets at payments firm Paysafe.
“Over the last decade, governments and other international organisations have been making their best efforts yet to boost financial inclusion. While the numbers may indicate that these initiatives may have slightly improved the situation, they have one critical flaw. They all assume that the answer to solving financial exclusion is simply enabling access to a traditional bank account.
“Reasons for being underbanked or unbanked vary from not having enough money to meet minimum requirements, high maintenance fees, and the risk of overdrafts – but also many simply choose not to be banked for various reasons.
“According to a Financial Conduct Authority report, a third of the U.K.’s 1.3 million unbanked used to have a bank account but don’t want to have one again. Likewise, 56.2 per cent of unbanked Americans say they aren’t interested in being banked either. So, while there are many initiatives to improve access to bank accounts and digital financial services, those are not the only approach to tackling better financial inclusion.
“Traditional banks and fintechs are no longer the only entities that can deliver financial services. With banking as a service (BaaS) there is an opportunity to enable the unbanked and underbanked to start engaging with the financial system on their terms. BaaS’s potential lies in the fact that it makes it possible for any company to offer financial products tailored to its customers’ needs without having to become a bank.”
Digital assets and DeFi can empower the unbanked
Digital assets are mischaracterised as nothing more than speculative investments or digital playthings for so-called ‘tech bros’ and other privileged groups but the reality could not be further from the truth,” says Alex Tapscott, managing director of Ninepoint Partners’ Digital Asset Group.
He points to a recent survey conducted by Morning Star in the US that revealed that while 10 per cent of the fully banked owned digital assets, a staggering 37 per cent of the underbanked owned them. They’re using digital assets to make payments, store value, invest in emerging technologies and access an array of other DeFi services to fill the gap.
Moreover, 44 per cent of digital asset holders in the US are minorities, according to a survey by the University of Chicago’s National Opinion Research Center.
“Outside the United States, the situation is starker,” he says. “Not only are many people in the global south unbanked or underbanked, but their local currencies are often hyperinflationary, and they suffer under their governments’ draconian capital controls. Consider Nigeria, where nearly 30 per cent of Nigerians use Bitcoin as an alternative to fiat cash.
“In El Salvador, there are more Bitcoin wallets than bank accounts. The digital asset wallet MetaMask, through which individuals buy, sell, and store cryptocurrencies, digital art like NFTs and more, is most popular in the Philippines and Vietnam.
“To be sure, we face risk as well as opportunity here. Holding most of our wealth in non-stablecoin digital assets like Bitcoin subjects us to bouts of volatility. 2022 has kicked off with a bout of market volatility, felt across many asset classes. Digital assets have not been immune to this tantrum. Rising interest rates and hawkish signals from the Federal Reserve, combined with continued uncertainty around Omicron, have led to a widespread ‘risk off trade.’
“But ultimately this is a positive thing: In the same way cell phones allowed billions of people to leapfrog landlines, digital assets and DeFi are empowering many with financial tools that they could not otherwise access. This is a huge catalyst for economic growth as more people move from the informal cash-based economy to the digital economy of the future. It’s also just plainly a good thing for the world’s unbanked, underbanked and disenfranchised and should be encouraged and celebrated.”