The pandemic has changed every aspect of the financial landscape, from accelerating the adoption of contactless payment methods to the growth of digital banking. It has also revealed that significant numbers of people don’t have access to traditional banking services. Currently, 2.3% of UK adults — or 1.2 million people — are unbanked, and likely even more are underbanked.
Ian Nelson is Managing Director in EMEA for Q2. Ian started his 20+ years career working with major banks including Bank of Scotland, RBS and Lloyds helping them to shape and grow their lending and asset finance businesses. He moved to the vendor side of the house when he joined SunGard (now FIS) in 2014 to lead EMEA sales for their lending solution. He subsequently joined Q2 in 2018 and has been instrumental in leading the European expansion and building a successful regional business, with a multi-faceted and diverse team on the ground.
Why are people underbanked? They may not have sufficient income to access traditional banking services, may not have adequate credit history to qualify for loans, or they — like many Gen Z consumers — may be debt averse and wary of financial institutions. In fact, 18- to 24-year-olds account for almost a quarter of all unbanked adults in the UK. Between traditional banks and specialist lenders, the lending landscape is now quite fragmented, and in some respects, the underbanked have fallen through the cracks. Those who had difficulty getting credit via traditional routes are finding it even more difficult to do so.
Being underbanked can have profound consequences, preventing people from getting loans and owning property and costing them substantial amounts in fees over time. The underbanked, who typically have lower incomes, are left vulnerable to predatory lenders who may offer unethical terms and charge usurious rates. Additionally, the pandemic has made contactless payments the only option at many retailers, which severely limits the ability of those without a bank or credit card to pay for goods.
The fintech companies disrupting the financial industry have both an opportunity and a responsibility to develop innovative solutions to ensure the unbanked and underbanked don’t get left behind as the industry reinvents itself. This is particularly true for lenders, who can lead with technology to provide those who were previously overlooked with access to capital and other money management services.
Responsible lending and fintech companies
Previously, consumers that didn’t have access to traditional banks were left out of the financial system. Today, there are many more players, and new technology has allowed fintech companies to disrupt the lending industry and set up loan services. They can quickly go to market with offerings (sometimes in weeks) and better engage with clients — all while being able to meet regulatory cross-checks and controls.
Many fintech companies are practising responsible lending as they work to support underbanked and underserved consumers, not only by making capital available to them, but by making sure that capital is available quickly and accessible with the tools these consumers have on hand. Namely, their smartphones. This means enabling people to apply for credit using an app and get approved for that credit within minutes. Done well, this can change the face of commerce, not to mention home and business ownership.
Offering innovative options
One example of fintech providing a solution to the underbanked and unbanked is the proliferation of companies offering Buy Now Pay Later (BNPL), an installment loan service that allows consumers to buy everyday goods and services without paying the full cost upfront. Consumers are able to pay back the loan in multiple interest-free installments over the course of several weeks or months. They are able to get approved for BNPL within seconds at the push of a button during checkout, and they have options for how they make payments — such as Apple Pay, PayPal, debit or credit card. The breadth of payment options alleviates the challenges that contactless payments present to the underbanked because a bank card isn’t necessary. The process also typically doesn’t require a hard credit pull representing a whole new way to close the lending gap for the underbanked. It’s catching on quickly: More than 17 million people in the UK have used a BNPL service, a practice that has grown in popularity during the pandemic.
Now, we’re seeing fintech companies creating ecosystems that allow the capabilities of one solution to build off the capabilities of another, providing a full suite of client services. Fintech companies are using artificial intelligence to deliver faster, more accurate credit decisions and provide different credit decisions for various scenarios in a changing market. Additionally, open APIs are allowing multiple companies to join forces.
For consumers, this means access to more tools that talk to each other, making it easier for them to manage their money and their credit in a way that’s right for them. These fintech ecosystems can be a game-changer, making healthy financial habits accessible.
Fintech companies are stepping up to meet this historic moment, forging a new path forward for responsible lending. They’re using technology to innovate in the financial space, helping people who’ve never before been able to access credit and setting a new standard whereby borrowers can get approved within minutes without ever having to step foot in a bank.
While the pandemic has been a tragedy, it has fueled fintech companies to tackle a need that’s long been ignored. By strengthening the financial offerings for the people who need it most, they’re building stronger communities and setting us up for a more equitable future.