Financial exclusion is the most pervasive social problem you’ve never heard of. And tech can lead the way in consigning it to history, says Virraj Jatania, founder of Pockit.
Around 2m people in Britain today are living life without a bank account, while 4m more use their accounts infrequently, according to estimates by the think-tank, the Financial Inclusion Centre. There are usually a couple of reasons that people end up living like this. The first is that they have had financial difficulties, spiralling into debt, breaching overdraft limits or even going bankrupt. The second is that they may be a recent immigrant or have moved around a great deal, and lack the documentation to prove their identity or where they live.
Whatever their situation, ultimately these are some of society’s most marginalised people, who have understandably developed a deep mistrust of banks. Cut off from everyday financial services, they are consigned to a life dependent on cash, ‘pay day’ loans, borrowing friends or family or high cost pre-paid products. Living a largely cash-based life also makes it hard to save or plan for the future, hampering wider social and economic mobility as a result.
Since 2014, major UK banks have had to provide fee-free basic bank accounts to everyone in a bid to address this issue. However, these accounts typically consist of little more than a (non-contactless) cash card because there’s little incentive for the banks to offer them in the first place.
The infrastructure behind the main high street banks – thousands of staff and hundreds of branches – as well as their regulatory obligations over fraud prevention and money laundering, make offering basic accounts highly unattractive. No wonder, then, that banks do the bare minimum to promote them.
Yet, as daily life moves inexorably online, we urgently need to help the poorest in our society – people who are already overlooked by financial institutions – to manage that shift. If you depend solely on cash, you can not access the lower costs associated with paying, say, utility bills by Direct Debit or shopping online.
According to one estimate, families without bank accounts, who are unable to transact online, end up paying on average an extra £1,300-a-year. Given the hefty price tag of not serving such customers – both financial and societal – someone should urgently be offering a range of banking services to the financially disadvantaged. And if the traditional banks can’t do it, then why not tech startups?
A couple of powerful tech trends have merged to make it possible for a startup like mine to begin to tackle this problem and serve the 2 to 6 million who are financially excluded. First, technology has enabled startups to access the payment architecture, such as Faster Payments and Bacs, that have for years been monopolised by the banks. We have effectively been given access to the legacy systems, the rails upon which the banking system runs, which has allowed us to build bespoke tools to serve this hard-to-reach group.
All of this has, of course, been enabled by rising smartphone penetration, which is set to reach 70% of the global population by 2020 (and by 2015 was already at 68% in the UK). This trend alone, coupled with the fact that 88% of the UK population use the internet at least occasionally, has provided the route for the disadvantaged to gain access to banks. Being able to make and receive payments, and transfer money via a smartphone, in privacy, means people who have highly dysfunctional relationships with their bank, can avoid the stigma they feel when they venture into branches.
Today, startups can provide any smartphone user (or connected device) with next-generation, intuitive, secure and transparent end-to-end banking applications. And because we do not carry the cost of branches, back office and other infrastructure, the savings can be passed on to customers.
In a matter of years, almost all of us will be running every aspect of our financial lives through smartphone apps, which will, by increments, level the playing field for those short-changed or side-lined by the banks. Financial exclusion is one of the most pervasive, yet least known, social problems of our times. Thanks to technology, the day it is solved is drawing closer all the time.
Virraj Jatania,
CEO and founder of Pocket,
a startup building the world’s most inclusive bank.
