The challenge of solving for financial inclusion

There is no shortage of financial access, health and literacy apps. But while financial inclusion has taken off as a hot buzzword in the industry, it remains a tough one to tackle. That's because, beyond the specter of legal and technological issues, financial applications usually depend on digesting data from customer bank accounts. That’s a problem when the people in a startup's targeted demographic don't have a bank account. So startups have refocused on financial "health" instead of "inclusion." Most financial health apps are savings assistants, like Digit or Qapital; or spending trackers like Moven or Clarity. Some, like Credit Karma or Nerdwallet, exist to help people improve their credit scores. Acorns and Robinhood are there to educate people about investing and let everyday people dip their toes in something that was once exclusive to high finance. But they all require users to link their bank accounts in order to register; they're not for the unbanked. And if TD Bank's recent partnership with Moven is any indication, these startups can be hard to sustain as businesses and probably will need to partner with -- or sold to -- a bank. “People approach financial inclusion from strictly technology and investment standpoints,” completely lacking empathy, said Christine Lu, CEO and founder of America Innovates and an investor in impact investment app Aspiration. “People are unbanked for a reason. You can’t lead with technology first to find solutions to the unbanked if you don't understand why they are and continue to be unbanked… it’s an oxymoron almost.” It’s not that different from the realization bigger financial institutions are waking up to: technology is a feature -- a tool even -- but it’s not the solution to the industry’s many problems. So despite jobs (in all industries) becoming more and more reliant on technology expertise, business as usual still rests in the hands of the industry experts. Too often, Lu said, founders of these solutions don’t genuinely understand the problem they're trying to solve: why people are unbanked. There’s a vague awareness, but they often don't fully comprehend "when a family is $700 away from financial ruin or when a predatory fee is the difference between being able to cash a checker buy milk for the baby." Too often, privilege gets in the way. That's why Lu said she centers her investments around the people running the company and their life experiences. The technology will come later, she said. “I have no doubt that those obsessed with solving for financial inclusion will be able to find the technology to build the solution,” Lu said. “I’ve looked at a lot of these apps, but they're just features of the broader problem they're trying to solve.” Another barrier to adoption, according to Monica Brand Engel, a partner at Quona Capital, is that marginalized people just might not have the time for it. They’re some of the strongest and savviest consumer demographic, she said, as they often need to figure out how to survive with much fewer resources than most. “They have problems with the most basic parts of their lives -- paying bills is a challenge, getting to work is a challenge, everything they do is difficult. If you offer them a benefit they are probably more than willing, but they also have been offered a lot of quick fixes before and so they're skeptical. They've gotten used to a certain way of being informed and figured out how to make things work.” So even though most fintech developments have evolved around changing consumer behavior, the more interesting investments for Engel are in startups with their eyes on changing the cost structure of a business and applying technology to risk analytics. For example, in Latin America and some part of Asia there’s a big move toward digitizing invoices. It’s driven mainly by governments’ desire to collect taxes, but with a digital record of every sale, lenders can use it to identify different consumer touch points, inflows, outflows, risk. There’s no need to send a loan officer. “Those tech apps rapidly change the cost structure of financial services,” Engel said. Engel has also spoken extensively about using mobile devices -- it doesn't even have to be a smartphone -- in emerging markets to create alternative data that can bring people into the formal financial system. In the U.S., however, huge companies like PayPal and Amazon may already have the lead on that -- and the financial stability to make it a long-term offering. Both companies now offer services for those who get paid in cash, don’t have bank accounts or debit cards and don’t use credit cards. Both have enough users and partners in their networks to emulate Ant Financial’s use of new payment methods to produce alternative data and ultimately bring more people and commerce into the economy. “It’s been clear for a while that PayPal has a vision to democratize financial services,” Anuj Nayar, head of global initiatives at PayPal, told Tearsheet earlier this year. “A lot of this stuff we’re doing specifically to hit the underserved. People are being disenfranchised … it’s incredible how high a proportion of the U.S. population couldn’t raise $400 in an emergency.”