Can technology bring in those excluded from the financial system?
- With 12 million Americans going to payday lenders each year to manage their financial needs, banks and startups recognize that those excluded from the financial system bear a disproportionately high cost.
- Developing new tools for underserved populations that are affordable and profitable is an ongoing challenge.
With 12 million Americans using payday lenders each year, the fees they pay to manage their basic financial needs are steep — $9 billion annually. This puts a heavy burden on the unbanked and underbanked, who, according to the FDIC, number about a quarter of the U.S. population.
Financial inclusion, according to the World Bank, means having access to “useful and affordable financial products and services that meet their needs,” including transactions, payments, savings, credit and insurance.
Tearsheet asked four stakeholders in the field — from banking, venture capitalist, startup and nonprofit perspectives — what financial inclusion means to them and what can be done to expand it. Here are the excerpts, edited for clarity.
Colleen Briggs, executive director of community innovation, JPMorgan Chase
The traditional definition of financial inclusion has evolved. It used to be that having access to a bank account was the end goal. But collectively, it takes much more than a bank account to stay [financially] healthy. People need the tools to manage daily finances, whether shocks and meet longer-term goals. People need more than knowledge — they need action-oriented, ongoing support. The banking system and the fintech system can work together to unlock the financial system [for the underserved]. Other partners, including nonprofits, and community partners such as employers, can also help people bridge the unexpected shocks. We need lots of choices for small-dollar credit — there are some exciting innovations happening and we need to figure out how best to make them affordable and profitable.
Gaia Ines Fasso, director, Anthemis Group
Solutions already exist in fintech to tackle financial inclusion. These include players in the alternative credit and risk scoring space, (for example, Traity); behavioral nudging (for example, Payoff); peer-to-peer models (for example, Lemonade) and low-cost mobile distribution (for example, M-Pesa). Access to financial services needs to be complemented by education about the principles for good financial management and a better understanding of what services exist to maintain financial health in the short term. However, the future of fintech will see continued collaboration between financial institutions and startups to deliver more relevant and inclusive services to their customers. New players without backing from a regulated financial institution have less opportunity to scale (customer acquisition costs, financial leverage).
Om Kundu, founder, InspirAVE
To the extent that over a third of the planet still does not have an account (even as 700 million opened new ones between 2011 and 2014) and it remains “expensive to be poor,” no doubt there is a massive opportunity. Incumbent institutions have found it tough to create an economically viable model in serving such segments. Entrepreneurial ventures can innovate faster to solve tough problems, which are lasting in their social impact and scale. Leapfrogs in mobile technology and data emanating from our ever-expanding digital and socially networked footprint are opening new vistas that ought to empower and qualify a lot more individuals to access credit and save for what matters the most to them.
Ryan Falvey, managing director, Financial Solutions Lab, Center for Financial Services Innovation
Fifty-seven percent of Americans are struggling financially, and providers of all sizes, from early-stage fintech companies to the biggest banks in the country, have a huge opportunity to help those consumers build their financial health. We see a tremendous amount of innovation among startups to provide consumers with new ways to build and access credit, build savings and assets and have greater resilience. We also see a lot of interest from larger players in many of these same innovations. It’s good business to develop solutions for the 156 million Americans who are in poor financial health, so we encourage financial institutions to align their products and business practices to the needs, desires and ambitions of them.