The Customer Effect
Technology has opened up access to banking but can it stop the unbanked from falling through the cracks?
- The unbanked and underbanked do have more options now.
- But many of those options are too expensive.
This article was contributed as part of Tearsheet’s new Thought Leaders contributor program. Natalie Cartwright is co-founder of Finn AI. Those of us who work in finance can’t imagine life without a bank account. But for the world’s 1.7 billion unbanked adults, this is a reality. In the U.S., 33.5 million households are either unbanked or underbanked and lack the ability, criteria, or financial literacy to access banking services. Without access to savings and credit, these people often live — and remain — in a cycle of poverty. In traditional banking models, the unbanked and underbanked were considered unprofitable and risky: many have poor credit ratings, were unlikely to generate meaningful deposits or incur sufficient banking fees. But, as more banking services go digital, the un- and underbanked present a profitable business opportunity. Thus, it’s no wonder that it’s not just banks who are clamoring for this revenue; so too are technology companies and retailers, creating an open playing field for a now much-coveted underbanked dollar. While some non-traditional banking products, such as GoBank, have been productive in providing a solution to an otherwise unserved consumer, and likely cut the use of expensive alternative financial services products from this population, most are not altruistic: they don’t offer interest, they charge for deposits, overdrafts and other monthly fees. These customer are likely paying more out of their pocket for banking and reaping fewer rewards. More importantly, they don’t solve the problems of the unbanked. The fees are so high and unpredictable that it’s a struggle to stay banked. Mobile opens access The beauty of technology, and in particular mobile, smart phones, and AI, is that it democratizes access to products and services to a population that would otherwise not be served. As smart and mobile phones become more capable and less expensive, they can also drive financial inclusion. In the U.S., nearly 95 percent of adults have a mobile phone and 80 percent of those are smartphones. And since they’re not tied to traditional banking norms such as branches, ATMs, and credit cards, the unbanked are more likely to adopt digital banking via their phones. Because mobile phones lower overall operational costs for the banks, they should also conceivably pass along those savings to customers, but this is usually not the case. One in four underbanked customers falls back through the cracks within the first year, crippled by overdraft fees that are lucrative for banks but disproportionally affect lower income consumers at $11.45 billion annually. Thus, many banks are offering products that are even more lucrative for them but not in the best interest for the unbanked. Cutting costly overdraft fees would be one way for banks to strengthen their relationships with the unbanked. Upstarts like Petal are realizing this. Petal recently introduced a credit card that eliminated overdraft and late fees and instead, makes money through interest rates and transaction charges. AI and the underserved banking customer TymeBank in South Africa uses AI to help people learn about their money and how to save. It teaches people about credit scores and rewards them for good financial behavior — TymeBank offers an amazing 10 percent interest rate on savings accounts for customers who can define specific financial goals they want to hit, and then contribute to them. AI can also be used to help customers avoid bank overdrafts while establishing spending patterns and behaviors that will make their financial lives better. For example, using AI, a bank can alert a customer when they’re about to go over their limit, recommend better products based on their financial position or make recommendations on their spending habits so that they can save more. Finally, ATB (Canada) is launching Brightside, their digital bank line focused on helping people get ahead, offering services such as automated rounding up, guided goal building and challenges to spend less on optional items. This is a really good example of a traditional bank launching a disruptor channel focusing on underbanked people. For banks, the mandate is clear. Either focus on providing better services to customers or leave their business open to an upstart who will. With such a large unbanked opportunity, and trust of banks so low, if banks aren’t thinking this way, the challenger banks are. It’s never been easier for bank customers to switch or drop their banks and it’s never been easier to start a digital bank. And with so many new entrants and established institutions jostling for market share, smart banks will focus on earning and maintaining the trust of all their customers – unbanked or otherwise.