Making Good on Financial Inclusion with FinTech

The initial vision for financial technology (aka FinTech) in the aftermath of the Financial Crisis (2008 -2009) was to provide alternative paths to traditional banking.

Established financial institutions were seen as a the main driver in poor economic conditions at the time. Many charged $100s in overdraft fees to their clients. Not all US individuals qualified for a traditional banking account or credit, which meant they had to use check cashing stores and payday loans.

Early fintech startups took on the banner of expanding access to banking by opening services to a broader audience, with minimal (or no) fees. Technology allowed these companies to do so without a physical location — through a website or mobile device.

Fast forward to today, the FinTech sector is still hyper-focused on increasing availability of financial services — going beyond deposits to lending and wealth management. The mission of financial inclusion is here to stay, but how should we measure progress behind this movement?

CONTEXTUALIZING FINANCIAL INCLUSION

There are a few key points to clarify when it comes to the topic of financial inclusion.

This doesn’t only apply to individuals, but businesses.

Small businesses (especially ones that recently started or have less than 10 employees) may be unable to open a checking account from a traditional bank, who requires a minimum balance to avoid a monthly fee.

Many banks require 2 years in business before considering an application for credit. Women & minority-owned businesses struggle the most to obtain loans.

Those at-risk are unbanked (e.g. not eligible for a standard checking account) or underbanked (e.g. may have a checking account but don’t qualify for credit cards, loans, or savings without substantial fees).

Access is important, but access to ‘useful & affordable’ solutions is the goal.

This doesn’t only apply to countries that are low income or emerging economies.

In the US, about 20% (1 in 5) of households are unbanked or underbanked due to their usage of payday lenders or check cashing stores. The estimate of those living ‘paycheck-to-paycheck’ is believed to be higher.

The FinTech movement from the last 10 - 12 years created numerous companies with a laser-focus on one element of financial inclusion. For these firms, financial inclusion’s impact is measured through improved access, usage, and quality.

Access to financial services

In first considering ‘Access’, it’s easy to think of the approval (or denial) in requesting a checking account or credit card.

Besides the hurdle of qualification, there are other considerations to access such as affordability (i.e. fees), location of customer (e.g. in a state where a lending product isn’t allowed), and level of financial literacy (as some adults may not be familiar with banking rules).

Fintechs have stepped up with numerous neobank platforms (digital banking startups without physical locations) that have no monthly fees for a basic account and card.

Consumer credit is a more complex area due to numerous regulations and increased risk of losses and default.

Many credit products still rely heavily on an individual’s traditional credit score, which is based on length of credit history, utilization rate, and payment history.

Unfortunately, a consumer can’t have credit without an active credit product — yet they need a credit product to start building credit history. Many end up applying and hoping one bank or lender will take a chance and give an approval.

Fintech companies are upending this traditional approach to credit by analyzing alternative data on applicants that shows ability to pay.

Recurring deposits of payroll can highlight a customer’s current ability to pay. This can include an in-depth review of bank transaction history that shows monthly payments towards utilities & subscriptions. Some fintechs are now able to apply payment history to credit profiles for credit bureau reporting — such as Experian with Experian Boost.

USABILITY for FINANCIAL INCLUSION

New financial products and platforms can be created for the underserved, but if there’s a lack in adoption then there’s no impact towards financial inclusion.

The frequent and recurring usage of financial services is a key indicator for fintechs on a mission for good. Owning a bank account is not the end game. Budgeting and savings within this account makes all the difference.

FinTech first made its mark by delivering a high-quality user experience that made banking easy and simple (in comparison to traditional banks). An easy-to-use platform leads to more user activity (such as purchases, trades, and payments).

Platforms are able to analyze this activity and make custom recommendations for future products that further enhance the experience.

Top fintechs today offer overdraft protection or cash advances if they forecast that a client may have a negative balance before their next paycheck. These types of offers are within a user’s dashboard (after log-in) and can be requested quickly with a tap of a button.

PRODUCT QUALITY as a journey

Increasing access and ensuring high usability are definitely critical points of measurement.

Achieving continuous quality from more than one product offering is even more important. Financial inclusion isn’t a single destination, but an ongoing journey that requires new products that match the evolving needs of the underserved.

Founders and operators of fintech companies typically have a phased approach.

The initial focus is on establishing a primary deposit account relationship in which all earnings and expenses flow. Centralizing all transactions makes it easier to customers to budget on a monthly basis. This budget will show how much is left towards savings (both short-term & long-term), or if certain expenses need to be reduced to avoid payday loans.

The secondary phase can be a savings solution with a high-yield APY (annual percentage yield) and features that automate transfers. A final phase can focus on building credit through a secured credit card (credit limit based on savings balances) or a credit builder loan (with monthly deposits reported to credit bureaus as payment history).

In deciding on product roadmap, fintech teams should leverage customer data — from both existing clients and surveys. Underserved groups have varying concerns when it comes to finances, which makes quality & usability moving targets.

IMPROVED INCLUSION LEADS TO FINANCIAL HEALTH

It really comes down to better financial health for society overall.

Individuals and businesses who have open access to financial services tend to have an advantage in being able to use affordable credit, maintain an emergency savings, build long-term wealth, and buy a home.

These users qualify for services from banks and non-banks, and have access to (some form of) financial advising throughout their lives.

The ones who need financial inclusion the most struggle to make ends meet and lack the financial education on where to start making a change.

It’s up to not only fintechs, but local community groups and government agencies to invest resources in empowering underserved groups globally.

Ensuring progress towards financial inclusion NOW makes it more likely future generations will have better opportunities to reach financial independence and prosperity on their own.

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