One of the biggest premise of fintech, perhaps somehow implied, is that it would change banking for the better. You know the story: the year is 2009, greedy banks have created a massive mess. And that’s an understatement, just watch The Big Short (ad) for a quick recap. In the following years, fintechs will emerge as a credible alternative to the old banking system across much of financial services. One of the most visible part being retail banking and consumer finance, with the likes of Revolut, Monzo or Chime. Fintechs have risen with the hopes that they would do things differently and truly improve people’s life. But are fintechs just traditional financial services with a shiny paint – lipstick on a pig – or do they actually care about people’s financial well-being? For instance, can fintech help with financial inclusion?
The problem at hand
Believe it or not, it is not a given to have a bank account in the Western World – the so-called “developed countries”. For an abnormally high percentage of the population, it is actually Mission Impossible. And not the good kind, with Tom Cruise running around beating up the bad guys. Take the UK for example. There are about 1.2 million people without basic banking facilities according to a recent study by the Government on financial inclusion. Globally, about 2 billion adults do not have a bank account. These are the unbanked.
The under-banked also represent another massive tranche of the population. Still in the UK, 10 million to 14 million people are considered under-banked. It means that they have either very basic bank accounts (the term ‘basic’ fits well since you cannot do much with it) or cannot access credit from mainstream sources. Out of mainstream sources implying high interest rates. When you think about, this is a crazy proportion of the population. And the UK is not alone, it is the same story in many developed countries. For instance the USA: 25% of households are either un-banked or under-banked according to a 2017 survey by the FDIC. The numbers are even higher in developing countries.
Financial exclusion is real in today’s society, and it is not a fringe of the population. The cherry on the cake: the ‘poverty premium’. It describes how much more it costs low-income households to pay for goods and services than the average. A lot is down to not having a bank account or access to regular financial services. There are therefore hope that fintech can help with financial inclusion.
The challenge: banking the unbanked
There have been various initiatives over the recent years to bring people into the system. At least the ones that want to. There will always be some that prefer not to, which is fair enough. For those that do, fintechs have introduced several innovations, or leveraged existing technology, that can improve the situation:
Banks tend to hide behind regulation, mostly by scare of the regulator post-GFC. But also because changing these processes is not high on the priority list. It happens when you are playing catch up with your digital transformation agenda or carrying out another cost-cutting exercise. Neobanks have brought serious innovation to the onboarding processes, once a dreadful experience with banks. In turn, it has pushed banks to get slightly better at it. Fintechs are not taking shortcuts here. Instead, they are more flexible with the documents required, the way you submit such documents, or even working around different banking licences. It all adds up to making it much easier for people that used to not tick all the boxes. For instance having a bank account, even a prepaid card, without a proof of address used to be near-impossible, not any more. Anti-Money Laundering (AML) has also benefited massively from leveraging new technologies like AI, which in turn means no blanket rules for not accepting clients.
There was a time when getting a credit, retail or business, was the most rigid process in the world. Still is with some financial institutions. Don’t have a good credit score for some odd reasons? Denied… or here is the highest annual percentage rate (APR) you will ever see. Oh, you are a business without 3 years of history, hum tough. Thankfully, a number of fintechs have come up with really smart ways to change that. There, we have seen that fintech can help with financial inclusion. Like Salary Finance, which provides pay cheque deducted loans and is able to considerably lower the interest rate charged – because less credit risk – thus improving people’s financial well-being.
There are other innovative ways to assess people and businesses’ credit worthiness. A lot of it is down to what you do with the data that is available. The reality is, the more you feed into your credit model, the better you will be at assessing if a customer will repay the loan. For instance, you can take into account movements, projected cashflow or suppliers’ information. OakNorth is a fintech leading the way in that space, by changing how lending is being done through technology-driven solutions.
Besides leveraging automation and artificial intelligence for KYC and credit assessment, there is something bigger at play. By automating processes and augmenting employees’ capabilities, you are able to bring better quality services to the masses. The types of services that were only available to high-end customers through dedicated relationship managers is available to the other end of the spectrum. That is thanks to automation as it becomes cheaper to provide these services to more customers. In short, it means that fintech can help with financial inclusion.
Personal budgeting for instance is a game changer to help people manage their money and get them out of expensive debt. Although it would not reduce income inequality, it can improve wealth inequality. You build wealth by spending less than you earn and fintechs have brought to the market a number of personal financial management (PFM) tools that can genuinely move the needle. There is a need for more financial education to go even further in that space.
The technology has many applications in financial services. Given its specifications, blockchain has the potential to dramatically help with financial inclusion, notably in developing countries. For instance, land title deeds on distributed ledger, so they can be used as collateral for loans. Or making sure that payments reach the rightful recipient through smart-contracts in countries where the banking system is not as robust.
Blockchain technology can bring into the financial system many people that until now could not access it. The rise of cryptocurrencies, Bitcoin most notably, is another example of how people are looking for alternatives to a banking system that is not inclusive.
There are many more ways that fintech can help with financial inclusion: processes that can be improved to allow more people to qualify or technology that can be further leveraged. There is still a lot to do for the unbanked and under-banked so that it becomes just a tiny marginal problem for society. Fintechs have impulsed a strong innovation dynamic to the financial services industry, mainly through leveraging new technology to reinvent broken customer journeys. This has helped significantly with financial inclusion.
With the Covid-19 crisis raging on and as the economic situation deteriorates – or at least does not improve in the short term – the problem is only going to grow bigger. People are going to fall behind loan and credit card repayments, businesses are going to struggle with their finances and notably cashflow… Financial inclusion is likely to stay a big problem for a while. And that’s not even mentioning that a cashless society is obviously a nightmare for the unbanked. Unless fintechs continue to bring the right innovation to the market, alongside incumbent banks that should definitely do much more…