Imagine having no access to formal financial services. This is the reality for more than 60 percent of the world’s employed population who make up the informal economy. We call them “The Unbanked”. Having access to a bank account or even the ability to take out insurance, loans, make payment transfers and use fx services, are activities that many of us take for granted. The unbanked are highly concentrated in emerging and developing regions and comprise workers and businesses that are not regulated or protected by the state. The concept is originally applied to self-employment in small unregistered business however, in developed countries the unbanked population can also include vulnerable groups such as refugees, asylum seekers and the homeless who have trouble opening bank accounts without verification documents such as proof of address and may even face discrimination at the point of human interaction. People living in rural areas are almost twice as likely to be in informal employment as those in urban areas and without any financial footprint, it almost renders the prospect of climbing out of poverty, improved employment rights and decent working conditions an impossible goal for these vulnerable people.
Why fintech matters
The evolution of fintech provides a promising future with the opportunity to connect the unbanked and to build an inclusive financial system, something that traditional banks and intermediaries have been reluctant to do. The legacy banking system adopted by high street banks, which was designed to bring consumers into physical branches, comprises ancient software technologies and cannot meet today’s expectations of digital natives. With mobile penetration rates in developing and emerging regions skyrocketing, we see consumers across the world glued to their mobile screens for several hours a day. Fintech solutions have the opportunity to infiltrate and rapidly scale in emerging markets as they have demonstrated the ability to do so in developed regions, and the time is now. Financial inclusion will inevitably help to facilitate the transition of the unbanked to the formal economy where they will be able to generate wealth through greater productivity and access to finance. Financial inclusion is not just about having a bank account for everyone in the society. It is about creating an ecosystem that enables and encourages people to use financial instruments in their everyday life. There are four key instruments of financial inclusion – payment, credit, insurance and investment. Technology has the potential to truly democratise each of these instruments and make a tangible impact on the financial well- being of people.
What does it mean to serve the underbanked ?
To be deemed underbanked extends far beyond not having access to finance. Even the process of opening a bank account with a high street bank in a business scenario entails endless meetings in-branch, with a long list of required documents from business plans and forecasts to various incorporation documents and physical forms of identification. The process can go from days to weeks. The underbanked are inconvenienced by inefficient methods of banking. If you’ve ever tried to gain access to capital that you had the clear ability to repay, yet we’re denied due to failing archaic bank criteria, you will also fall into the “underbanked” category. For example, common sense would tell us that applications for commercial loans and those for working capital are not the same, yet they are assessed in much the same way. The underbanked are those who have access to the financial system, yet still struggle to get financial support when they need it most. They are under-served. Banks don’t have the will power to give smaller customers the time of day to immerse themselves into their unique situations to provide tailored solutions – why you ask ? Well because profit margins are generally lower than their bigger clients and they do not have the best interests of these smaller entities at heart. Providing consumers with convenience, attention to detail, and a high level of customer service is essential to serving the underbanked.
The truth is, a systematic bias underpins the entire banking system that prioritises the needs of big corporations and institutions over the depositors who earn low interest on deposits, and are charged high interest on loans that can never be deemed as sustainable for growth. Moreover, they often need collateral such a property or another securitised asset. This bottleneck system is counterproductive of any financial inclusion measures and limits access to finance by default. It’s what we call selective offering. Since the global financial crisis, digital natives have expressed their level of dissatisfaction and lack of trust with the value and service level offered by traditional banks and financial intermediaries who do not meet modern expectations. As we continue to evolve into a cashless society with electronic payments consumers demand a digital platform with customer centricity, rather than a physical structure with product focus. As a direct response to this demand, a third of bank branches in the UK alone have shut in the last five years. Truly branchless banking is a natural by-product of a global society that wants to spend their money wherever they go, and manage their accounts from the convenience of a single app.
We have entered into a new reality, a new era that places technology at the core of everything that we do.
Open Banking, is an enabling technology, like the internet – it is only powerful because of the businesses that build on top of it to create innovative financial products and services. In essence, it is the art of bank collaboration to enrich consumer experience through the use of APIs. Governments have been adamant that consumers are given back control over their financial data even down to transaction based data, and they ultimately get to decide how to use it. These APIs allow third-party fintech services to access customer data from high street banks to provide next generation banking. Open Banking was born out of the GDPR and PSD-2 regulations to revolutionise the use of data and payments. We can all agree that competition is a good thing, it improves industry standards, drives innovation and prevents the concentration of power into the hands of the few. New technology is raising consumer expectations and reducing barriers to entry. This let’s customers compare account options like for like – they can shop around for better banking deals – and benefit from greater transparency and choice when it comes to managing their finances. It is fintech that enables consumers to manage multiple bank accounts from one app or place. Customers will have a seamless experience that consists of one single bank account, one single view, one single payment card, and one single digital wallet.
Artificial Intelligence enables fintech providers to satisfy their customers – for individuals, this could include financial help such as monitoring spending habits or behaviours, and providing desired alerts and automatic processes as stipulated by the individual, to providing insights and analytics to help improve their financial health and literacy. The data extracted from Open Banking APIs can also be further processed to analyse trends in SME business performance and provide user recommendations on the types of finance that they should be considering and when they should be taking action based on these insights and analytics. Thus, AI saves consumers time, and helps to improve their efficiency and awareness whilst banking.
We must overcome the problem of information asymmetry using a holistic approach and a deeper understanding of how we can best assess the credit situation of a person or business entity. As a global economy we must combine financial data with geographic and socio-economic data that provides more accurate information for decisions to be made. Applying machine learning over time takes AI one step further, for example by allowing the identification of features not visible in simple cross-sectional analysis. Machine learning will serve as a powerful tool, rather than a robot to completely replace human interaction. It is this application of AI to broader and deeper data that allows a far greater number of individuals and SMEs to be captured and credit-scored – a step in the right direction towards greater financial inclusion.
As a digital challenger bank, we leverage the new environment of technology that provides the foundation for financial inclusivity to become an achievable concept. We currently offer a wide range of banking and trade finance products for businesses and consumers, and we have the ability to offer white labelled payment solutions for governments, banks and large institutions. Join the financial inclusion conversation by leaving a comment below or getting in touch with us via our contact form below.