Banking on the Unbanked
Leveraging FinTech for a Financially Inclusive World
The unbanked and underbanked populations of the world serve as proof that the purpose of capital in today’s world is not as good as it gets. In America, 14.1 million adults are unbanked and 48.9 million adults are underbanked, which means 25% of American households are conducting their finances outside the formal banking system. Most Americans that do not have bank accounts cite not having enough money as the main hindrances. The rise of mobile banking around the world has proven to be highly beneficial for people with low incomes; thus exposing unbanked and underbanked Americans to mobile financial services has the ability to increase bank account ownership and stimulate economic growth. The challenge, however, emerges in the second most cited reason that Americans operate outside the financial system — lack of trust in banks.
The banking system has ignored the unbanked and underbanked by conducting business as usual, leaving them underserved and economically disadvantaged. The opportunity to change the narrative by investing in the unbanked and underbanked presents itself by leveraging innovative solutions through mobile banking technologies. With access to a financial services they can trust, nearly 33 million U.S. households would finally have the capability to be financially included and economically empowered.
Exclusion from financial services widens the extreme income inequality that plagues America. The lack of investment in low income Americans has left them and their communities in economic despair. Bank accounts provide the ability to build credit, send and receive money, and improve savings. Additionally, it makes starting a business, buying insurance, and investing in education more attainable.
Increasing bank account ownership is very feasible with proper implementation as seen in other parts of the world. Indonesia is an example of a country that has made incredible progress in investing in their unbanked population. With a push to include Indonesia’s unbanked into the financial system, nearly half of the population now have a bank account compared to 20% in 2011. Including the unbanked and underbanked into the digital financial landscape, through mobile banking, has the power to shrink the appalling income inequality that exist in America.
Unbanked and underbanked Americans have expressed what they want from a bank. The 6.5% of U.S. households that do not have a bank account have made it clear that they do not trust the banks. This lack of trust in the banking system is so prevalent that those who are unbanked are more comfortable using predatory and expensive alternative financial services. The 18.7% of Americans that do have bank accounts but who are underserved (the underbanked) expressed convenience, security, and control over their finances as what they want from a bank. Financially excluded Americans need to experience a financial service that is trustworthy, convenient, secure, and allows them to feel in control.
Leveraing FinTech
Digital financial services help meet these customers’ demands. Underbanked households are more likely to conduct their finances through mobile technologies than fully banked households. FinTech is the best way to curate that experience as it does not require a major lifestyle change. Mobile financial service platforms are very convenient and a large majority of American have access to a smartphone.
Control over one’s finances is placed in the palm of customers’ hand with mobile financial services. A simple glance at the mobile banking websites of two of America’s largest banks prove this point. Bank of America and Chase both present mobile banking as “secure” and “convenient”. Bank of America’s mobile banking website boasts, “take charge of your account” at the top of their mobile banking website. Furthermore, Chase advertised “text banking” which would be a great feature for unbanked and underbanked Americans who do not have regular access to Wi-Fi. Not only does mobile banking provide exactly what underbanked Americans want, it also improves affordability of banking services. Account management tools, such as monitoring and alerts, help reduce fees, track finances, and improve on the spot decisions. The ease of paying bills and carrying out peer-to-peer transactions is more convenient and quicker with mobile payments as well. Mobile banking offers the services that unbanked and underbanked Americans demand and need.
The Kenyan mobile banking service M-Pesa revolutionized the industry by investing in small payment transactions. M-Pesa started over ten years ago; but is now serving over 20 million users and operating in over ten countries. In 2018, M-pesa reported a 6.5 percent contribution to Kenya’s GDP, entrepreneurial education to over 5,000 youth, and “increased access to essential government services from 20% to 90%”. M-Pesa’s investment in the ‘base of the pyramid” has allowed them to grow deep roots in the communities that use their services, propelling them to become a dominant company in the region. Furthermore, the company’s drive for innovation helps sustain them as a commanding leader in the industry. M-Pesa’s focus on the small payment market and emphasis on innovation is a perfect vision for including America’s unbanked in the financial system.
Banking on the Unbanked
The mobile financial service provider that invests in lower income Americans has the chance to make history. The implications of opening up mobile financial services to the millions of Americans adults (16+) is simple, lucrative, and purposeful. By using the technology that is already available, the cycle of poverty caused by lack of financial inclusion, could diminish. Not only will this company reap the short term benefits of potentially gaining millions of customers, but the next generation of bank account owners are just on the horizon. The 6.4 million children growing up in an unbanked households5, who otherwise would have been conditioned to not trust nor use banks, have the ability to experience the achievement of long-term financial goals through mobile banking.
Status quo for mobile financial services has been “build it and they will come’ but this clearly is not working. Including the unbanked and underbanked requires doing business as unusual. India is the perfect example of bringing mobile financial services to the people and watching it build. In the past decade, the Indian government worked with non-government firms to increase economic growth through financial inclusion. As a result, in the past year alone, over 3 million new mobile banking accounts were added. This provides insight and incentive to provide mobile payment services to a historically ignored population.
Now is the optimal time for the adoption of a mobile payment platform for the unbanked and underbanked.
It is only a matter of time before everyone, regardless of income level, will need to make the transition to mobile banking and financial services. Innovative leaders have the chance to make history by investing in unbanked and underbanked Americans, allowing them to be the first population to fully transition. Existing infrastructure is available to develop and learn from.
The severe fragmentation of the digital payment systems industry is a direct result of a lack of innovation. The opportunity for a company to become a leader in the industry is available if it implements educated strategies to include the poor. Low income Americans tend to make in-store purchases rather than online or in an app. This could possibly be due to lack of access to credit, thus the inability to provide payment methods, which further strengthening this argument. The need for in-person mobile banking capabilities for this population is obvious.
The limits to economic development in many parts of the United States are linked to the share of citizens without bank accounts. As the first step towards financial inclusion, bank accounts improve access to credit and improved savings, which in turn benefits the wider communities. Leveraging FinTech capabilities is the best way to bring the unbanked and underbanked population into the financial system. This is a solution to an enormous and persistent problem of ignoring the poor. Leveraging capital by investment in the poor helps long-term goals for a more inclusive world.
