Building for the Underbanked— LendIt USA 2020
Given the current political environment and the ongoing presidential election in the U.S., conversations around race and gender have been forced into the spotlight.
The financial services sector is facing, albeit belatedly, its own moment of reckoning. According to the FDIC, 20.5 million people are unbanked and nearly 50 million more are underbanked. Women and Black Americans are disproportionately underserved by banks, insurers, and even wealth and asset managers.
As a financial services consultant turned fintech aficionado, I have always been drawn to the industry’s ability to bring creative solutions to market faster than traditional incumbents. I believe in the power of fintech to lead the charge on financial inclusion, and was particularly excited to attend the LendIt USA 2020 fireside chat, “Building for the Underbanked,” featuring Angela Strange (General Partner, Andreessen Horowitz) and Matt Harris (Managing Director, Bain Capital Ventures).
The conversation between Angela and Matt provided insight on three questions:
1. Why are people unbanked or underbanked?
2. What makes a good product that serves these communities?
3. What trends are we seeing in financial inclusion?
Why are people unbanked or underbanked?
A successful company must win both innovation and distribution. Startups are better at innovation while incumbents are better at distribution. Traditional distribution networks often do not reach the unbanked or underbanked. Customer acquisition costs exceed hundreds of dollars, not to mention the ongoing infrastructure costs required to service existing customers. For a typical bank, the revenue from people who may be light users of their existing product set are often not enough to justify these acquisition and servicing costs.
What makes a good product that serves these communities?
A product must start with the mission of helping people solve their financial challenges, rather than to getting people “banked.” Successful innovators have a deep understanding of the communities their products are designed to serve and often come from these communities themselves. Companies fail when founders build solutions from an outsider’s perspective or attempt to retrofit existing products to unbanked or underbanked segments.
What trends are we seeing in financial inclusion?
Of the various industry trends Angela and Matt highlighted, two were most interesting to me: lower startup costs in the fintech industry and the shift from financial education to financial automation.
The financial services industry is still highly regulated and complex. However, startups can launch products more cheaply and quickly than ever before. Many entrepreneurs who grew up with a deep understanding of the problems that need to be solved did not grow up learning about the intricacies of financial services. This trend allows founders to more easily come up the learning curve and bring products to market that serve their communities.
And while financial literacy remains important, the most successful companies understand that financial education is highly time and energy intensive. Companies like Propel (mobile personal finance management for food stamps), Tally (credit card debt consolidator), and Acorns (all-in-one investment, retirement, and checking account) reduce the cognitive load for these consumers by focusing on financial automation.
