How FinTech Reimagines the Meaning of “Underbanked”

Originally published on the Wharton FinTech blog on April 9, 2015.

Ask what “FinTech” means to someone in social impact, and I can almost guarantee that his or her answer is “financial inclusion.” It’s a term more popular in the social impact world, and for all intents and purposes it’s synonymous with FinTech for people in impact investing, international development and elsewhere in the space where technology bridges the infrastructure gaps that prevent access to banks in the first place. From microfinance to mobile payments to alternative loan services, FinTech has already proven itself a pillar of the social impact world, capable of fulfilling the so-called triple bottom line: people, planet and profits.

FinTech + Social Impact = Financial Inclusion

Financial inclusion is defined by the Center for Financial Inclusion as “A state in which all people who can use them have access to a full suite of quality financial services, provided at affordable prices, in a convenient manner, and with dignity for the clients. Financial services are delivered by a range of providers, most of them private, and reach everyone who can use them, including disabled, poor, rural and other excluded populations.” The term was first used in 1997, according to the Financial Inclusion Commission, and has since been used to describe efforts to give financial access to the traditionally unbanked or underbanked.

From my perspective, it’s easy to see how FinTech fits into social impact. I’ve spent quite a bit of time researching and sourcing companies with the Wharton Social Venture Fund (a student-run impact investing fund), and individually in Latin America, where I spent my last summer looking into how social enterprises measure impact. I’ve also been fortunate enough to be exposed to quite a number of financial inclusion ventures through my work as a Fellow for Wharton’s Social Impact Initiative, and through my own career search. As I’ve become more familiar with the social impact sector and financial technology as a tool, I’ve come to recognize financial inclusion as the intersection of the potential of FinTech and social impact.

What makes FinTech so important to Social Impact?

Shifting perceptions and uses of both new and traditional financial services — like M-Pesa, CommonBond and even “traditional” microfinance — are exactly what makes FinTech so crucial to the social impact space. In the most basic terms, people are coming to expect more and better quality products and services from the finance industry: FinTech is bridging the gap between current offerings and expectations by fostering innovation on both the provider and consumer end of the spectrum. Startups such as those mentioned above, then, are thinking about what’s possible in terms of changes to existing financial structures: i.e., fundamental shifts in how consumers interact with their money and with financial institutions.

Some of the more technical groups in FinTech are focused on the possibilities of the blockchain, the disintermediation of the banking services and, of course, data and analytics.

Social impactors have their eyes on the same trends, but with a distinct perspective: they’re wondering how FinTech — and the innovations and trends thereto — can be harnessed to benefit the underserved. Now, definitions of who fits into that “underserved” market vary widely; social impact is still relatively young as an industry, after all, and it’s still going through some growing pains. Trends like micro-loans and mobile payments are often associated with rural populations in the developing world, who we might see as the traditionally “underserved” market.

The interesting thing about FinTech, however, is that in a sense all of us are underserved. FinTech isn’t just about solving problems at the base of the pyramid or in just the developing world: it’s about making financial technology, and more importantly, financial access, available to everyone, everywhere.

Redefining the Under and Unbanked

Allow me to demonstrate with the most pertinent example. When we hear “unbanked” and “underbanked” we tend to think of exactly those populations I mentioned earlier: rural, poor and outside of the developing world. But the fact is 7.7% of US households were unbanked and 20% were underbanked in 2013, according to the FDIC. That’s not a negligible number by any means. Data on the penetration of retirement plans — 401(k)s, IRAs, etc. — is equally as dismal: only 16% of American workers have 401(k)s, and 40.4% have IRAs, according to ICI Global. Worst of all, about one-third of those with retirement accounts haven’t even started saving. Talk about an opportunity for FinTech!

Mobile payments technology is perhaps the most well known implementation of FinTech in social impact, with companies such as M-PESA, Kifiya and Venmo swiftly and drastically altering the financial landscape in both the developing and developed worlds. In other words, physical cash is not necessarily king anymore. Alternative loan and refinancing services — think Wharton startups CommonBond or Nexu — have also been proliferating widely across incomes, geographies and demographics. And who can forget Bitcoin, the cryptocurrency that is fundamentally changing the definition of access and ownership of monetary value.

Going Forward

Clearly, financial access, tools, literacy and, most importantly, financial freedom are social issues that span the globe. FinTech has enabled “social impact” upon each of these factors through innovation in payments and financial services. However, I believe FinTech’s biggest social impact potential has yet to be realized. The approach so far has been relatively piecemeal (by which I mean individual solutions to portions of the overall problem) and is only the first step. I believe FinTech’s real impact is going to be the ability to give anyone — from the unbanked farmer in Ecuador to the savvy investor on Wall Street — access to and, more importantly, control over their financial resources. In my personal opinion, FinTech, in conjunction with social impact, is going to mean the end of banks as we know them — a complete override of the financial sector. This will revolutionize how we handle our money and empower individuals to decide how they will save, invest and spend.

Wharton is already leading the discussion on multiple fronts with Wharton FinTech, the financial inclusion team in the Wharton Social Venture Fund and their Leadership and Diversity for Innovation Program in partnership with Women’s World Banking, Credit Suisse and Cisco. FinTech’s role in social impact still has a ways to go, but I think it’s safe to say Wharton is at the front of the wave.

Sarah Millar is a first-year MBA/MA student at Wharton’s Lauder Institute, where she focuses on Latin America and the Spanish language. Prior to Wharton, she wrote an in-house market commentary at a private broker-dealer in New York, and will be spending her summer at a startup and an impact investing fund in Mexico City. Post-MBA, she hopes to work in social enterprise and impact investing with a heavy focus on BoP investments in Latin America.