How those who lived below the radar of financial institutions are now getting the most attention from the global tech ecosystem
If you’ve traveled, especially to developing countries, you’ve probably noticed a certain phenomenon known as “leapfrogging”: while developed countries remain stuck in the ways of the past, their developing counterparts have not only adopted, but also embraced newer technologies faster. They manage everything on mobile, for example, simply skipping over old landline and desktop technologies.
Around the world the same phenomenon is at play, it turns out, when it comes to financial technology (fintech) and the population known as the “unbanked,” the term used for people who are not served by a bank or similar financial institution in the country in which they live. Since its early days, the relationship between banks and their customers has been tenuous, with the shiny, stuffy institutions approaching customers with mistrust and, in many cases, superiority or elitism.
That feeling only increased with the rise of financial fraud and money laundering, coupled with the 2008 mortgage and financial crisis. In light of these trends, banks, it seemed, became ever more interested in protecting their own interests, thus making it even harder for customers to open bank accounts and requiring more of them, such as proof of their financial stability and trustworthiness.
With so many people excluded—or even pushed—out of the banking sector, the unbanked population was born. According to the U.S. Federal Reserve, in 2017 there were some 55 million unbanked or under-banked adult Americans, or 22 percent of U.S. households.
But opting out, whether deliberately or not, of banks and financial institutions means opting out of many opportunities and services that are central to modern society, and the options offered in their place are often risky, painful, and sometimes just as cumbersome and excluding as those traditional institutions they have sought to replace (or at least supplement).
Technology steps in
Identifying the challenges facing the unbanked (and the opportunity they represent), in the past decade a new wave of entrepreneurs and developers has emerged, developing solutions that bypass brick (or, rather, in the case of banks, marble) and mortar for technology that is lean, accessible, and inclusive. Their focus has been, in many cases (though not exclusively), on low-income and migrant populations, including foreign workers, immigrants, and ex-convicts. They’ve also, however, turned their eyes toward higher-income “digital nomads” (people who move regularly by choice and work remotely or manage online businesses) and freelance or other “gig economy” workers who are less likely to have steady income or assets.
In the process, individuals and entire communities have gone from persona non grata in the world of finance to becoming the industry’s new darlings, attracting tremendous attention from traditional institutions and new players, like tech startups, alike.
Indeed, the opportunities are great, and companies are stepping in to address a huge range of challenges that have traditionally plagued the unbanked.
Companies like Israel-based Neema and UK-based WorldRemit, for example, are tackling the challenges involved in transferring money between people—often across different countries or continents—without bank accounts. Historically, sending money across borders in these situations has involved high fees, something these companies and others seek to address. Additionally, many of these new companies offer mobile-based apps and platforms, giving users more flexibility when it comes to sending or receiving money.
Credit cards have traditionally been linked to banks or financial institutions, and getting a card usually requires some sort of application process, including a review of a person’s credit score and credit history. With many countries seeking to eliminate or at least decrease use of cash and the parallel rise of online shopping and services, people without credit cards are often at a serious disadvantage. Companies like the Argentinian Ualá and the American Petal have stepped in to give people who have trouble qualifying for credit cards, such as foreign workers and even teenagers, the opportunity to stop being limited by their dependence on cash.
Like credit cards, lending has traditionally been in the hands of banks and financially institutions (or, alternatively, sketchy, high-risk, high-interest loan sharks). With platforms that are primarily mobile-based, companies like the British TuTasa, Israeli/Ghanaian FIDO, and Indonesian Amartha are putting loans in the hands—literally—of people in developing nations, who have historically had to leap through hoops to get institutional loans or stomach high fees.
The “gig economy,” which encompasses part-time, freelance, contracting, and consulting work in a variety of industries, isn’t just a passing trend. A 2017 estimate by Intuit pegged it at about 34% of the U.S. workforce and estimated that it will grow to 43% by 2020. Unlike individuals who work as full-time employees, gig workers don’t always know where their next “paycheck” will come from, how much it will be for, and when it will come in. Their income fluctuates from month to month, and they’re often beholden to long and unfavorable payment terms. Companies like Instant in the U.S. and Canada and Trezeo in the UK use fintech to give gig workers a way to claim payments earlier and enjoy more control over their cash flow.
Fintech can’t be ignored.
Fintech solutions emerged, in many cases (though not all), as an innovative, more inclusive alternative to banks and financial institutions. But that doesn’t mean those same institutions are safe to rest on their laurels. In fact, many of them are feeling the heat, especially in light of surveys such as one conducted last year that found that ten years after the 2008 financial crisis, the tables have turned and most Brits don’t trust banks. Many banks have realized that their future, too, lies in financial technology and have accelerated their acquisitions of fintech startups and their establishment of fintech accelerators and incubators.
Will banks loosen their neckties and put more focus on the unbanked? Only time will tell, but one thing’s for sure: More inclusive banking presents many opportunities that are too good to pass up, and with fintech, the unbanked will certainly prevail.