Financial inclusion: ‘Fintech-ing’ the underbanked

May 6, 2020
Terence Tse, Andrea Cosentino, Mark Esposito.

Like bread and butter, fintech has always been paired with terms such as financial inclusion, “unbanked,” and “underbanked.” Admittedly, with the current pandemic, maybe no one is in the true mood to think about fintech. But what is increasingly clear is that the economically underprivileged will be further disadvantaged by the lockdowns everywhere. Hence, it is more important than ever to address the issue of financial inclusion.

Underbanked. The underbanked are people who don’t make the full use of traditional financial services, often including banks. This is partly because they lack access to affordable financial services. Other times, it is down to their preference. Instead, they would rather resort to the alternatives such payday loans, check-cashing services, and prepaid debit cards. Interestingly, some of them have access to banking, including checking or savings accounts, yet many more choose not to take advantage of the full array of traditional financial services.

The unbanked, on the other hand, refers to adults who don’t use or have access to any traditional financial services at all. They generally pay for things in cash and have no insurance, pensions, or any other type of professional money-related services.

People choose to avoid financial services for many reasons: they could be young customers with student debt or people who have lost their jobs. Individual circumstances also play a role: criminals wanting to avoid transaction trails, older people who survived crises and distrust financial institutions, as well as individuals who struggle financially on a day-to-day basis. Very often, income and education, rejected access to credit, and the need to settle bill payments with cash are some other reasons why people choose to be unbanked or underbanked.

Achieving financial inclusion. Financial inclusion—accessibility and equality of opportunities to access financial services—has been seen as a key to bring wider social benefits. Even the most basic bank account can be a first step toward broader inclusion as it serves as a gateway to other financial services, such as credit and insurance, to help start and expand businesses, invest in education or health, to manage risk, etc. Organizations such as the World Bank, G20, and the European Bank of Reconstruction and Development have run a variety of initiatives to enable people to make greater use of financial services. At the same time, payment companies and telecoms such as Visa, Mastercard, and Vodafone are actively bringing new financial services possibilities to developing countries.

‘Tech’ to provide ‘fin.’ Arguably, incumbent banks should be doing more. Yet, focusing on financial inclusion is high risk with relatively low return and the underbanked and unbanked are often too costly to be served profitably. This however paves the way for fintech startups. In our view, these startups can be placed in five categories:

  • The game changers. They offer traditional banking products and services, but at considerably lower costs (commissions and fees) compared to incumbents. They can afford to do so typically by cutting out manual tasks and intermediate players using technology. Typical examples are remittances (money transfers) and peer-to-peer lending with newcomers side-stepping traditional financial services companies. Examples: TransferWise, Mobetize, Remitly, Arcus, peerTransfer, Currencycloud, Azimo, WorldRemit, Ripple, Revolut.
  • The atomizers. This group atomizes incumbent banks’ products that have minimum price thresholds that are too high for many to access. Atomizers either do away the minimum thresholds completely or run at only a fraction of them. Example offerings include microcredit, microinsurance, microsavings, micro-pensions, micro-investments (also called fractional trading) and low-cost “robo-advisors.” Examples: Grameen Bank, Robinhood, Freetrade, Zopa, CreditLadder, any crypto exchange allowing fractional purchase.
  • The snipers. Sniper fintechs offer products addressing a specific customer need or niche, including loan advances, specific mobile payments or partial salary-taking (e.g., if you have already worked five days, you can receive one-sixth of your monthly salary). Examples: Wagestream, M-Pesa, and BitPesa.
  • The amplifiers. This group expands access to existing financial products to a larger audience via more advanced risk-calculation techniques. It offers personalized products and services, avoiding merely considering financial factors but also including, for instance, social and psychological ones. The offerings can help people to improve their traditional credit scoring to move gradually away from blacklisting or providing solutions for freelancers and other self-employed people. Examples: Uulala, Lenddo, FriendlyScore, ZestFinance, CreditLadder, Uber, Alipay, modeFinance, and Credit Karma.
  • The educators. These companies simplify the understanding of existing financial products through more intuitive user experiences, greater transparency on costs and financial risks, and clear(er) explanations and training on the offered products. The educators also try to alter behaviors and strengthen customers’ skills in managing their financial affairs—encouraging them to save more, continuously monitoring spending, and offering accounts and cards to get children to handle money properly. Examples: Finimize, Cleo, Yolt, Plum, Cash Coach, Digit, GreenLight, Walmart, gaming companies (Long Game, Acorns, Moroku, Flourish), and BBVA.

The coronavirus pandemic is likely to drive many people into economic hardship and poverty. Financial inclusion will play an ever-more vital role in alleviating the economic struggles faced by the underprivileged. Even though the world is not necessarily in the mood to talk about fintech, it is only by addressing financial inclusion now that we can prevent greater global problems for us all.

Terence Tse is associate professor of finance at ESCP Europe Business School. Andrea Cosentino is a co-founder of Licas Ventures. Mark Esposito is an economist with appointments at Hult International Business School, Arizona State University, and Harvard University, and co-founder of Nexus FrontierTech.