By David Ritter, Financial Services Strategist at digital consultancy CI&T.
One customer segment that has been historically neglected by the financial services sector is the so-called “unbanked” and “underbanked”. The unbanked are people who don’t use any banking services, including debit cards, current accounts, and savings accounts. Meanwhile, underbanked consumers use some type of bank account, but don’t have regular access to services like credit cards or mortgages. They often turn to alternatives, such as payday loans and cheque-cashing shops, to get by.
The majority of banks and financial firms have done relatively little to address the issue, since serving such customers has typically been less profitable than other segments. However, new technology can improve profit margins and there is great market need: the global unbanked population now stands at a staggering 1.7 billion, including 40 million citizens in the European Union alone. And as our daily lives become increasingly cashless, dependence on digital finance has grown, creating an even larger gap between those with access to banking services, and those without. Thankfully, the situation is primed for change.
Advances in technology, driven primarily by Fintechs that provide debit cards, financial apps, and other payments services, have gone some way to democratising access to digital financial services. Meanwhile, Open Finance can unlock customer data to inform risk-based decision making, potentially making credit products available to individuals who might not have been able to take out a loan previously. Let’s delve a little deeper into how these changes could reshape the finances of millions worldwide.
Understanding the underbanked
There is a range of factors that make individuals underbanked or unbanked. Homelessness has been a huge challenge for people trying to open a bank account, as such accounts typically require a permanent address.
Equally, migrants travelling to a new country may lack the financial records or other documentation required to access financial services. A lack of international standardisation, for example in credit bureau reporting, can make it difficult for banks to source the information they need from conventional sources.
Individuals who are new to credit or have negative events in their history also struggle to be approved for borrowing. Perhaps most surprisingly, 20% of unbanked Europeans simply say they “don’t want a bank account”, with 10% claiming that they “don’t trust banks with their money”. So, how can technology change these conditions?
Making money simple
As we’ve seen with the popularity of digital security features such as the iPhone’s FaceID, simplicity breeds trust. By simplifying access, offering extra clarity, and saving customers effort, financial firms can service unbanked customers and win over sceptics. Fast-growing Fintechs are leading this charge with app and internet-based solutions: PayPal and other digital wallet providers make it easier for anyone to receive money, make payments, and monitor balances. They increasingly offer extra services too, such as the ability to pay in installments and manage subscription payments on demand.
Financial firms are relaxing their rules and making it simpler to access basic services. Banks such as HSBC have introduced “no fixed address” accounts, which provide homeless people with a safe place to keep and spend money, in partnership with charities. Meanwhile, Monzo allows individuals without standard identification documents to apply for a basic bank account, accepting alternatives like their biometric residence permit or a benefits letter as identification. Credit presents a greater challenge, however.
New ways to assess credit
Lenders must continue to make responsible decisions when offering credit products, whether that’s Klarna’s “buy now, pay later” service, a credit card, or a mortgage. But while credit history, bills, and other regular payments will always be key considerations, they don’t provide the full picture. A bank statement or credit score is a snapshot of a specific moment in time, not a moving image reflecting an individual’s life with money.
The increasing digitalisation of financial services and introduction of Open Finance regulations such as PSD2 broaden the number of touchpoints available for lenders to assess potential customers. Tools such as Experian Boost leverage this potential: customers can connect Experian to their non-financial accounts, such as video-streaming services, to demonstrate on-time payments behaviour that would result in a boost to their credit score. A connected view of underbanked consumers’ financial lives can be the difference between rejection and getting their foot on the credit ladder.
A financial journey
Ultimately, developments in technology, practices, and regulations may not transform the financial circumstances of the underbanked overnight, but they are opening doors that were previously closed. Accessible technology and digitised finance can now give people the tools they need to improve their lives with money, bit by bit, and that’s a cause we can all get behind.