Andrew Rabbitt, CEO, incuto
Fintech is rarely written about or described in the context of how it can help local communities or low-income households. More often than not, media stories focus on how financial technology has propelled a challenger bank into the limelight, about up-and-coming providers securing new funding or how Fintech is improving efficiencies and cost saving for customers. Innovation is, of course, both interesting and important – especially where financial services are improved and cost savings are passed onto customers. Not only this, but Fintech is opening up a wide range of new financial services which may previously have been inaccessible or lack transparency for customers. It doesn’t, however, address the vast numbers of individuals who may not have access to those services in the first place.
Financial exclusion – namely those individuals across the UK who cannot access financial services and often have to pay a poverty premium because of their low income – is a reality for many. Although innovation and technology adoption in financial services has been slow across the board, financial inclusion may be the final frontier for Fintech, and one that now needs urgent attention.
There is a huge opportunity for Fintech to participate in the ‘tech for good’ revolution – it’s time we saw innovation championing financial inclusion and access to high-quality, affordable services for all.
Tackling the Poverty Premium
In the UK, there are around 14 million people who pay more for goods and services simply because they are from poorer households. These individuals and families are subject to a poverty premium which manifests itself in different ways. For example, if you can’t afford to buy household goods and electrical items outright, you may need to use the extremely high-cost rent-to-own model of purchasing these items from providers like BrightHouse. Similarly, many low-income households are forced to pay pre-paid tariffs for energy, meaning they don’t have access to the cheaper tariffs, and 1.5 million people in the UK do not have a bank account – forcing them to use expensive, cost-per-transaction, pre-paid card providers.
When it comes to gaining access to finance, these individuals again find themselves side-lined. Many have to resort to expensive payday lenders typically charging between 800-1200% APR. It is well publicised, and highlighted by organisations like the End High Cost Credit Alliance and Debt Hacker, that these types of loans and the continued financial burden they put on individuals and families can cause ongoing hardship for years to come.
Access to affordable, responsible finance is at the heart of eradicating the Poverty Premium. Namely, giving the financially excluded access to bank accounts, debit cards and lower interest loans so they are paying the same costs as the wider population and not facing long-term, crippling debt. In today’s technology driven world, the potential exists to give everyone access to better quality and cheaper financial products and services. If we empower organisations who work with low-income families and households and offer a viable alternative to high-interest, pay-day loans and bank charges, we can take giant strides towards eradicating the poverty premium in financial services.
Enabling ethical banking
The key to tackling the poverty premium in financial services must lie with those organisations who can offer fairer and more ethical approaches to lending. Credit unions, community banks and CDFIs are perfectly placed to take on this role. However, there continue to be a number of significant stumbling blocks for these lenders to reaching the individuals and communities they seek to serve.
For example, credit unions often offer their members limited branch networks (some have no more than two branches servicing a given geographical area), plus they are struggling with legacy technology and paper-based systems which make their service extremely slow and inaccessible. Traditionally members have had to physically go into a branch to either withdraw or pay in money using only their membership number.
At a time when technology is making the very concept of a geographical customer base almost obsolete, credit unions have continued to serve only local communities, despite the fact that demand for their services continues to grow. We know, for example, that membership to credit unions rose by 250% last year. This is despite the fact that nine credit unions went into default in the same period – perhaps due to their difficulties transforming the service they offer in a digital era.
Unfortunately, UK Credit Unions, community banks and CDFIs have struggled to compete with pay day lenders such as Wonga and QuickQuid. Rightly or wrongly, these providers have succeeded in capturing the market via easy, online access and high-profile advertising campaigns.
The solution is simple. Open up the services credit unions can offer and give access to a wider audience through technology. Better branch access via partnerships with wider networks, plus a debit card (rather than simply a Membership number) would allow the financially excluded to access additionally services at the same price as the wider population and better online access and automation.
Innovative technology for financial inclusion
Like all organisations, credit unions must innovate and transform the service they offer Members. A digital offering that increases access and ease of use for customers is absolutely fundamental to that process.
Of course, any technology solution for credit unions must be all encompassing. After all, it’s not just about enabling people to apply online in a faster and more efficient way. It’s about giving them financial freedom and access to services such as a bank card and account which they can use, the ability to pay in money at a wider network of outlets and the same level of interaction and engagement that they would receive from a high-street or online bank.
Technology which would truly innovate must include paper-free, automated applications; automated communication to increase engagement; 24/7 access including pre-authorised amounts and rates, pre-filled applications and e-signatures; automated ID verification, AML, affordability and credit scoring and underwriting; a self-service web portal for Members to view and manage their accounts and, as mentioned already, access to banking services including a debit card, an account number and sort code.
With technology now available to fulfil these requirements, it’s time that credit unions, community banks and CDFIs seized the chance to enhance and improve their services and become more competitive through innovation. With many credit unions falling behind in a digital world, it’s more imperative than ever that these organisations embrace technology and subsequently address the problem of financial exclusion and education.