The emerging US market for inclusive fintech



Impact Voices is an occasional series sharing the opinions of impact investing practitioners and leaders with ImpactAlpha readers. The views expressed in Impact Voices are the writers’ own, not ImpactAlpha’s.

Around the world, countries are thinking about how to extend financial services to their citizens who still can’t access bank accounts, payment services, credit, or insurance products. Financial inclusion, and its link to fintech, is high on the development agenda globally.

Inclusive fintech needs to be on the US agenda as well. Here, the conversation tends to center on financial health or wellness rather than access to financial services. But a look at the numbers shows substantial need on both accounts: 23.2 million Americans don’t have a bank account; 138 million are financially unhealthy, struggling with income volatility or challenges to credit; and 156 million — almost half of all American households — do not feel financially secure.

CFSI’s 2017 Financially Underserved Market Size Study

Many Americans may be financially underserved, but they still spend about $173 billion each year on services and fees to borrow, spend, save and plan. That’s the market for extending financial services to the underbanked and improving financial health in the U.S.

Seizing three key opportunities (and one bonus opportunity) can accelerate both financial access and financial wellness in the US’s own emerging market for fintech solutions.

Credit unions can be innovation hubs to serve the underserved. Many credit unions have lacked the appetite for risk-taking needed to innovate. Despite being as mission-driven as not-for-profits, many have not prioritized serving lower-income populations in their community. Arguably, they should be on the front lines of serving the millions who either lack bank accounts today or who are otherwise financially vulnerable. After all, serving “people of modest means” was in the original credit union charter. Yet only a few hundred of more than 6,000 US credit unions are certified as community development credit unions or receive assistance as a community development financial institution.

For more commercial and mainstream credit unions to head back to their low-income roots would require leadership commitment, a business case for doing so and investment in technology and new processes to reduce operational costs. Low-margin services require high-efficiency operations and innovative service delivery (for example, through smartphone apps) which credit unions are not yet known for.

The Filene Research Institute has been exploring credit union innovation through its i3 (Ideas, Innovation, Implementation) program. Its Accessible Financial Services Incubator has identified and tested more than 200 solution concepts to date in collaboration with over 200 credit union leaders.

To be sure, “very few of these ideas are in use at credit unions or commercially successful,” as the Credit Union Times notes. What would it take for these innovations, partnerships and a focus on solutions for the financially underserved to be the priority for 2,000 or more credit unions in 2018, rather than just a few hundred?

Employers can turn financial services into returns on investment. Workplace financial wellness programs have proliferated in recent years. Offerings now range from financial management (such as Hello Wallet) to student loan repayment support (including Common Bond, Gradifi, LendEDU, and more) to direct credit offers (for example, TrueConnect, Ziero, and Kashable).

Washington University’s Center for Social Development has collected a database of about 300 Employee Financial Wellness Programs to assess whether they offer “a promising strategy for building financial security among low- and moderate-income workers.” Employers will judge such programs based on their own returns on investment in improved retention or increased in productivity from reduced financial stress. In 2018, we hope to see more discussion of the risks and tradeoffs for employees from the shift of financial services and management to the workplace. Among the outstanding issues:

  • Mobility. Would you quit if you still owed your employer money?
  • Privacy. How comfortable are you with your boss knowing you have $40,000 in student debt, or that you can’t pay a recent $10,000 hospital bill?
  • Trust. Will consumers believe they are receiving unbiased financial advice from their employer? Will employer be tempted to bias — for example, in promoting products where they have a financial stake?

There is a real risk that employers providing financial services could exacerbate inequality and financial exclusion. Will only employees with stable employment have access to the latest financial services or the most reasonable rates? Could access to financial services come to mirror access to healthcare, with the unemployed and self-employed paying a premium for worse service? Or are employers merely be a parallel and more efficient channel for distribution?

Chatbots can fill a financial education gap for millions. We’re not there yet! But machine learning, artificial intelligence and big data analytics are coming, for better and worse.

The vision is compelling: imagine “Amazon’s Alexa for all your financial needs”. The next 6–12 months will see a shift from ho-hum and standalone customer service applications to increasingly sophisticated financial guidance and education engines. Teller and the forthcoming Bank of America bot, Erica, were influenced by BofA’s partnership with Khan Academy. There is huge promise for chatbots to drive financial education in emerging markets, including products to help small business entrepreneurs, such as Mr. Finance in Myanmar.

But we are still waiting on evidence from customers. Do they prefer having chatbots answer their questions or suggesting how they could be saving more money? And more critically: do customers act based on prompts from friendly chatbots?

Bonus: Combine financial needs and advocacy in one convenient app. This idea is nascent. But the potential to elevate the voices of millions of underserved to policymakers is so exciting that it warrants a mention.

As an example, one initiative aimed at simplifying access to a financial service specifically for low-income Americans ran a pilot to collect data on how welfare payments were being used. The hope was that using the data in aggregate to advocate for greater funding.

Using data analytics for financial inclusion is well underway in emerging markets, for example, with M-Shwari, Cignifi, or First Access. In the US, a data-rich approach to advocate for greater government focus on financial health would be a welcome innovation indeed.

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