Financial institutions have talked often about the need to better serve the unbanked. And they’ve also been scolded for not doing a better job at it by various public watchdogs. But how best to do so — and to do so profitably — remains a challenging issue.
According to the FDIC, 7.1 million U.S. households were unbanked, as of 2019. Globally approximately two billion of the Earth’s total adult population remains unbanked, per the World Bank.
Considering the lingering nature of this issue, it’s no surprise that many all-digital firms have popped up looking to fill this void. One example is Tala, a fintech that provides micro-loans of up to $500 to people in Mexico, India, Kenya and the Philippines. Tala recently raised $145 million in a Series E round and has a valuation of more than $500 million, CNBC notes.
Bank Dora, a neobank that is actually a joint venture of four credit unions was formed this year with the intention of courting under- and unbanked consumers nationwide. Even the much-debated idea of postal banking is seen as a way to help reach underserved communities with financial services.
Fintechs like Tala say that creating a digital infrastructure is key to bringing more people into the banking system.
Many of the startups that have arisen to serve the unbanked say the key is delivering easy-to-use digital services to attract this segment. Tala utilizes smartphone data to make lending decisions, and the company’s CEO, Shivani Siroya, told Forbes that there needs to be a better digital infrastructure for the world’s underserved banking customers and that these customers need “a digital account where they could access their money whenever they needed to.”
Fill a Specific Need
One concern that frequently crops up when discussing the issue of serving the unbanked is that this market is mostly seen as unprofitable. But there are avenues to do it profitably if financial institutions really want to, says Theodora Lau, founder of the venture capital firm Unconventional Ventures.
As an example, she cites the fact many unbanked that already pay onerous fees at check cashing establishments which indicates “these people are not just looking for free services. They are paying hefty fees because they don’t have access to formal financial services. So why don’t banks want to be a part of this?”
She adds, “People are losing a big chunk of that check [on check cashing fees] so here is one opportunity.”
Lau also advocates for the aforementioned postal banking idea, saying it could help serve underserved communities.
“Especially as banks keep closing branches, where are you going to go?” she says. “If a bank closes your local branch you may not know where the next closest one is, but everyone knows where their town’s post office is.”
With the underbanked — those who use banks or credit unions for a few minimal services — providing them with digital, convenient ways to manage their money could be another way for traditional institutions to make progress towards adding profitable customers. Morning Consult analyst Charlotte Principato cites survey data that indicates underbanked adults see the lack of payments innovation as a hindrance to adopting a traditional bank account.
“A majority (58%) [of the underbanked] say they could manage their finances just as easily without a bank or credit union account, compared to 34% of fully banked adults — those who do not use alternative financial services — that say the same,” the analyst states.
“Underbanked adults don’t just need a place to stash their money,” Principato continues, “they need the vehicles to send and receive it. Besides using payday lenders, bill pay services and money orders, underbanked adults are also more likely to use prepaid debit cards and own cryptocurrency in order to make payments.”
In a research paper, the Atlanta Fed notes that unbanked consumers lack access to digital payments and banking services, and points to Kenya’s M-Pesa network as an ideal model to overcome this. M-Pesa operates small kiosks that are spread out throughout the African country in remote villages, through which users can exchange cash for mobile money and vice versa.
In the end, the Atlanta Fed notes that unbanked consumers, especially in the U.S., overwhelmingly still use cash and that “without providing a solution to this problem, unbanked consumers will continue to be shut out of online commerce and even some in- person services that no longer accept cash.”
Is it Really All About Digital?
However, some say just offering digital services won’t necessarily help the problem of reaching the unbanked.
Yaya Fanusie, a senior fellow at the Center for a New American Security, says in a Forbes article that enabling wealth is key.
“A 2015 World Bank report looking at financial inclusion globally noted that 59% of survey respondents cited lack of money as the main reason for not having a bank account,” Fanusie writes. “Interestingly, a second reason was that people depended on a family member who already had an account. This indicates that cultural and familial factors greatly influence whether one wants or can get banking services.”
Fanusie continues: “People mainly lack financial services because they lack income and not the other way around. So, to effectively bank the unbanked, the key problem to solve is how to help people generate more income. This prime factor is ignored by many technologists because when it comes to helping people gain wealth, there is no singular app for that.”
Some say the best way to reduce the numbers of the unbanked is by helping them build wealth.
Lau says there is no one solution for financial institutions to effectively reach the unbanked, and that “the challenges are much broader than most bankers think.”
“It’s not just about offering digital services,” she says, “there are millions of people who are off the digital ecosystem. It’s also not always poor people [that are unbanked].Some have resources but just aren’t being served in the right way. Unfortunately, there is no one easy answer.”