Leveraging Technology to Improve Financial Inclusion in the United States
By Ismail Amla, Executive Vice President, Professional Services, NCR Corporation
The benefits of financial inclusion are known and numerous. Households that lack access to bank accounts or relatively affordable mechanisms for receiving, paying, and spending money end up spending a significantly higher percentage of their income on cash-intensive financial options. These options, like money orders and payday loans, tend to have much higher fees and usurious interest rates. Households suffering from financial exclusion are disproportionately poor and less educated. The highest percentages of these excluded households are found in the least affluent countries. But even in the United States, according to the latest FDIC surveys, 5.4% of households were unbanked. This group represents 7.1 million households. The exclusion of people from the financial system also hinders economic growth; money that could have been spent on goods, services, and education is instead trapped in the cash economy or used to pay punitive fees and interest.
I believe the world is at a signing moment. Just as economic growth has dramatically reduced poverty rates around the world, ubiquitous, cheap, and connected technology can dramatically reduce rates of financial exclusion. It is now up to companies like NCR and the entire fintech ecosystem to work collectively to make this happen. Together, we believe we can dramatically reduce financial exclusion over the next five years in the developed world and over the next decade in the developing world.
Promoting greater access to technology, greater openness of the financial system, and a more robust and fairer market for financial products will enable us to achieve this goal. Combined, these three force factors are already at the origin of a rapid fintech revolution. This revolution is both a moral imperative to improve lives and a one-of-a-kind business opportunity that will benefit society by increasing overall economic growth.
Although the digital divide still exists, technological advances and cost reduction are rapidly avoiding this divide. According to Our World in Data, 640,000 new people come online every day. Smartphones and access to cheap or free data are the essential instrument of progress. Today, low-end smartphones cost less than $100, and forward-thinking carriers, such as India’s Jio, are offering low-cost wireless data plans. While smartphone data plans vary widely from country to country and are often expensive, Wi-Fi access is much cheaper and often free. If these trends continue, the number of people without Internet access will continue to decline.
A whole generation of new banks, such as Chime and Monzo, have built businesses entirely based on mobile phone apps. In China, for example, where digital payments are now the dominant form of exchange, the phone has become the main gateway to financial services. In developed countries, fewer people are using cash and employers are rapidly moving away from paper check payments. COVID has further accelerated the transition from cash to digital payments.
Traditionally, the unbanked and underbanked use digital financial services at a much lower rate than higher demographic households. But we have clear evidence that digital financial inclusion can work in less developed economies. In Africa, more than 200 million people use mobile electronic payment systems. In Kenya, M-Pesa mobile payment systems are almost universally adopted. With smart product designs, we can change that. The M-Pesa system was designed with local culture and values in mind.
The enormous pressure that emerging fintech is placing on traditional banking processes is driving a welcome unbundling of financial services and multi-tiered competition. Venmo, for example, offers to give customers who set up direct deposit instant access to paychecks. Traditionally, banks have taken a day or two to process these deposits. For the poor and financially excluded, two days can mean the difference between paying rent on time and incurring a penalty. Unbanked users who wish to transfer money across borders for relatively small sums, as is often the case with remittances, can now choose from several options, including cryptocurrencies. Zelle, which is managed and owned by a consortium of major US banks, allows users with accounts to instantly transfer money at no cost.
While the winds of tech trends may be at our backs and the rapid rise of fintech may provide the impetus to rethink financial services, there are still a number of concrete steps that the financial services industry should consider. .
- Remove common obstacles. Minimum fee balances or service charges drive away low-income consumers. In fact, according to the World Bank, the number one reason unbanked people don’t have an account is simply because they don’t have enough money. Clearly, this is something that is doable. CapitalOne, a major US bank, has just announced that it is waiving overdraft fees while continuing to offer overdraft protection.
- Encourage mobile banking. According to the World Bank, low-income consumers tend to have a mobile connection rather than home Internet access. Designing banking products and mobile financial services that appeal to the unbanked will reduce exclusion. It is also a good universal product design. There’s a very good reason why the dominant financial platform in most parts of the world that are mostly unbanked or only recently banked is the smartphone.
- Expand access points to advanced digital services. There’s a good reason why convenience stores, supermarkets, and other stores all have ATMs. Indeed, ATMs attract customers and make it easier for them to pay. In the digital economy, these same access points can take on equally important significance for stores as centers for the digital delivery of financial services, which could even be co-branded between banks and stores. Physical real estate combined with smart digital hotspots bring services closer to community members who might not walk to a bank branch on their own – and who otherwise would not have easy access.
- Choose prepaid products. In 2017, nearly 27% of unbanked U.S. households used prepaid cards according to a FDIC Household Survey. Prepaid credit cards or debit cards can offer a descent path to credit history that can unlock other key doors. These cards are safer than cash or checks and can be used for online purchases.
- Find new ways to analyze customers and give them access. In the United States, several companies are using artificial intelligence to create alternative and more accurate credit scoring systems. Created by former Google executives, Upstart looks at over 1,000 additional metrics to assess whether someone is likely to repay their loan. Upstart is actually more accurate than older credit scoring products and is particularly good at identifying people who might not get credit through traditional underwriting processes, but are actually very good risks. Similar systems can operate at lower levels of funding and loans, where unbanked people can operate.
To effect these kinds of changes, we will all have to put ourselves in the shoes of those watching from the outside, trying to imagine what it might be like to live a life of financial exclusion. It is now. The technology is there. The opportunity is huge. Let’s make a big dent in financial exclusion, not in our lifetime, but in the next decade – or even sooner.