Since the beginning, the relationship between banks and their customers has been tenuous. Stuffy and elitist institutions often approached customers with mistrust, and customers returned that mistrust. This only increased with the rise of financial fraud and money laundering, coupled with the 2008 mortgage and financial crisis. In light of these trends, banks became ever more interested in protecting their own interests, thus making it even harder for customers to open bank accounts.
"The Federal Reserve’s 2019 report on the economic well-being of U.S. households states that 22% of American households are either unbanked or underbanked."
With so many people excluded from the banking sector, the unbanked population (people who are not served by a bank or similar financial institution) has exploded. The Federal Reserve’s 2019 report on the economic well-being of U.S. households stated that 22% of American households are either unbanked or underbanked.
But opting out of banks and financial institutions, whether deliberately or not, means losing out on many opportunities and services that are central to modern society. The options offered in their place are often risky, expensive, and sometimes just cumbersome.
Over the past decade, a new wave of fintech startups have emerged; identifying the challenges the unbanked face and the opportunities they represent. Startups in fintech are developing solutions that bypass banks for technology that is lean, accessible, and inclusive. Their focus has been (though not exclusively), on low-income and migrant populations, including foreign workers, immigrants, and ex-convicts. In addition, they’ve also worked to serve “digital nomads,” freelancers and other gig economy workers who are less likely to have steady income or assets.
These startups are stepping in to overcome a range of obstacles that have traditionally plagued the unbanked, including these major challenges:
Israel-based Neema and UK-based WorldRemit, are tackling the challenges involved in transferring money between people—often across different countries or continents—without bank accounts. Historically, sending money across borders in these situations has involved high fees, something these companies and others seek to redress. Additionally, many of these new companies offer mobile-based apps and platforms, giving users more flexibility when it comes to sending or receiving money.
Credit cards have traditionally been linked to banks or financial institutions. Getting a card usually requires some sort of application process, including a review of a person’s credit score and credit history. With many countries seeking to eliminate or at least decrease the use of cash, and the parallel rise of online shopping and services, people without credit cards are often at a serious disadvantage. Companies like the Argentinian Ualá and the American Petal have stepped in to give people who have trouble qualifying for credit cards, such as foreign workers and even teenagers, the opportunity to stop being limited by their dependence on cash.
Like credit cards, lending has traditionally been in the hands of banks and financial institutions (or, alternatively, sketchy, high-risk, high-interest loan sharks). With platforms that are primarily mobile-based, companies like the British TuTasa, Israeli/Ghanaian FIDO, and Indonesian Amartha are putting loans in the hands—literally—of people in developing nations, who have historically had to leap through hoops to get institutional loans or stomach high fees.
The simple act of opening an account in traditional banking may be intimidating. As standalone brands that operate exclusively online, digital banks are an accessible alternative. Most of the unbanked already have a mobile phone from which they can open a new account, receive more comfortable rates, and often encounter a much less complicated bureaucracy to navigate. Digital banks do not have any physical branches or ATM’s, and instead allow for all transactions to occur online. Nubank and Webank are two examples of digital banks being built from the ground up.
These fintech solutions have emerged, in many cases as an innovative, more inclusive alternative to banks and financial institutions. But this doesn’t mean that same institutions are safe to rest on their laurels. In fact, many of them are feeling the heat. Many banks have realized that their future too lies in financial technology. They have accelerated their acquisitions of fintech startups as well as established fintech accelerators and incubators. Though it may not be the most intuitive step for a startup working in fintech that serves the unbanked to reach out to traditional institutions like banks themselves, this sort of partnership could be the one to push the accessibility of financial services to the next level. Banks are realizing they must be a part of the digital revolution, and your innovation may be just what they need.
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