Banking for everyone: the FinTech revolution
Millions of people worldwide still do not have access to basic banking facilities, but innovative thinking, modest pricing models and alternative recruitment approaches by FinTechs is changing this.
India’s Post Payments Bank makes use of the postal service to connect those in rural areas to digital finance
In 2020, it seems unthinkable there are still people without access to mainstream financial services. Globally, the number of those without a basic bank account – also known as the unbanked – totalled 1.7 billion in 2017, according to statisticians at Global Findex. That is down from around 2 billion in 2014.
While the number of those without basic banking facilities is still high, the decline within that three-year period suggests that fundamental banking services are now more widely available to unbanked groups and those who previously felt financially excluded.
This lack of access to basic banking facilities is not a problem unique to any one country. It is present in developed, emerging and frontier markets.
The UK, for example, is ranked ninth by the World Bank for banking inclusion. Despite this, it still had some 1.2 million citizens classified as unbanked by the Financial Conduct Authority’s Financial Inclusion report, published in 2019.
In other geographies, the numbers are far higher. The World Bank estimates that the developing countries within Europe and Central Asia, combined, have some 116 million adults without a basic bank account. It also states that 27% of the population in Latin America and the Caribbean are unbanked, with more than half (56%) of Chileans without access to basic bank services.
Zish Khan, chief operating officer at British challenger bank Aldermore, says people excluded from financial life may include those with a disability, on low disposable incomes, or may be facing cultural barriers or geographical ones.
He says that, in the UK, the unbanked are most likely to be 18 to 24-year-olds who are unemployed, with above average levels in London and other “core” UK cities.
“There remains a significant opportunity to democratise financial services,” he says. “This ultimately enables the ability to manage and move money as a right for everyone, and not just the high-net-worth individuals.”
Barriers to entry
In more recent years, an explosion of innovation has levelled the playing field when it comes to accessibility to basic financial services. The arrival of new brands, techniques and platforms has lowered barriers to entry within the sector, giving access to financial products to millions of people who previously had none.
In some of the most rural communities of Africa and Asia, for example, fintechs have brought access to basic banking through mobile phone technology. Meanwhile, in developed banking markets, like the UK and South Africa, fintechs have challenged the market dominance of legacy players, leading to a reduction in prices, and increasing affordability.
Jeff Lynn, executive chairman at equity crowdfunding platform Seedrs, says fintechs have brought about accessibility, usability and lower transaction costs. This is particularly the case for consumers who previously had limited access to efficient rates of borrowing, payment methods or investments.
But he suggests there is still a way to go towards democratising financial services entirely, despite the best efforts of fintechs and challenger banks.
Paul Humphrey, chief executive of fintech BMLL Technologies, says the financial sector could learn valuable lessons from other industries, however, which have been far quicker to democratise.
“Outside of financial services, if you own a spare room you can become a hotel – Airbnb has allowed that. If you own a car, you can become a taxi. Financial services is somewhat a laggard in that, behind other industries.”
Mr Humphrey’s colleague, chief operating officer William L’Heveder, says some traditional banks have been slow to adopt or allow democratisation because they have what he calls “monolithic processes”.
“But the use of open source coding and technology has enabled the small bits of these big, monolithic processes to be broken up,” he says.
“Competition for those individual pieces of the process has enabled the rise of this democratisation element.”
Mainstream lenders have spotted that by partnering with some of the fintechs, they can roll out services and products that appeal to a wider range of customers, while bypassing the need to invest in costly and time-consuming technology upgrades.
There are numerous examples of these partnerships. In January this year, SBM Bank in India announced a partnership with Indian fintech PayNearby to build an “open banking network” that delivers basic banking solutions to customers. This builds on its commitment to facilitate financial empowerment among the underbanked and unbanked segments.
In the UK, Barclays’ partnership with UK-based fintech Bink allowed its customers to link their payment card to their loyalty memberships.
Another area for the financial services industry to tackle, particularly fintechs, is how best to attract a diverse workforce.
“The tech industry has always been slow to understand this I think,” says Seedrs’ Mr Lynn. “The more diversity, the more perspectives you can bring. The better you can serve a wider range of customers.”
Maelis Carraro is the director of Catalyst Fund, which is an accelerator programme for early-stage inclusive fintech ventures in emerging markets that develop financial solutions for those that are underserved by the financial services industry.
She says: “In the first 20 companies we supported in the first three years, we only had two women-led fintech companies of the entire portfolio.”
Ms Carraro sees that trend changing but suggests there needs to be dedicated resources to encourage women founders to start and scale.
“We applied a gender lens in the selection of start-ups and we also have a requirement that every company who comes through the programme has to have a local founder. We ensure diversity that way,” she explains. Among the latest “batch” of six fintechs the Fund is working with, two were women-led.
Education, education, education
One way in which to build a more financially inclusive society is to provide financial education in schools.
Mr Khan agrees that financial education at a young age is “essential” and cites a survey by the UK’s Money Service Advice which found that children at the age of seven who are taught financial education become better savers later in life.
There are many within financial services who have been campaigning for personal finance to be taught to those in primary and secondary education. Some organisations have taken it into their own hands, providing education across regions and groups where they believe it could be most beneficial.
In its report, Digital Finance 2.0: Unlocking Latin America’s economic growth potential, Santander found that more than 360,000 people in the region benefited from its financial education programmes in 2018.
“One of the critical ways you give access to the wide range of financial services is better financial education at all levels,” says Mr Lynn. But he warns against finance being taught by corporates.
“If you’re relying on companies that are selling a service to provide the education, even the most honest are still going to focus on the things that are relevant to our product and service. It is still not going to be a completely independent perspective,” he notes.