This blog has often pointed out that fintech products and services don’t merely provide the average consumer with convenient alternatives to a range of financial services. They’re also helping people who were previously unbanked or underbanked take advantage of these services as well. As a result, these people can grow businesses, save and invest money more wisely, and generally participate in the economy.
This demonstrates fintech’s true value. While added convenience is certainly a benefit, helping people manage their finances more effectively is perhaps more important.
It also represents an opportunity for new fintech entrepreneurs trying to determine who their target customers should be. Although a handful of fintech companies are focused on helping the underbanked access financial services, others may overlook this market.
This is often a mistake. The following are a few reasons why.
The Customer Base Is Large
It’s not easy to determine how many people in the world are unbanked or underbanked with precise accuracy. That’s partially because there are many different degrees of being underbanked. Some people don’t have financial accounts at all, while others technically do, but due to a range of circumstances, they are unable to leverage them to the same capacity as others.
That said, estimates indicate there may be 2 to 3 billion underbanked people living on the planet right now. That’s an enormous customer base that has effectively been ignored. Within the US, the numbers are considerable as well. In 2017, the FDIC estimated that 8.4 million American households were unbanked, while 24.2 million were underbanked.
That highlights an important point: underbanked populations do not mainly consist of people who refuse to take advantage of financial services because they don’t trust banks and similar financial institutions. While such people exist, they’re not common. Successful fintech companies that have targeted this customer base know that most underbanked people want to use various financial services. Unfortunately, they’ve been unable to, due to a variety of reasons.
Sometimes geography is a restrictive factor. A person may not use a bank because they don’t have access to one. In other cases, a person may not have been provided with a strong financial literacy education in the past, and now feels intimidated by complex financial tasks (that a fintech product could of course theoretically simplify). Usually, however, underbanked people can’t afford to bank—the late fees and overdraft charges make traditional bank accounts and other financial services too expensive for the many people who live paycheck to paycheck.
Fintech companies have the unique opportunity to target this group of people. With the wide adoption of smartphones across nearly every socioeconomic class, and new technologies in banking, the cost to create financial services products is rapidly falling.
Ease of Adoption
In addition, targeting the underbanked helps fintech companies overcome another challenge that’s unique to the industry: finding early adopters.
People choose fintech products because they allow them to complete financial tasks with greater ease and efficiency than they can with their current bank or similar institution. However, while consumers are increasingly embracing fintech solutions, many are still hesitant to give alternative banking a try. It’s no surprise—people naturally demand a higher standard of trust for the companies that manage or have access to their money. It’s easier to trust a relatively unknown startup with your photos than it is to trust them with your money. The biggest financial institutions have been around for decades (if not centuries). Even if no one really loves their bank, they still may feel more inclined to trust an established institution with an aura of authority over a new fintech startup.
Luckily, this challenge is virtually non-existent for fintech companies targeting the underbanked. Because they haven’t made use of many traditional financial services, they don’t have much loyalty to any brand. These institutions never served them well, so there’s no bond to break. Therefore, they may be more likely to embrace whatever solution best suits their needs, even if the company lacks household name brand recognition. If you can provide a genuinely high quality product, you’ll likely have an easier time finding early adopters.
Demonstrating Fintech’s Power
Helping underbanked people access key financial services directly benefits these individuals, of course, but it’s also beneficial to the global economy. That may not be clear right now, but if fintech companies continue to target the underbanked, it’s likely to become more apparent in the near future.
For example, when a fintech lending company provides an underbanked person with a loan a traditional lending firm might not approve (often because they don’t have access to the digital information and data fintech lenders can use to evaluate loan applicants), that person can begin growing a business. If their business is successful, they’ll hire more employees. This boosts their local economy. After all, it’s worth noting that underbanked people tend to cluster in similar geographic regions. This isn’t always the cause, but it’s common enough that a ripple effect can occur, with one person’s financial independence stimulating the whole community.
It will take time for these shifts to happen on a large scale. That said, fintech can make them possible. That’s one of the most significant reasons fintech is truly unique.