A significant portion of the population remains “unbanked” or “underbanked” due to a variety of factors. They may not have any trust in traditional financial institutions or they may lack the financial resources to afford a bank account, for example. Unbanked individuals are those who don’t use any traditional financial services, like bank accounts, while underbanked individuals supplement traditional options with additional services. For example, they might have a bank account, but rely primarily on check cashing businesses instead of depositing their checks into the account.
Financial institutions are constantly looking to better serve the unbanked and underbanked populations, with varying degrees of success. However, startups participating in the current fintech revolution may represent the best opportunity to date for serving these types of customers. The following are essential reasons why.
For numerous reasons, public trust in financial institutions has declined in recent years. Customers who would benefit from opening a bank account are wary to, believing they can’t trust banks with their funds. In some sense, it’s not surprising—many banks are not transparent about the fees they charge. For example, many bank customers realize that they’ll be charged an overdraft fee if they don’t have enough money to cover a purchase. However, they might be in for a rude surprise when their bank fines them not just once, but charges multiple overdraft fees for every day the account has a negative balance.
Fintech startups represent an alternative to traditional banks. They can form a “blank-slate” relationship with customers. People who are reluctant to rely on an existing bank due to a past negative experience will likely be more willing to try a new service. If fintech startups can reliably serve their customers and put a premium on transparency, they can establish a greater degree of trust with their user base. Some companies may even partner with traditional financial institutions, using their clout to bring over their existing customers.
Similarly, people who choose not to rely on banks for their financial services often cite unclear terminology and confusing contracts when explaining why they refuse to open an account. For example, some disclosure agreements provided by banks can run as many as 70 pages long. People may misunderstand the terms of an account and suffer penalty charges as a result. Rather than allowing the same thing to happen again in the future, they walk away from their bank.
This represents yet another opportunity for fintech companies to offer a better solution. When people use any technology, whether it’s a social media app or a mobile banking service, they expect the product to be easy to use, easy to understand, and convenient. As such, virtually all fintech startups will need to build truly intuitive products if they are to attract customers.
This approach stands in contrast to the often confusing nature of traditional banking. When fintech companies expand their services, they may appeal to the unbanked and underbanked population by offering products and services that are easy to understand. As users grow more comfortable with these services, they may even come to embrace traditional financial institutions in the future, feeling more confident in their ability to comprehend financial processes.
According to the Federal Reserve Board’s Division of Consumer and Community Affairs, approximately 70% of unbanked individuals use mobile phones. The report also indicates that among underbanked people who do occasionally use traditional financial services, 40% use mobile banking apps.
This may have something to do with the accessibility of these programs. Though many people think traditional banks are a common fixture in every community in the US, they aren’t as visible in some areas as others. In the densely populated South Bronx, for example, there is only one physical bank per 20,000 residents.
Some people don’t open bank accounts because the entire concept of doing so seems inaccessible to them. Perhaps their parents never had a bank account—whether because banks weren’t ubiquitous in their community, or because they could not afford an account. To many of these people, the idea of walking into a bank and setting up an account is foreign, because it simply wasn’t done in their family. Thus, even if there are banks in their neighborhood, the ability to properly take advantage of them seems out of reach.
Mobile banking apps, on the other hand, are readily available—all a user has to do is download them onto their device of choice. At this point in time, they may still need to visit a brick-and-mortar bank to actually open an account, but doing so can seem much easier when all of your essential banking needs are available via a mobile phone. In the future, fintech companies may even eliminate the need to visit a bank when starting a new account.
This degree of accessibility is vital to the unbanked and underbanked populations. As mobile devices become even more ubiquitous, they can be an essential resource for people who are unfamiliar with the process of starting a bank account or using other common financial services.
The impact of these trends on traditional financial institutions is still developing. Some may cooperate with fintech startups, seeing a chance to attract more customers through partnerships or by taking a cue from the younger companies’ services. Other traditional banks may struggle to retain their customers. Either way, it’s reasonable to assume that unbanked and underbanked people will benefit from the fintech revolution.