Can FinTech get the unbanked, banked?
There have been many articles written about the unbanked in America and how the problem can be solved with financial technology, or FinTech. With companies like, Apple and Google creating technology ecosystems that are making life easier to do many things, including Point of Sale transactions (via mobile) and online transactions, and maybe in the long term banking. The solution to get the unbanked, banked should be glaringly obvious.
But, maybe it’s not that easy, is it really just technology that can solve the problem? The “unbanked” is typically a term for people who do not use banks or banking institutions in any capacity. It is also used to describe people who are relaying on personal checks or cash for their banking activities. An “unbanked” person generally pays for things in cash or alternately a money order, which is more expensive and can’t be used everywhere.
Why do Unbanked people need to become banked? Well, from a banks perspective, they want to have more people using their services that they make money from. And from a society perspective, its generally accepted that you can achieve more, like getting a mortgage and paying bills electronically with a bank account.
It’s been reported that many unbanked people that lack theses banking capabilities, have a mobile cell phone. They are often a pre-paid low cost phone that aren’t always connected to the internet. There is where FinTech can help. As the technology keeps developing, phones are getting better and faster and that means the phones we have now will become obsolete and passed down to unbanked people of society, giving them the opportunity to access the internet easily. Mobile phones have enormous processing power and will eventually be the primary device for banking and finance activities for many of Americans. However, it’s still early stages, the use of mobile banking is growing, users can access the app at any time. It’s still not our first option for banking.
To provide a little context to the severity of this issue, nearly one-third of the population in the US (106 Million) are either under unbanked or under banked. The FDIC (Federal Deposit Insurance Corporation) state that around 17% of American’s are underbanked. Meaning they use a bank account in addition to an alternative financial service like, payday lenders – which we now see the CFCB introduction new legislation that will probably put a lot of payday lenders out of business or payroll cards.
With the expansion of cell phones in the US, it has also provided a mechanism for the underbanked to facilitate financial transactions. The FDIC also state that 87% have mobile phones as actually used for their financial service. And 40% of underbanked consumers with mobile phones had done mobile banking in 2013.
One of the fundamental issues with the adoption of consumer’s mobile wallets is the consumer’s buying behavior (for example – what they are doing at the payment terminal – getting your wallet out of your pocket?). Consumers aren’t familiar with the process of using their phone to make a purchase, its still quite foreign to users, even early adaptors. But, as time go on, consumers will eventually change their way of paying and this will drastically open up the world of mobile first for everything, especially banking and paying for bills and services.
In reality, we can see cell phones as luxury goods. That is, something that the majority of society use as a mini computer in your hand. It has only really been the last 2 or 3 years that the Mobile Payments and Banking world has exploded and most of the phones in the market are not even capability of performing financial activities.
Federal Governments and Non Profits
There is also a lot of involvement form government and industry bodies. Non-Profit organizations, such as BankOn and Pew Research Trust are doing in-depth research into the extend of the unbanked issue in the US and are looking at small and large companies to help solve the issue, or at least contribute something to the discussion. I was recently at a Pew Research Trust Symposium on Mobile payments and the unbanked and there are many different aspects and ways to view the solution, but what is clear is that all parties need to work together to solve the problem. This research is so insightful for large organization that want to understand the customers’ needs at a much deeper level.
This means that big companies can clearly make a change to the underbanked. Phones that are cheap and widely available would make a huge difference for the unbanked to be able to have access to secure funds.
Seeing banking technology in practice
The greatest example of the unbanked population using technology to solve an everyday banking problem is in Kenya and the payment method, MPESA. MPESA didn’t adapt to the use of smart phones or a new app to enhance the user experience. The Kenya solution is somewhat dependent on the messaging platform of the telecommunication company which is more independent.
Several companies and groups have tried to bring this to US, but with not much success. But the current structure this cannot be replicated in the US, because of the following reasons;
The existing banking landscape – The Kenyan banking system is not as advanced as the US and therefore the day-to-day banking with physical banks and even setting up a bank account is not easily accessible to millions of Kenya’s. Therefore, an easier solution is needed. In the US, there are Bank Branches in just about every major city, with many options for banking customers.
The lowest level of technology – One of the most successful parts of MPESA is the it’s not a complex solution and it doesn’t require a software update every couple of months. It can be done with the use of any basic cell phone. The thirst for new technology and services in the US restricts a universally applicable banking solution that allows any users with the lowest level of technology to participate in the program. The concept of disruption has many great advantages for customers, but often disables a countrywide solution as there is a fear of being overtaken by the next solution.
The solution solves a problem (not enhances a current set-up) – MEPSA solves a problem in a market that the unbanked are more common than the banked.
Companies like Apple, Google and Microsoft have the software and hardware power to embrace all members of the community as individuals who are contributing financially and not being swallowed by predators’ companies looking to make a short term profile. As mobile banking and mobile payments grow in the US and the world, all parties must take into account all members of society, especially the underbanked community.