The opportunities and threats of digitally enabled financial inclusion

What have fintech and open banking done so far for the unbanked and the underbanked?

 

If you listen to fintech CEOs talking about the genesis of their business, they will tell you how their frustrations as clients of incumbent banks led to founding a start-up. Their mission is to make banking hassle-free, efficient and cheap. And those that hit a loftier, humanitarian tone may also talk about their will to enhance inclusion by serving the pariahs of mainstream financial institutions: the unbanked and the underbanked.

 

Financial inclusion should also be a spin-off of open banking’s primary aim to level the playing field between established banks and fintech. Two years into the open banking era, it’s worth taking stock of which pain points have already been ticked off the exclusion list.

 

The unbanked

 

Recent figures show that there are still 1.3 million unbanked people in the UK – an astonishing number for any developed country, let alone a major global financial hub. But is it really that surprising, and is there room for improvement?

 

If we were to chart the number of unbanked individuals in the UK over the past ten years, there would be a remarkable plunge after September 2016, the date when the EU’s Payment Accounts Directive – which mandated the nine big banks to offer basic bank accounts – was implemented. Although fee-free basic bank accounts offering core banking services without overdraft or credit facilities had been around before this, banks, understandably, weren’t keen on introducing and promoting them without a legislative push. 

 

Demand for basic bank accounts in the following years soon skyrocketed. According to Treasury data, 7,455,960 basic bank accounts were opened by 30 June 2018, when PSD2, the framework underlying open banking, had just come into force. 

 

However, fintechs have broadened the choice of basic bank account services, likely drawing in many of the unbanked by the ease and speed in which these accounts can be opened. (About a third of the unbanked today has trouble providing proof of address, such as a driving licence, passport or utility bill.) But where fintechs and open banking’s AISPs (Account Information Service Providers) can make a real difference is helping clients remain banked, or even giving them a leg-up to the higher rungs of banking.

 

Automatic savings sweeping, when algorithms predict how much a user can save and deposit the amount in a savings account, as well as other budgeting and smart saving apps, can become tools to achieve just that. By nudging customers to save and sending them alerts to pay bills in time, banks – old and new – can help them remain in the system, and, in the long run, graduate to accounts that fully meet their financial needs.

 

Building credit capacity for the underbanked

 

A major pain-point of legacy banking has been the laborious, drawn-out processes of taking out a loan or a mortgage. What fintech is proving to be successful at is bypassing the old credit-scoring mechanisms which can, for example, decline your mortgage request even if you’ve been paying rent for years that exceeds the mortgage plan’s monthly instalments.

 

These new credit capacity-building offerings from fintechs look like real game-changers for the credit-invisible, who have thin financial track records if they have them at all. The digital trails clients leave can be leveraged to improve their creditworthiness. Regular, in-time payments of phone, cable TV or utility bills can be aggregated across a number of accounts, and serve as proof of responsible financial behaviour.

 

There is, however, a strand of fintech that could be pushing the boundaries of privacy too far in order to beef up  clients’ credit scores. What can potentially turn this generously inclusive service into the stuff of dystopian nightmares is a willingness to blur the line between financial and social data.

 

According to this school of thought, any digital information left behind can serve as behavioural data supporting financial reliability – whether mobile data such as location, browsing history, installed apps, phone model or calendar events, or the people and networks the applicant is connected to on social media, and what they post there. Even mouse-movement monitoring and psychometric tests can also be regarded as legitimate tools to assess creditworthiness.

 

Fintech and open banking are undoubtedly making great strides towards extending banking services to everyone. But inclusion in this area is not only about getting access to bank accounts and passing affordability checks. It’s also about customers being able to do these things while keeping their dignity. The partial-salary schemes that some fintechs offer in partnership with employers, where employees can take out a proportionate percentage of their salary before payday, are financial transactions without the humiliation that payday and doorstep loans entail.

 

For freelancers and those on zero-hour contracts, smart loan repayment services accommodating their income fluctuations and saving them penalties are a boon – their applications having been rejected so many times by old-school banking. Also, shop-now-pay-later schemes, which in their present form can be regarded as alternatives to credit cards, are also innovations creating more equal financial opportunities. The pandemic has provided fintechs and progressive incumbent banks with a great opportunity to support the financially vulnerable in creative ways. But we must always make sure inclusion doesn’t come at the cost of intrusion into our privacy, or a new surge in sub-prime credit and loans breeding more trouble…

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by Zita Goldman