December Banking Technology Update: Supporting Underbanked Populations
There are millions of Americans that do not have a bank account and/or have little to no participation in the formal financial system. According to a survey conducted by the Federal Deposit Insurance Corporation (FDIC), “approximately 15.6 million adults were ‘unbanked’ in 2015.” An additional 51.1 million adults were considered to be “underbanked,” meaning they had some type of bank account, but also relied on “alternative financial services” (AFS), like money orders, payday loans, pawn shop loans, etc.
There are a variety of reasons an individual might not have a bank account or use the services of a regulated financial institution. While “not having enough money to maintain an account” prevents the majority of these individuals from participation, there are other barriers to entry. Without a bank account or formal record of financial reliability, these “alternative populations” don’t have access to a variety of other critical financial services such as credit, mortgage loans, and small business loans.
Barriers to the financial system
Not having enough money to maintain an account is a problem most of the unbanked and underbanked struggle with. Poor Americans often get stuck in a cycle of poverty since their only resort for financial services is usually high interested AFS, never giving them a chance to build savings and get ahead. According to the U.S. Census Bureau, Black and Hispanic families have the highest rates of poverty in the US, and families headed by a single mother are by far the poorest type. People with disabilities, including many veterans, are also twice as likely to live in poverty compared to an adult without a disability. These groups struggle disproportionately with gaining access to the formal financial system. That also means it’s more difficult for them to purchase a home or start a business.
There are also non-financial barriers to formal banking, like those who live in remote areas or groups like the Amish. While digital banking is closing the gap on geographic and cultural challenges, in most cases you still need to be physically present to open a checking or savings account or apply for a loan. Traditional “banking hours” (9AM-5PM) create an obstacle for those who work during the day, often on an hourly basis, and cannot afford to take time off to visit the bank.
Finally, there are some people that have the ability to participate but do not trust banks or want more privacy. Public trust in the banking system plummeted after the financial crisis in 2008. According to Gallop News, “the current percentage of adults who say they have confidence in banks is just half of what it was in 2004 when 53% expressed confidence in the institution.”
Creating a more inclusive banking system
Improving access to mainstream financial services for these alternative populations benefits society as a whole. It can help lift many out of poverty and reduce the societal costs of supporting them. Better access also means more money being invested in the financial system as a whole, helping the economy grow. Giving these individuals a safe and inexpensive place to build up savings and credit will ultimately lead to a higher rate of home ownership and more small businesses. This can be achieved by creating a modern banking system that is more efficient, convenient and incorporates non-traditional data into the underwriting process.
The cost to maintain the outdated and slow legacy systems much of the current banking infrastructure is built upon is extremely expensive. While more efficient options do exist in the AFS space, they also charge egregious interest rates. If regulated financial institutions were to re-build their expensive and cumbersome processes using modern technology, they could offer services to alternative populations – and all populations for that matter – at a much lower cost.
Not only is digital banking less expensive – it’s more convenient. While branch locations still serve an important purpose in the community, they are expensive to maintain. By reducing the number of physical locations and increasing the services available online, banks can broaden their reach to those in remote locations and those who can’t easily visit a branch.
Another way to support these alternative populations who often don’t have a formal credit history is to incorporate non-traditional data, like rental payments or utility bills, into the underwriting process. For small business loans, this could also mean customer reviews and other indicators of business performance.
Fintech partnerships helping to increase access
While few would argue that banks could offer services at a lower cost and improve their digital presence with modern technology, many cite the large cost that would accompany an enhancement of this nature. While it’s true that upgrading these legacy systems internally would be a costly and risky venture, many regulated financial institutions have found a faster and less costly way to get ahead – partnerships.
Fintech companies, like Mirador, partner with banks to quickly create a modern banking relationship that is more inclusive. Mirador’s technology allows banks to originate loans at a lower cost, reducing the time & effort required by borrower and lender, and they incorporate non-traditional industry insights into the underwriting process.
By removing the barriers to the formal financial system and encouraging alternative populations to build up their wealth, all of the social benefits. A modern banking relationship is one that celebrates diversity and creates an inclusive environment where all people have a chance to participate.