Not many of us will consider banking an ‘expensive’ service in our lives. But if you live on just a few dollars a day, have no credit, or are a migrant worker with no legal right to financial services, the world of banking can be beyond your reach. Next Money Features Editor Sophie Camp takes a look at the underbanked.
The Global Findex Database by the World Bank Group was last updated in 2017. It is collated every three years and its data shows that about 1.7 billion adults remain unbanked. Whilst we wait for their new study to be released, this number is still an alarming representation of the difficulties faced by many to access financial services and other reports paint a similar picture of the situation right now.
The Future of South-east Asia’s Digital Financial Services Industry report was conducted in October 2019 by Google, Temasak and Bain & Company. Across the six largest countries in Southeast Asia – Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam – they found that 75% of the adult population is either ‘underbanked,’ or ‘unbanked’. The pattern is seen in other reports being repeated across Africa, South America and the MENA region (at almost exactly the same amount, around70%, in each area).
And then there are those underserved, or unbanked, in otherwise hotbeds of fintech activity. 55 million adult Americans are underbanked, or unbanked – 22% of households across the country. In the UK there are six traditional banks that are Shariah law compliant, yet there are 2.7 million Muslims.
Habits and behaviours in the underbanked
How do communities without bank accounts survive without access to financial services? Many have long standing systems of commerce that cover cash, voucher systems and e-wallets tied to mobile phones. In certain regions, such as Mexico, e-commerce giants have even changed their model to cash to appeal to local behaviours. Amazon began accepting cash payments via Oxxo, a popular corner store chain, across Mexico in early 2019. It was a decision made off the basis that allowing cash gave them access to many, many more customers than online banking facilities would.
Credit is rare in many parts of the developing world, and loans can be difficult to come by from formal banking institutions, so informal options abound. In Jamaica, an informal loan club known as a susu, or sou-sou, is a rotating savings and credit association created by a small group of people. The standard contributions by each member eventually pay one member of the ground for something they desperately need, but don’t have the money for, such as a car or to start a business. In many parts of Africa, loans are made based on human decision making from someone making a long trip into a rural community to check whether livestock, or possessions, could be used as collateral.
So, no bank account does not mean no online shopping, or no online transfer of money. But it is hardly akin to the daily online banking interactions that most of us take for granted. It’s important to understand that, to make solutions useful and seamless.
Hidden issues within underbanked demographics
Within the underbanked and unbanked there are even more demographic breakdowns.For example, 54% of women globally have access to mobile internet, but 300 million fewer women than men access mobile internet.
Of course, during these uncertain times there is another depressing factor about the unbanked. In countries where online banking, contactless payments and debit cards are staple, it’s been easy for grocery stores to all but demand card payments instead of cash to help flatten the coronavirus curve. Bills and coins are hardly the cleanest at the best of times, never mind during a global pandemic, and WHO made the recommendation to countries globally early on. Some countries have gone one step further. The People’s Bank of China is quite literally laundering money to clean bills before re-circulation and many thousands have been simply destroyed. The Federal Reserve in the US now stores banknotes coming from Asia to allow any potential virus to die off before being re-circulated. How are these measures possible in the developing world, where there isn’t the infrastructure for contactless cards?
Being underbanked and depending on cash can now quite clearly be linked to a higher risk of becoming ill in a pandemic.
How to serve them in the best possible way
It’s easy to decry the lack of access many people have in the world to the financial services that others take for granted. But, simply taking an existing fintech company and opening in a geographical area with little financial services may not actually be the solution.
Looking at how the unbanked and underbanked currently manage their money is a good starting point. And there are other considerations:
- not everyone in these communities will have consistent, or safe access to the internet, even if they do have mobile data;
- be aware of products that count on credit scores – many who are unbanked don’t have them;
- financial literacy. New technology, or a new way of way of doing things will only work if customers have the financial literacy to understand their uses;
- cash isn’t going to go away. At least, not in the immediate future. Trying to hammer fintech, or open banking solutions into a cash-based society will be like trying to fit a square peg into a round hole;
- trust. In many countries and communities across the world, mistrust in financial institutions has rendered them uncomfortable with the banking world. Gaining trust is an important step and one not to be glossed over;
- generational gaps. Young unbanked individuals may be quick to sign up, whether that’s because they are more familiar with technology, or haven’t yet taken on their parents’ way of doing things. But older generations may be more difficult to convince to change their behaviours, or to learn how to do new things;
- don’t forget the demographics within these numbers. Simply offering new fintech options does not mean that people will use them. Women make up 55% of the unbanked globally. Their path to an easier and more affordable financial service may not be as easy as for men;
- cultural nuances. This may be the hardest to get right. It’s a noble cause to want to offer a solution for the unbanked. But there are cultural and social hurdles to overcome. And if an existing system has worked for centuries, it may be better to improve what they already have, rather than try to brush away what came before you.
The potential for fintechs who want to either begin, or move into the space for serving the unbanked is huge. If we go back to the figures from the beginning of this article, there are quite literally billions of opportunities. A recent Accenture and CARE report estimated that the global market opportunity is worth $380bn.
Back in the early days, traditional banking was created with a narrow profile. The amazing, and empowering thing about financial technology and open banking in the modern world, is that everyone should be able to interact with financial services in a way that benefits them.
It’s easy to say ‘should’. But actually making that happen on the ground is a task for the fintech and open banking industry to tackle. Fintech has become a solution and a way to make life infinitely easier for many. Without extending these myriad of solutions to communities who are still struggling to access financial services, and helping them to solve their unique problems within their own cultural and demographic factors, then fintech cannot surely call itself an industry that fulfills all of its social responsibilities.