Underserved communities have historically had a tepid relationship with financial institutions, but emerging technologies in fintech has opened new doors – and opportunities – for this demographic. Data from the FDIC in 2019 revealed approximately 7.1 million U.S. households were unbanked, meaning they did not have a checking or savings account in a bank or credit union. The survey cited 16.1% of unbanked households held a general distrust for banks and preferred to use alternate services like a cash advance agency.

Thankfully, it appears that the tide is changing since 2019. Financial institutions have accelerated digital efforts and new players in the fintech industry have created solutions designed to address the inequities and concerns of underserved communities. As such, the unbanked have opened up to embedded finance solutions and fintechs are bridging the gap between financial institutions and underserved demographics.

Cash is No Longer King

One of the effects the pandemic had on the financial industry is that it forced businesses, consumers, and financial institutions to imagine what a cashless society would look like. Unable to touch PIN pads, let alone handle cash, many merchants permanently stopped accepting bills and coins. As more and more businesses began to shy away from cash in favor of card and digital transactions, the unbanked were left without the same access to the things they need, or want, to buy. The dwindling of cash acceptance has provided fintechs with an opportunity to present themselves as a problem-solver to the unbanked.

Peer-to-peer payment services like Venmo or buy-now-pay-later (BNPL) from fintechs such as Affirm and Afterpay are helping underserved markets by providing a cash alternative avenue for purchasing goods and services than cash. Banks are treading cautiously but are following suit with their own set of helpful tools and services such as online bill pay, transfers, and loan applications. Critics of these emerging technologies fear the risks to the unbanked are still too high, citing increased debt or overspending. However, advocates for embedded finance insist these solutions are necessary to improve financial stability, inclusion, and equity among lower-income communities while giving merchants greater market share.

The ABCs of FinTech

According to a 2020 survey from the National Foundation for Credit Counseling, 78% of adults in the U.S. agree that they need financial advice from a professional, regardless of their present level of financial education. Current public initiatives marketed towards the underbanked emphasize how to fix one’s credit or pay off debt, which assumes that the audience is digging themselves out of a financial hole and doesn’t have any financial goals beyond that. This is a mistake that both fintechs and FIs have the power to change for the better. For instance, Acorns’ Money Basics and Grow Your Knowledge options encourage financial literacy and continued financial education to users directly on its platform. The platform also enables users to invest spare change and open an Acorns checking account. Non-banks like Chime are also addressing financial inclusion concerns with automation tools that boost savings and investments and encourages financial education to its users.

Generation Z and younger are prime targets for fintechs and non-banks despite having less purchasing power than their older peer groups. This cohort is often responsible for making big financial decisions by the time they reach the age of 18. They are targeted by credit card companies, allowed to take an excess amount of student loan debt, or finance expensive mobile devices or a vehicle before having a full view of their current and future financial picture. This only fuels the mistrust consumers have for financial services. While corporate banks are less likely to market to this audience, fintechs see the untapped potential and benefits of marketing to younger generations, particularly in underserved communities, early on. A 2020 Bankrate survey revealed most American adults have kept the same primary checking account open and in use for over 14 years. Who is to say that this won’t be the same trend for young adults and their chosen fintech? Hence, automation tools, embedded finance, and banking-as-a-service (BaaS) technologies are powerful innovations to propel the underserved and unbanked forward and can be leveraged by traditional FIs, as well.

How do Fintechs Become More Visible?

Underserved and unbanked communities often miss out on helpful resources and fintech solutions due to a lack of visibility. While we know that banks don’t truly hold our personal money in a vault that we can access at any time, we can walk into a bank, deposit and withdraw cash, have checks from the bank with our name and address listed, receive mail from them, and more. They are qualified by these physical representations of their existence. So how can fintechs, who exist within the technology they were built on, make the digital version of the assets they hold for users more visible to the unbanked?

There are three key components to visibility. They are:

• Tangibility: Users need a tool with which to wield their funds. Many fintechs are adopting cards to provide access to accounts, including Chime, Ramp, Divvy, and others. Having a hard, physical connection to their money makes users feel more secure. Plus, without consistent access to internet, a computer, or smartphone, a card grants these users another way to access funds when they need it most.
• Service: Fintech customers are looking for a personalized digital banking experience without predatory fees or minimum balance requirements, which low-income users can’t meet. Instead, providing access to services such as payday lending and personalized finance and budgeting tools gives users flexibility. Unlike a regular loan or the use of a credit card, payday lending is not exploitative for the user since it is providing early access to earned wages, and not providing money that was not going to be there otherwise and getting them into a hole that may continue to deepen. Personalized tools allow users to make the services fit their own needs, getting better value out of the experience.
• Accessibility: Customers want to be able to see and access their funds easily. Technology can get complicated, and tech companies don’t always have the easiest to navigate platforms. Having an app, and one that is straightforward and uncomplicated, can boost engagement. A 2021 study by the Pew Research Center shows that 43% of lower-income (making $30,000 a year or less) adults reported not having broadband internet service, and 41% didn’t own a home computer or laptop. However, that number drops to 24% when measuring how many adults within that salary range do not own a smartphone. The ability for people to be able to make all their interactions with their money, and not get frustrated or slowed down by needing to be on a browser, via a smartphone app is vital to the success of a financial technology company. While that number does leave some without access, having room for improvement will continue to drive innovation for fintechs by providing a problem in need of a solution.

Bridging the Gap

The citizens of our underserved communities are not looking for equality from financial systems, they are looking for equity, and fintechs have the power to connect all our communities by promoting equity within the financial space. Fintechs have a societal responsibility to the underbanked- they are the bridge to connecting communities to greater financial opportunities, which will in turn provide greater financial stability to underserved households, increase equity, and improve the relationships between the unbanked and the local credit unions and FIs. By committing to connecting communities to technologies that can serve them, fintechs are encouraging adoption, promoting education, and serving an underserved sector of society, and truly becoming the bridge between the unbanked and our modern financial institutions.

Join us at Fintech Talents North America on May 12th, 2022! Live stream starting at 09.00am EST

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Written by Sarah Ikalowych, PR Associate, KCD PR, Editorial Contributor.