For many, having a bank account is a given. They’ll open a bank account that may lead to mortgages, loans and children’s savings accounts.
Yet, for many people having a bank account is not automatic. Being unbanked – or underbanked – arises from a set of uncontrollable circumstances. People’s understanding of the system, their poor language skills and lack of credit history makes them more vulnerable and more susceptible to fraud, deception and unscrupulous lenders. Without the safety net of a bank account, they often turn to loan sharks for help and then struggle with extreme interest rates on their loans.
It's a vicious cycle without end; without banks, they have to pay unregulated private individuals to cash checks – simply for living expenses- and banks don’t want them without a good credit history. While it is an uneven playing field, there are emergent fintech solutions that could make life easier for the un- and underbanked.
What are the problems that need to be fixed and the fintech solutions that are working to make life better for millions all over the world?
Banks insist customers maintain a minimum balance to avoid fees. If you’re just starting out or if your situation isn’t stable, you might not meet this threshold and won’t open an account – this is one of the main reasons for not having a bank account. Being unbanked can be more expensive than paying bank fees, instead paying for check-chasing services and using money orders to pay bills.
Fintech companies are creating banking products and services that include low-cost and subscription-based accounts that remove these barriers. There’s no minimum balance required, and users can receive wages, pay bills and shop online and in-store with cards linked to the account.
Banks are narrow-minded, without provision in place to recognise the needs of essential workers – the backbone of the economy. Banks lack the mechanisms and insights needed to set a credit score for millions of people, which places them outside the traditional banking system and unable to get an account.
It leaves many wide open to predatory lenders that charge extortionate interest rates, while affluent consumers with better credit scores are offered near zero-rate loans and financing. Unregulated lenders target certain communities, often of colour or ethnicity, as they know that a bank account is out of reach for them. It means that the people that have least money are forced to pay the most in fees and charges from unauthorised lenders.
Fintech alternatives online accounts’ give workers direct access to their own money, fee-free, and offers them targeted financial services.
The unbanked and underbanked lack trust in financial institutions. Many unbanked come from countries without a reliable banking system. Banks have also made it clear that they’re not open to approaches from certain communities or minorities, they don’t understand them and have no data to try to appreciate their needs or wants, which feeds the cycle of distrust.
Data-focused fintech companies have products and services driven by user-insights, which allows them to offer them targeted solutions to help them to meet spending and saving goals.
The unbanked and underbanked are the hardest-working, most poorly paid in society, yet they pay their taxes and keep the economy moving. Unbanked from a young age, they remain outside the system throughout life, forming alternative financial habits that will see them pay more for less. Actively kept out by banks, it is an unequal and unfair situation that banks are in no hurry to change.
Fintech rewrites banking rules. By offering accounts with no minimum balance requirements and easy access to fee-free products, fintech solutions can better meet the needs of their users. It will negate the needs to pay over the odds for financial services and democratise banking for all.