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Financial Inclusion: Is Fintech Our Best Bet at Reaching the Unbanked?


Many of us take low-cost checking and savings accounts for granted. We use bank accounts every day to deposit our earnings, build up a nest egg, or pay the bills. But for people who don’t have access to banking services, saving money or even getting paid can be much more difficult and expensive. The economy isn’t equitable as long as some of us are locked out of essential banking services.

One strategy for promoting financial inclusion is to increase the share of the population with accounts at brick-and-mortar banks—but that can be an uphill battle when there are required minimum deposits or when no banks are located nearby. Technology, on the other hand, presents an alternative that can bring banking to underserved communities.

Unequal Financial Access Is Costly for Underbanked Communities

There’s a big difference between what people with bank accounts pay for financial services and what underbanked people pay to check-cashing businesses, high-interest loan companies, and wire transfer services. Writing for the White House blog, Jason Furman notes that someone with a checking account pays about $100 a year in fees, while someone who depends on check-cashing services can pay fees that top $1,000 in a year. That’s a tenfold penalty just for not having a bank account.

Underbanked individuals not only pay more for the services they use, but they may also miss out on opportunities to start businesses or purchase homes because they don’t have access to the full range of financial products—including business loans and mortgages—that conventional banks offer.

What’s worse, lack of financial access can be a vicious cycle. Someone who doesn’t have a savings account may have trouble building up enough funds to cover an unexpected bill, finding themselves turning to a high-interest loan to make up the shortfall. The high interest and fees they pay further drain their resources, so that they cannot save enough money to meet the minimum deposit at a traditional bank.

Fintech Can Help Grow Access to Banking Services

While conventional banking services haven’t reached everyone, fintech offers promising solutions to help underserved communities. Mobile money services and apps make savings and checking accounts available at a much lower cost than check-cashing services.

Sending cash through services like PayPal, Venmo, or Square is far cheaper than conventional wire transfers, so more of the money can go to the recipient instead of to fees. The ease of sending money online to friends and family also means that people may be able to help each other avoid high-interest loans.

People can also access mobile money services anywhere, provided they have access to a phone and/or the internet. So if there isn’t a brick-and-mortar bank in their vicinity, they can take care of some financial transactions without needing to travel.

Remaining Challenges to Inclusion

Although fintech seems poised to have a transformative impact on financial inclusion, there are a few potential pitfalls. First, fintech services usually require consumers to have a mobile phone or internet access. But the FDIC found that in 2015, 31% of unbanked Americans did not have a mobile phone, and 72% did not have internet access at home. Thus, ensuring that people have access to the technology that fintech services rely on is an important step toward inclusion.

Plus, as is true of every sector, no single company provides a solution for all consumers. A particular fintech company may make some consumers better off but leave others behind. For example, a lending app that offers attractive rates to borrowers with good credit scores might offer rates comparable to a high-cost payday loan to borrowers who are deemed a risk by its algorithm. This impact can be mitigated, however, if entrepreneurs and investors work to create a wide range of products for underbanked communities and consciously avoid replicating the disparities that exist in traditional banking services.

The banking sector has made great strides in bringing financial services to more people: as Furman notes, the portion of US households with a bank account grew from 86% in 1989 to 93% in 2013. But there are still many people in the United States and globally who cannot participate fully in the economy because they lack access to financial services. New solutions are needed to help reach them. By harnessing mobile technology and offering affordable products, fintech may help close the gap and make banking available to all.

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