Eric Greco, Equity Analyst, explains how the advancements of fintech companies are helping to provide the unbanked and underbanked with access to a broader range of often-crucial financial services.
March 31, 2023
While substantial progress has been made in the 15 years following the Great Financial Crisis—largely attributable to socioeconomic gains—significant barriers remain within the U.S. financial services industry. There is a need to address the millions of unbanked and underbanked Americans who lack adequate access to traditional banking services. The unbanked and underbanked populations are disproportionately low-income, minority, and immigrant households. They face a range of obstacles from high banking fees and minimum balance requirements, to limited branch access. These barriers largely keep them confined to an ecosystem outside the conventional financial system.
According to the Federal Deposit Insurance Corporation’s (FDIC’s) 2021 National Survey of Unbanked and Underbanked Households survey, 4.5% of U.S. households (or 5.9 million) were unbanked in 2021, meaning that no one in the household had a checking or savings account. This represents a decline from 5.4% or 7.1 million households who fell into the unbanked category in 2019, the lowest since the survey began in 2009. Additionally, an estimated 14.1% or 18.7 million households were underbanked, meaning that they had a bank account, but also used alternative financial services like money orders or payday loans. This represents a decline from 16.0% or 21.0 million households who fell into the underbanked category two years prior.(1)
The Rise of Nonbanks
In recent years, there has been a surge in the popularity of digital payments and mobile banking platforms (“nonbanks”) that offer peer-to-peer payment and banking services, such as PayPal, CashApp, (subsidiary of Block), Chime, and Venmo (subsidiary of PayPal). These platforms, which allow users to send and receive money electronically, have been a gamechanger for many individuals who have historically been underserved by traditional banking institutions.
Coinciding with the rise of smartphone ownership in the U.S.—over 85% of adults in 2021 reported smartphone ownership according to the Pew Research Center—digital payments and mobile banking utilization have skyrocketed. Mobile banking usage rose from 15.1% of households in 2017 to 43.5% in 2021.(2) This provides a unique opportunity for mobile payment and banking platforms to service the very members of our society who lack basic access to traditional banking services. Look no further than the global remittances commonly used by immigrants to send or receive funds cross-border to family and friends. Visa recently published data showing 53% of consumers are now leveraging mobile, peer-to-peer apps to send funds globally, versus 34% utilizing a physical bank and the remaining 12% sending cash, checks, or money orders by mail.(3)
Addressing Financial Inclusivity
Financial inclusion, which refers to the process of bringing unbanked and underbanked populations into the traditional financial system, has come to the forefront as a critical issue. These populations face significant barriers to accessing financial services and products, which hampers the ability to save, invest, and build financial stability. In the United States, financial inclusivity has improved over the past decade as numerous fintech companies within the digital payment, neobank, and mobile banking vertical (both publicly traded and private companies) have emerged and addressed some of the inequities facing the unbanked and underbanked.
Fintechs, leveraging AI and predictive analysis tools, have not only made certain features more ubiquitous— such as free debit card issuance, early direct deposit, no account minimums, no monthly fees, and zero overdraft fees—but have also disrupted and triggered significant change across the digitally-enabled-user banking experience provided by traditional banks. Additionally, nonbanks often have less stringent requirements for opening an account than conventional banks. Chime, for example, does not require a credit check to open an account, making it more accessible to those with poor credit or no credit history.
Fintechs have not solved every issue of financial inclusion across the financial services industry, but they certainly have driven innovation, inclusivity, and disruption. These are key characteristics Bailard’s Technology Equity Research team looks for as it screens investment opportunities in the financial services industry.
In addition to offering low-cost financial services, nonbank providers also offer financial education and literacy for the unbanked and underbanked. Many platforms offer educational resources and tools that help users understand financial concepts and manage money more effectively. This is particularly useful for people who are new to financial services and may not have the knowledge or experience to make informed decisions. For example, CashApp offers a free financial education program called CashApp Boost, with tips on budgeting, saving, and investing. Similarly, Venmo provides resources and information on personal finance, such as how to build credit and manage debt. These enhancements can be particularly valuable for the unbanked and underbanked, who often lack access to financial education.
Fintech Product Development
We also note a trend in nonbanks driving financial inclusion through new products that are more tailored to the unbanked and underbanked. Many of these new offerings have provided an avenue towards escaping the predatory payday loan industry. It has not been uncommon for payday lenders and loan sharks to take advantage of financially-vulnerable individuals by offering cash-strapped customers exorbitantly high interest rate loans, ultimately making repayment burdensome.
Anecdotally, it is more common for digital payments platforms and mobile banks to offer loans and credit payment products—such as buy now, pay later—to consumers with limited access to broader banking services. While certain aspects of the terms behind these products have received scrutiny, these loans are typically more favorable and more accessible to low-income individuals. Offerings such as buy now, pay later, are generally structured to allow a consumer to make four interest-free payments every two weeks. Again, while fintechs may not be reinventing the wheel as it pertains to loans and credit offerings, they are forcing traditional banks to optimize their products in order to be more competitive.
CashApp’s free debit card (called Cash Card) offers “Boosts,” allowing users to earn discounts and rewards at select merchants. This rewards-like feature linked to a user’s debit card is still relatively nascent. The benefit of helping users save money on everyday purchases can be particularly valuable for low-income households. As another example, Venmo offers Venmo Credit, which is a line of credit that can be used to make purchases. With often limited access to credit, the underbanked segment is likely to find this especially useful. Usage of Venmo Credit allows the underbanked an avenue to make purchases and build credit history, both of which can greatly aid future financial stability.
All that said, it’s imperative we highlight the importance of ensuring accounts are FDIC-insured in light of the recent volatility in the banking sector surrounding bank deposits. Users of mobile payment and/or banking platforms should be aware that not all banking institutions are insured by the FDIC. Numerous fintechs catering to digital payments and mobile banking are registered banks or leverage partner banks for FDIC insurance. However, this is not always the case and may often depend on the type of product and services being utilized. Nonbank payment companies are typically subject to less rigorous regulatory oversite than traditional banks. Users of nonbanks may be subject to contractual rules and procedures that are not supported by federal statutory or regulatory standards, resulting in fewer of the protections afforded to bank customers.
In Summary
Nonbanks have emerged as key players in promoting financial inclusion for the unbanked and underbanked in the U.S. Through digital payment services, savings accounts, loans, and educational resources, nonbanks have made it easier for individuals to access more traditional financial services.
Make no mistake about it, many of the consumer-friendly banking and financial services brought to market by fintechs have forced traditional financial institutions to reevaluate product offerings and adopt more consumer-friendly policies, while also modernizing user experiences to mitigate attrition across business lines. In our view, this has the potential to continue improving financial stability and increase economic opportunities for millions of Americans who are currently excluded, in some form, from traditional banking services. As such, emerging fintechs and nonbanks are likely to play an increasingly important role in promoting financial inclusion with a strong positive societal benefit for years to come.
1 https://www.fdic.gov/analysis/household-survey/2021execsum.pdf
2 https://www.pewresearch.org/internet/fact-sheet/mobile/
3 https://usa.visa.com/content/dam/VCOM/regional/na/us/run-your-business/documents/2023-visa-remittance-landscape-study.pdf