The Federal Reserve reports that 16% of Americans are underbanked.While underbanked individuals have some sort of bank account, they also tend to rely on alternative financial services such as payday loans, money orders, check cashing services and more, to take care of their finances. However, at the start of the pandemic, these Americans swiftly turned to community financial institutions for quicker access to stimulus checks and to better manage their finances. At the same time, COVID-19 accelerated the shift to digital across industries and banking was no exception.
The pandemic demonstrated just how important digitization is for community financial institutions and the underbanked. Therefore, fintech is key for banks to make a meaningful impact on financial inclusion – it just requires the right strategy.
Not All Fintechs Are Created Equal
Despite having a bank account, many underbanked individuals opt to use third-party services, including money orders, payday loans, or prepaid cards to fund purchases. Oftentimes this is due to the need for quicker access to funds. Today, many consumer-focused apps offer capabilities like the ability to deposit checks or send and receive money.
However, this comes at a cost, often in the form of fees.
According to the Financial Health Network, unbanked and underbanked Americans spent $189 billion in fees and interest on financial products in 2018, the latest year for which there is complete data. Using the Federal Reserve’s estimate that some 63 million Americans are unbanked or underbanked, that would be an average annual cost of $3,000 per person.
Unfortunately, these aren’t the only costs consumers may face when using third-party financial services.
Alternative financial services and apps do not offer the same level of security as FDIC-insured financial institutions. If an issue arises with a payment or money transfer for example, the individual would not have the same protections from a standalone fintech app or alternative financial service provider that they would from an FDIC-insured financial institution.
On the other hand, fintech companies that partner with financial institutions are FDIC-insured, which ensures customers’ funds are safe. This is something few consumers realize today, but it is a point worth raising.
Better Fintech, Deeper Engagement
Not only do fintech companies that operate on their own lack the same security protections as fintechs that work directly with a financial institution, they typically offer just one or two capabilities, such as sending and receiving money or managing a budget. Yet, fintech companies that operate within the banking sector can provide accountholders with a full range of digital banking services in one place.
By centralizing a suite of digital banking services in one platform, accountholders can more easily leverageall of the financial tools available to them – from automated savings to budget tracking andmoney management. This is key, as the right technology should provide easy-to-understand, convenient financial services in one place, which lowersthe cost of adoption and helps remove barriers to access for underbanked consumers.
Since large portions of the underbanked population often operate outside of the formal financial sector, bringing them into the fold also requires financial education that’s relevant to their needs. A siloed fintech app with one or two functionalities cannot support this.
Instead, end-to-end banking apps integrate financial education within their platforms to help consumers better manage their money. Incorporating opportunities for learning is important for reaching underbanked individuals, as it helps expand their financial literacy and deepens engagement with their financial institution.
Fintech & Human Touchpoints Go Hand-in-Hand
Fintech alone cannot solve for financial inclusion. While budgeting tools, payment apps and other fintech innovations are useful, personal finance is incredibly nuanced and can easily become overwhelming for historically underbanked individuals.
Additionally, the pandemic has forced consumers, acrossall income levels, to re-evaluate their finances. As they consider how to navigate this new economic landscape, many are turning to community banks for advice and support.
Unlike standalone apps and third-party financial services, community financial institutions can complement their fintech investments with personal, human-to-human support. Fintech can make it easier for underbanked consumers to access digital banking services, but it’s the community financial institutions that can provide a human touch and this level of personal service is crucial given the economic shifts experienced in recent years.
By strategically partnering with fintechs and deploying the right technology, financial institutions can extend access to financial services for the underbanked, strengthening their relationships with the communities they serve. Now that’s innovation for inclusion.
Abhishek Veeraghanta is Head of Pidgin, a new, innovative and secure faster payments ecosystem, enabling financial institutions, business owners and individuals to process transactions faster and with lower fees.