Financial inclusion: understanding the needs of the underbanked
In my early days working at Barclays, I remember the launch of Basic Bank Accounts, aimed at creating a product which anyone could have, including those who could not qualify for credit.
Fintech start-ups can help drive the push for financial inclusion
Its aim was to increase “access to banks”, but (perhaps with the benefit of hindsight) we can debate how effectively this solution met the needs of those it was intended for.
Financial inclusion is not just about the ability to open a bank account. It is about access to a wide range of products and services, with fair and transparent pricing and benefiting from the level of product innovation that mainstream customers enjoy.
The ‘underbanked’ may indeed have access to bank accounts, but they remain underserved in terms of propositions targeting their needs.
Perhaps it’s not surprising that our biggest banking institutions are not an engine-room for propositions for those who do not fit the models and behaviours based on the majority.
Paradoxically, the so-called ‘universal banks’ cannot be a bank for everyone, but rather a bank for the ‘mainstream’.
In seeking the innovation that will address the wide range of sources and drivers of financial exclusion, we can look to smaller, more targeted firms – especially the fintechs.
The Kalifa Review highlighted the importance of fintech in “delivering better financial outcomes for customers”, and (more recently) the Financial Inclusion Commission noted the prominence given to financial inclusion within the Review.
The Commission noted: “Fintech can help in solving many of the challenges that lead to people being excluded from financial products and services.”
By way of example, in the market for personal loans, we have seen how, over the last five years or more, a vibrant market has grown up both for the manufacture and distribution of loans to those customers unable to qualify for the headline rates offered by mainstream banks.
Borrowers visiting the likes of MoneySuperMarket or ClearScore are presented with offers from literally dozens of lenders, with many being businesses that have only really emerged in the last few years.
These lenders do not see the underbanked as the ‘fringe’ who will put up with whatever they can get from a market which is not focused on them.
They build businesses around targeting this group of customers, and the best of them invest heavily in researching and understanding their needs and providing products and services and pricing that truly and fairly reflects their circumstances.
And, while the Basic Bank Accounts of the 1990s were about allowing more people to have a bank account, the focus today is on banking services.
Prepaid cards and e-wallets have provided access to the ability to make payments to shops and people without a bank account. For the generation starting to need access to this service, there is no immediate assumption that there needs to be a ‘big bank’ with a ‘big brand’ involved.
And there continue to be many new start-ups who see the opportunity to use new technology and new data services and analytics to offer propositions to many of those that could be considered to be financially excluded or ‘underserved’.
These start-ups are an engine for innovation, harnessing the creativity and fresh thinking of a new generation of entrepreneurs. They challenge us – the bankers – to take a fresh look at how we develop products, make decisions and price for risk.
They highlight that, in a highly dynamic society, the ‘norms’ are becoming less… ‘normal’. Employment patterns are less linear and traditional. Geographical mobility is much greater. And we are all now very aware of how global events can wreck apparently clear, predictable life plans.
When it comes to credit or insurance or investment, there needs to be more flexibility in the approaches to understanding needs, assessing risk and pricing products.
However, while these businesses are born out of a clear insight into the needs of specific segments of those seeking greater access to financial services, what many of them lack is the expertise and capital to fulfil all the obligations of operating within financial markets.
Regulatory permissions, market infrastructure and capital adequacy all stand as potential barriers, inhibiting the growth of this new wave of innovation.
A partnership model would appear to offer the means to unlocking this challenge. After all, even retail giants such as Amazon look to partner with specialist lenders to offer the Amazon Credit Card, and smaller start-ups with infinitely smaller resources can certainly take advantage of this approach.
Banking-as-a-Service (BaaS) providers can enable the capabilities for operating in financial services, allowing the fintechs to launch their propositions. Such service providers are best known for offering product platforms and payment gateways, but for new digital start-ups, the needs extend further into lending – or even banking – permissions, expertise in credit risk assessment and loan pricing, and access to capital.
Financial inclusion must be about much more than access to a bank account. It demands that all customers should benefit from the same level of purpose-driven proposition and the same competitive pricing as mainstream customers are accustomed to seeing.
The fintech market is already rich in start-ups looking to bring such offerings to market, but in order to realise this potential, they must find solutions for regulatory permissions, funding and capital and product management expertise.
This is the opportunity for BaaS providers to act as enablers and accelerators for these propositions for the benefit of ALL customers.
About the author
Andrew Arwas is head of corporate development at Chetwood Financial.
Prior to this, he was business architect for a transformation programme in retail credit risk at Barclays, before taking on the roles of head of strategy and head of change for Barclays Mortgages.
After Barclays, Andrew worked at Capco, ultimately leading the firm’s wealth and asset management practice in the UK.
