Fintechs, the game changer when it comes to financial inclusion

Financial inclusion strives to remove the barriers that exclude people from participating in the financial sector and using these services to improve their lives. Through evidence presented in ‘Transforming our World: the 2030 Agenda for Sustainable Development’ it is shown that digital financial inclusion can help progress toward the Sustainable Development Goals (SDGs), working towards achieving goals like no poverty, zero hunger, quality education, and other things that have a social and economic impact for millions of people worldwide.

More than half of the world’s working adults (2.5 billion) are excluded from financial services. It is even more problematic among low-income populations in emerging and developing economies, where approximately 80% of poor people are excluded.

In the US alone 63 million adults (22%) are either unbanked or underbanked, with 7.1 million (5.4%) of the US households being unbanked in 2019. Moreover, there is a gap among banked/served and underserved communities, as minorities are the ones that suffer the most, with Black and Latinx households, for example, representing 64% of the US’s unbanked and 47% of its underbanked households. Ethnic minorities are not the only ones, as there is also a persistent gender gap (unchanged since 2011) in access to basic accounts in the financial system, where 72% of men have access to an account while only 65% of women have an account. For sexual minorities, financial inclusion is also a sensitive subject, as 62% of LGBTQ+ respondents of a survey by Experian, reported having experienced challenges with their personal finances because of their gender identity or sexual orientation.

Luckily, thanks to the growing adoption of smartphones across demographics and technological advances in banking infrastructure, the barriers, and costs to create financial services products have fallen, allowing the rise of fintechs to change the way in which minorities are treated.

Racial minorities

Even though the rates of unbanked people may be declining, they remain high in communities that experience income inequality and systemic injustices. Banking system discrimination against communities of colour and low-income communities is already a long-dated reality that has materialised in a variety of ways, including fewer banks in non-white neighbourhoods, fewer mortgage approvals, and higher fees when members of these demographics do use financial service providers.

This perpetual treatment made Black financial entrepreneurs create financial services and banks for their communities. As the black community has USD 1.4 trillion in annual economic impact in the US, First Boulevard was created in 2020 with the promise to eradicate the wealth gap for Black America through financial education. It offers a variety of features including roundups to support historically Black colleges and universities (HBCUs), in-app chat, a marketplace, savings goals, and expense tracking.

A similar initiative, Greenwood, gained the interest of the public eye as its purpose is to serve Black and Latinx people and business owners. It raised USD 40 million in seed funding from private investors, aiming to launch lending, credit, and investment programs by the end of 2022.

Cheese Bank is another digital bank that was born from the need to support minorities, aiming to help Asian communities and immigrants through a cashback rewards program. Tailored to be accessible for customers with no credit history, the company is also working on being able to take on new customers without requiring a social security number. It offers 10% cashback at more than 10,000 stores and Asian-owned businesses and has pledged to donate USD 10 for each new user to a non-profit organisation focused on helping the community.

Closing the gender gap through financial inclusion

Globally, about 2 billion adults remain unbanked – without an account at a financial institution or through a mobile money provider. Women are overrepresented among the world’s unbanked. About 980 million do not have an account, representing 56% of all unbanked adults globally.

Financial institutions have been trying to meet the needs of women for years now, coming up with specialised women’s banking products, women appointed to head up banking programs, or banks originally designed to be women’s banks. Even with all these things taken into consideration, the gender gap in financial inclusion remains still intact, with women in emerging economies 20% less likely to have a bank account than men, and 17% less likely to have borrowed formally.

There is at least a USD 700 billion revenue opportunity from better serving women as customers. Even though studies show that women save more relative to their total income than men do, pay back their loans at a higher rate, buy more products per customer, and are more loyal to their banks, many FSPs miss out on female customers because women can’t easily access their services or because their products and services are not sufficiently tailored to meet women’s needs, behaviour, and preferences.

Some of the biggest problems in the industry are represented by the fact that women are less likely to be approved for mortgages and other retail credit, they are less likely to receive funding to start and grow their businesses, and they are not being serviced equally and effectively.

With the rise of digital banks and fintech startups, there are now more opportunities for women. Starling Bank, for example, started the #MakeMoneyEqual campaign in 2018 aiming to remove negative gender stereotypes from the public conversation around money and personal finances. By using discourse analysis, they found that the media split women and men by language when discussing money: 65% of articles defined women as excessive spenders, and 70% of articles defined making money as a masculine ideal.

Another challenger bank that tries to address women’s needs is Elas, an inclusive bank that aims to promote women in the business world by helping them get a leg up on the investment market ladder. In Latin American, Jefa is building a challenger bank designed for women, focusing on solving the problems that women face when opening a bank account and managing it.

Sexual minorities

Even if the LGBTQ+ community in the US is estimated to include 30 million people with USD 1 trillion in spending power, LGBTQ+ consumers are nearly twice more likely to report that they have poor or very poor credit scores in contrast to non-LGBTQ+ consumers (16.1% vs. 8.2%).  One in five LGBTQ+ women has poor credit scores (20.7%). Nearly a third of Black LGBTQ+ consumers have poor or worse credit scores (31.3%), as do more than one in six Hispanic LGBTQ+ consumers (18.8%).

Transgender and gender-nonconforming LGBTQ+ people also experience difficulties with credit reports and scores after they change their legal names. This results in fragmented credit files that do not contain the consumer’s full credit history and can lead to a drop in credit score as well as denial of credit due to a lack of sufficient credit history.

Underserved by the traditional banks, the LGBTQ+ community needed a service that could provide them with equal benefits. Therefore, Daylight has launched in 2020 aiming to help LGBT+ people navigate their finances and prepare for their futures through products and content designed specifically for their needs. It allows users to set up an account online with their chosen name, regardless of what appears on their ID documents, and receive financial coaching focused on goals common among many LGBTQ+ consumers, such as saving for surrogacy or adoption.

Like Daylight, Pride Bank has launched in LATAM in the same year, offering a basic package of products, including a rainbow-branded prepaid card with the client's chosen name on it. As roughly 10% of Brazil's population (210 million) is a member of the community, the neobank aims to solve the friction, pain, and wealth gap that such individuals face daily.

Beyond the US and Brazil, other markets are looking at offering more inclusive services. In 2019, Taiwan’s O-Bank launched its ‘524 O! My Rainbow’ initiative to provide preferential loans and mortgages to same-sex couples, including lower interest rate and discounted processing fees, after the country’s same-sex marriage law took effect in 2019. Taiwan remains the only Asian nation to recognise same-sex marriage.

Applying this kind of banking model to the UK and Europe seems to require more research because of the presence of already established challenger banks, the EU’s 27 different markets in addition to the UK’s, now outside of the bloc, and all the related regulation and paperwork.

The bright side

As it can be observed, the widespread use of digital financial services already offers support for minorities to gain more control over their finances and greater economic opportunities. Banking apps, credit apps, and even investing apps are starting to democratise the financial services industry and provide new levels of access and equity to historically underserved people and locations. So, as the traditional banking approach doesn’t work anymore, underserved demographics are finally gaining the financial products for their needs.

About Claudia

Claudia is a content editor at The Paypers working on the Banking & Fintech team at The Paypers. Holding a bachelor’s degree in Journalism, she is very passionate about exploring the latest news on financial inclusion, financial literacy, digital banking, and Open Finance. Claudia is a diligent researcher, a meticulous editor, and an active advocate for diversity and inclusion.