Leveraging Technology to Improve Financial Inclusion in the United States

By Ismail Amla, Executive Vice President, Professional Services, NCR Corporation

The benefits of financial inclusion are known and numerous. Households lacking access to bank accounts or relatively affordable mechanisms for receiving, paying and spending money end up using a significantly higher percentage of their income on expensive, cash-based financial options. These options, like money orders and payday loans, tend to have much higher fees and usurious interest rates. Households suffering from financial exclusion are disproportionately poor and less educated. The highest percentages of these excluded households are in less well-off countries. But even in the United States, according to the latest FDIC surveys, 5.4% of households were unbanked. That group makes up 7.1 million households. Excluding people from the financial system also holds back economic growth; money that could have been spent on goods, services and education are instead trapped in the cash economy or used to pay punishing fees and interest.

I believe the world is at a signature moment. Just as economic growth has dramatically reduced global poverty rates, ubiquitous, cheap and connected technology can dramatically reduce financial exclusion rates. It is now up to companies like NCR and the broader fintech ecosystem working collectively to make that happen. Together, we believe we can dramatically reduce financial exclusion within the next five years in the developed world, and within the next decade in the developing world.

Fostering increased access to technology, greater openness in the financial system, and a more robust and fair marketplace for financial products will move us towards this goal. Combined, these three forces factors are already driving a fast-paced revolution in fintech. This revolution is both a moral imperative to improve lives and a once-in-a-generation business opportunity that will benefit society by increasing overall economic growth.

Ubiquitous Digital Access Drives Opportunity

While the Digital Divide still exists, technology progress and reduced costs are quickly shirking that divide. According to Our World in Data, 640,000 new people come online every day. Smartphones and cheap or free data access are the critical instrument of progress. Today low-end smartphones cost less than $100 and forward-thinking carriers, such as Jio in India, are offering low-cost wireless data plans. While data plans for smartphones vary widely by country and are often pricey, Wi-Fi access is far cheaper and often free. If these trends continue, the number of people who do not have access to the Internet will continue to fall.

A whole generation of new banks, such as Chime and Monzo, have built businesses based entirely on mobile phone applications. In China, for example, where digital payments are now the dominant form of exchange, the phone has become the predominant gateway to financial services. In the developed world, fewer people are using cash and employers are moving quickly away from paper check payments. COVID further accelerated the transition from cash to digital payments.

Traditionally, the unbanked and underbanked use digital financial services at a much lower rate than higher demographic households. But we have clear evidence that digital financial inclusion can work in less developed economies. In Africa, over 200 million people use mobile e-cash systems. In Kenya, the M-Pesa mobile cash systems is nearly universally adopted. With smart product designs, we can change that. The M-Pesa system was designed with local culture and values in mind.

The tremendous pressure upstart fintechs are placing on traditional bank processes is causing a welcome unbundling of financial services, and competition on multiple levels. Venmo, for example, offers to give customers who set up direct deposit instant access to paychecks. Traditionally, banks have taken a day or two to process these deposits. For the poor and financially excluded, two days can mean the difference between paying rent on time and incurring a penalty. Unbanked users who want to move money across borders in relatively small sums, as are common for remittances, can now pick from several options, including cryptocurrencies. Zelle, which is managed and owned by a consortium of major U.S. banks, allows users with accounts to instantly move money with no fees.

Concrete Steps Towards Inclusion

While the winds of technology trends may be at our backs and the rapid rise of fintechs may be providing the impetus to rethink financial services, there are still a number of concrete steps that the financial services industry should consider.

• Remove the usual obstacles. Minimum fee balances or service fees chase off low-income consumers. In fact, according to the World Bank, the primary reason the unbanked cite for lacking an account is simple lack of money. Clearly, this is something that is doable. CapitalOne, a major U.S. bank, just announced it was discontinuing overdraft fees while continuing to offer overdraft protection.
• Incentivize mobile banking. According to the World Bank, lower income consumers tend to have a mobile connection rather than home-based Internet. Designing mobile banking and financial services products that appeal to the unbanked will reduce exclusion. It’s also just good, universal product design. There is a very good reason why the dominant finance platform in most parts of the world that are either primarily unbanked or were only recently banked is the smartphone.
• Expand access points to advanced digital services. There is a good reason why convenience stores, supermarkets and other stores all have ATMs. This is because ATMs attract customers and make it easier for them to pay. In the digital economy, these same access points can take on an equally important meaning for stores as hubs of digital delivery of financial services, which might even be co-branded between the banks and the stores. Physical real estate combined with smart digital access points brings services closer to those in the community who might not make it into a bank branch on their own – and who might otherwise not have easy access.
• Emphasize prepaid products. In 2017, nearly 27 percent of unbanked U.S. households used prepaid cards according to an FDIC household survey. Prepaid credit cards or debit cards can offer a glide path to credit histories which can unlock other key doors. These cards are safer than cash or checks and can be used for online purchases.
• Find new ways to analyze customers and give them access. In the U.S, several companies are using artificial intelligence to create alternative and more accurate creditworthiness assessment systems. Created by ex-Google executives, Upstart looks at over 1,000 more indicators to assess whether someone is likely to pay their loans back. Upstart is actually more accurate than legacy credit rating products and it is particularly good at identifying people who might not get credit under traditional underwriting processes but are actually quite good risks. Similar systems can work at lower levels of finance and loans, where the unbanked might operate.

Making these types of shifts will require us all to walk in the shoes of those who are on the outside looking in, to try to imagine what it might be like to live a life of financial exclusion. The time is now. The technology is here. The opportunity is massive. Let’s make a big dent in financial exclusion, not in our lifetimes, but in the next decade – or even sooner.