By Clayton Weir, Chief Strategy Officer at FISPAN
The unbanked challenge
Unbanked is a term for those that don’t have a checking or savings account at a bank or credit union. According to the Federal Deposit Insurance Corp, over 7 million Americans fall into the unbanked category. Those who are unbanked tend to use alternative (and more costly) forms of financial services, such as payday lenders, check-cashing stores, and money orders for their financial needs.
As methods of payment are shifting, reaching the unbanked population becomes more important than ever before. Before, many people were paid in cash for their work. But as companies and employers move to digitized payment methods, such as ACH and direct deposit, employees who were previously paid in cash are scrambling to find other ways to receive their payments.
Technology & Open Banking Can Help
The accessibility that technology provides will help these large segments of society that remain unbanked. Increased financial inclusion brought about by technology will also play an important role in the new economy once the current pandemic is over. The use of open APIs that enable third-party developers to build applications and services around the financial institution will provide financial transparency options for account holders ranging from private data to open data.
Over the past decade or so, fintech innovation has occurred at a rapid pace and innovators have had to make do without meaningful access to financial data and the processing ecosystem. Most of the value that has been created in North America has been through rudimentary maneuvers such as screen scraping, instead of the nationwide open banking programs that already exist in other countries. Recently, there has been a wide range of market-driven initiatives to build a platform for a North American version of open banking, and we are seeing this happen more rapidly.
Innovation Will Lead to Inclusion
Following this past year and a half of living in a digital-first world, innovators in America are anxious to create new disruptive innovations. If we can provide solid building blocks for them, they will be able to move quickly to contribute to the economic recovery through more affordable solutions and increased financial inclusion.
In order for open banking to work, customers must provide consent before a bank can expose their data. This puts the customer in control. It is through this transparency that we can build stronger relationships between all stakeholders in the ecosystem.
Open banking initiatives will help unlock this type of data for consumers and let them share it with other potential lenders more easily. These solutions will also remove the technical aspect for unbanked users, such as the need to have access to a computer (they could carry out most of their transactions using a mobile phone).
We need to allow innovation and inclusion without putting up unnecessary obstacles. This is the only way to challenge the current situation. In order to do this, regulators must continue to craft open banking rules to help usher unbanked individuals into the financial ecosystem. The current pandemic has only served to highlight how critical it is for regulators and merchants to support payment methods that can be accessed by those who do not have traditional bank accounts.