Fintechs, the game changer in terms of financial inclusion

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As fintech pushes traditional lenders to act to catch up and rethink the products and services they offer, financial inclusion remains one of the key topics to address, as more than half of working adults globally are excluded from financial services

Financial inclusion works to remove the barriers that prevent people from participating in the financial sector and using these services to improve their lives. Through the evidence presented in “Transforming Our World: The 2030 Agenda for Sustainable Development”, it is shown that digital financial inclusion can help advance progress towards the Sustainable Development Goals (SDGs), working towards achieving goals such as no poverty, zero hunger, quality education and other things that have a social and economic impact for millions of people around the world.

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

In the US alone, 63 million adults (22%) are either unbanked or underbanked, and 7.1 million (5.4%) of US households were unbanked in 2019. Additionally, there is a gap between banked/served and underserved communities as minorities suffer the most, with black and Latino households, for example, accounting for 64% of unbanked households in the US and 47% of underbanked households. Ethnic minorities are not alone, 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 topic, as 62% of LGBTQ+ respondents in an Experian survey said they had struggled with their personal finances because of their gender identity or sexual orientation. .

Fortunately, with growing smartphone adoption across demographics and technological advancements in banking infrastructure, the barriers and costs of creating financial services products have dropped, allowing the rise of fintechs to change the way which minorities are treated.

racial minorities

Even though rates of unbanked people are falling, they remain high in communities that experience income inequality and systemic injustices. The banking system’s discrimination against communities of color and low-income communities is already a long-standing reality that has materialized in a variety of ways, including fewer banks in non-white neighborhoods, fewer mortgage approvals, and higher fees when members of these demographic groups do so. use financial service providers.

This perpetual treatment has driven black financial entrepreneurs to create financial services and banks for their communities. As the black community has an annual economic impact of $1.4 trillion in the United States, First Boulevard was established in 2020 with the promise of eradicating the wealth gap for black America through education financial. 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, has garnered public interest because its goal is to serve Black and Latino people and business owners. It has raised $40 million in seed funding from private investors, with the aim of launching loan, credit and investment programs by the end of 2022.

Cheese Bank is another digital bank born out of the need to support minorities, aiming to help Asian communities and immigrants through a cashback rewards program. Designed to be accessible to customers with no credit history, the company is also working on being able to welcome new customers without the need for a social security number. It offers 10% cashback at over 10,000 Asian stores and businesses and has pledged to donate $10 for every new user to a nonprofit organization focused on helping the community.

Closing the gender gap through financial inclusion

Globally, around 2 billion adults are still unbanked – without an account at a financial institution or through a mobile money provider. Women are overrepresented among the unbanked globally. Around 980 million people are unaccounted for, representing 56% of all unbanked adults globally.

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

There are at least $700 billion in revenue opportunities to better serve women as customers. Even though studies show that women save more relative to their total income than men, repay their loans at a higher rate, buy more products per customer and are more loyal to their banks, many FSPs are missing out. female customers because women may not easily access their services or because their products and services are not sufficiently tailored to meet women’s needs, behaviors 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 loans, they are less likely to receive financing to start up and develop their business, and that they are not being served equally and effectively.

With the rise of digital banks and fintech startups, there are now more opportunities for women. Starling Bank, for example, launched the #MakeMoneyEqual campaign in 2018 aimed at eliminating negative gender stereotypes from the public conversation about money and personal finance. Using discourse analysis, they found that the media divided women and men by language when discussing money: 65% of articles defined women as excessive spenders and 70% of articles defined earning money. money as a masculine ideal.

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

sexual minorities

Even though the LGBTQ+ community in the United States is estimated at 30 million with a spending power of $1 trillion, LGBTQ+ consumers are nearly twice as likely to report having poor credit scores or very poor, unlike non-LGBTQ+ consumers (16.1% vs. 8.2%). One in five LGBTQ+ women has a bad credit score (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%).

Gender-nonconforming transgender and LGBTQ+ people also experience difficulty with credit reports and credit scores after changing their legal name. This results in fragmented credit files that do not contain the full credit history of the consumer and can lead to a decline in credit rating as well as denial of credit due to insufficient credit history.

Underserved by traditional banks, the LGBTQ+ community needed a service that could offer them the same benefits. Therefore, Daylight was launched in 2020 with the goal of helping LGBT+ people manage their finances and prepare for their future with products and content designed specifically for their needs. It allows users to create an online account with a name of their choice, regardless of what appears on their ID documents, and receive financial coaching focused on goals common to many LGBTQ+ consumers, such as savings for surrogacy or adoption.

Like Daylight, Pride Bank was launched in LATAM the same year, offering a basic product package, including a rainbow-branded prepaid card with the customer’s chosen name on it. As approximately 10% of Brazil’s population (210 million) are members of the community, neobanking aims to address the friction, pain, and wealth gap that these people face on a daily basis.

Beyond the United States and Brazil, other markets are considering 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 rates and reduced processing fees, after the same-sex marriage law came into force country in 2019. Taiwan remains the only Asian country to recognize same-sex marriage.

The application of this type of banking model in the UK and Europe seems to require more research due to the presence of already established challenger banks, from the 27 different EU markets in addition to the now UK. outside the block, and all related regulations and paperwork. .

The bright side

As can be seen, the widespread use of digital financial services is already offering support to minorities for better control of their finances and greater economic opportunities. Banking apps, credit apps, and even investing apps are beginning to democratize the financial services industry and bring new levels of access and equity to historically underserved people and places. So, with the traditional banking approach no longer working, underserved demographics are finally getting the financial products they need.

About Claudia

Claudia is a Content Writer at The Paypers and works within the Banking & Fintech team at The Paypers. With 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 an avid researcher, a meticulous writer, and a strong advocate for diversity and inclusion.

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