Can FinTech Close the Gap Between ‘Unbanked’ Populations and Financial Services?
The Federal Reserve’s finding that nearly half of U.S. adults can’t cover a $400 emergency expense without borrowing money is a sobering statistic, and it speaks to the economic insecurity that’s an everyday reality for many. But there may be answers in financial technology.
Established and emerging FinTech solutions offer real potential to give unbanked people new access to financial services and impact their financial lives.
“What challenges are facing underserved populations, what innovative solutions can FinTech offer, and how can those solutions be advanced? These are questions we need to be asking,” said Ed Dumas, a lead markets specialist at the Federal Reserve Bank of Boston.
Dumas and Aparna Ramesh, the Bank’s senior vice president and chief financial officer, teamed up with the Aspen Institute’s Financial Security Program on Wednesday to host a half-day conference, “FinTech Financial Inclusion – and the Potential to Transform Financial Services.” The conference at the Boston Fed brought together experts in the populations that need financial services and the FinTech tools that can help them. The goal was to raise awareness and get people thinking.
Ramesh said the conference was designed to encourage “collisions” between people with different experiences and specialties that could lead to good conversations and ideas. “We’re trying to build these collisions, so people come out of this conference with greater awareness, and then do something about it,” she said.
The gap between financial services and lower-income communities is often self-sustaining. Say, for example, someone living paycheck-to-paycheck suddenly has a $400 car repair expense, and the choice may be to either fix the car or miss work. With no savings to draw from, borrowing money is the only answer. But with no credit history, a reasonable interest rate is out of reach, and debt worsens.
But FinTech may be a solution to help break the cycle. A lot of it begins with mobile devices, which are increasingly common across income levels and a lot easier to access than the bank branch across town. A mobile device can help a person sign up for a service that tucks away a few dollars a week into an emergency account. Or it could connect someone to a broader pool of lenders who use additional types of data to help underwrite and extend credit with better terms and interest rates than were traditionally available. FinTech makes services more efficient and scalable for both a company to deliver and a customer to receive, so the pool of available customers and profitable services widens.
FinTech can also have an impact on a more fundamental level. For instance, artificial intelligence combined with big data can offer insights that expand the often static criteria for credit-worthiness – like credit history. AI could potentially be used to analyze various consumer behaviors and spending patterns that show certain borrowers are good credit risks, whether or not they have long credit histories.
Besides academics, regulators and public policy experts, the Boston Fed conference included business people who have successfully targeted underserved populations with FinTech products. Panelist Ram Palanaippan is the CEO of Earnin, which gives workers affordable access to money in their coming paychecks via an app, if they need cash before payday arrives. Boston Mayor Martin J. Walsh, who has actively promoted financial inclusion, and Governor Lael Brainard of the Board of Governors of the Federal Reserve System gave keynote remarks.
Ida Rademacher, director of the Aspen Institute’s Financial Security Program, said income volatility is affecting more people at ever-higher income levels, and it’s essential to learn how FinTech solutions can expand access to much needed financial services.
“People in financially vulnerable communities need the same access to safe, affordable financial services as everyone else,” Rademacher said. “It’s important to talk about ways to incent FinTech providers to design products tailored to their needs, so they can navigate their financial lives and come out ahead.”
Find a video replay of the full conference here.