Editor’s note: Thomas Abell is a Senior Manager with Accenture Development Partnerships, where he works to improve financial inclusion globally. He is hosting a panel on the subject at “Digital Transformation Through FinTech,” a conference organized by Orange Silicon Valley on Feb. 16. in San Francisco.
In 2016, 7% of U.S. households have no checking or savings accounts, according to a report issued recently by the Federal Deposit Insurance Corporation. That figure amounts to 9 million U.S. households without a traditional bank account. Additionally, the FDIC study found that 19.9% of U.S. households are “underbanked,” or rely on financial services outside the banking system such as money orders, payday loans and check cashing or pawn shops. According to CGAP, a leader in financial inclusion research globally, more than 2 billion working-age adults (roughly half of the world’s adult population), do not have an account at a formal financial institution, a daunting figure that has made “financial inclusion” a key focus for development.
A new book by Lisa Servon, “The Unbanking of America: How the New Middle Class Survives,” explains how the financial services landscape has changed in America and how innovative financial institutions and FinTechs are rising to fill the gaps. The use of mobile platforms and data-driven analytics in finance have significantly broadened the opportunities for improving financial inclusion. 2017 promises to be a year of continuing innovation. A few key trends to watch are: the use of alternative credit scoring models, the use of APIs in financial services to enable new services, and the continuing growth of mobile applications and ongoing transition to smartphones.
New Credit Scoring Model
Alternative approaches to credit scoring can open opportunities for more people to access credit, especially in developing countries where traditional credit services are under developed. In Asia, for example, Lenddo provides a credit scoring model based on mobile phone and social network data. Lenddo’s mission: Improved financial inclusion for at least 1 billion people around the world using credit scoring and social verification based on non-traditional data. These new credit approaches, combined with mobile-money distribution services, can reduce the cost of delivering credit services to the poor.
In Kenya, the Commercial Bank of Africa has partnered with Safaricom to create a digital credit product called mShwari. mShwari is automatically available to Safaricom mobile customers via mPesa, their leading mobile payments app. mShwari generates a credit limit programmatically based on the customer’s mPesa payment history. The customer can access short-term loans with a few keystrokes.
San Francisco based social lender, SoFi has expanded their student loan refinancing model into mortgage and personal lending, leveraging the usage of alternative credit scoring models that include professional experience and monthly income versus expenses. SoFi’s recent $100 million acquisition of Zenbanx has made it the investment darling of this new area of financial services—and proof of the rich opportunity in servicing non-traditional customers.
New Interfaces, New Opportunities
The opportunity is much larger than credit. Financial service APIs are emerging as a new way to drive financial inclusion. APIs enable financial services to interoperate more effectively across different service providers. Today, most people are dependent on their bank to provide new services and interfaces to their financial accounts. Many governments are developing API regulations that will require financial firms to provide standard interfaces for accessing account information and handling payments. This innovation means that third parties can build products with better interfaces, reducing the dependence on proprietary apps offered by banks.
The implication is that service innovations could increase the availability of financial services for low-income customers. With the proper security in place, services could be extended to Facebook and other social platforms.
As examples for US developers and regulators: The EU’s Payment Services Directive II includes a requirement to create open access to payment accounts to initiate payments and to access account information. India is launching Universal Payment Interfaces (UPI) to drive interoperability and innovation in mobile payment services. UPI will further extend a transformation of India’s financial system that includes the world’s largest biometrics identification system, Aadhaar, which reached more than 1 billion users in 2016. Although these API regulations won’t be required until around 2020, many leading firms are starting to develop new products that should extend the interface to accommodate this broad universe of new customers.
Hot Lessons from Emerging Markets
In developing countries, mobile payment services have been the primary method of bringing financial access to the poor. Kenya led the way with Safaricom’s mPesa services, which is used by 70% of the adult population. India promises to be in the news for 2017 for mobile payment systems, following their “demonetization” announcement in October 2016, where the government eliminated large denomination currency and sent the cash-based economy into a tailspin. Payment provider PayTM has seen rapid growth as the unbanked population scrambles to adopt non-cash payment services.
The rise of smartphone adoption in developing countries could also drive a move away from the SMS-based services currently in use. Smartphone-based services have the potential to improve security and features to reach a broader population. There is also indication that in developed countries, 2017 could be the year of a breakout success in mobile payments from providers like Apple or Facebook’s Snap. Alternative services like Venmo, targeting peer-to-peer payments among Millennials, could be adapted for the unbanked.
It is time for financial stakeholders to look beyond the stigma associated with payday loans and other services for traditionally unbanked consumers. There is some major action happening in this area that cannot be ignored.