Millions of Americans are “unbanked” or “underbanked,”
meaning they have no bank account or cannot access their bank’s full range of
financial services to build credit and plan for the future. Before the
pandemic, the Federal Reserve estimated 22% of adults, or around 60 million
people, fell into this category. The pandemic has undoubtedly increased these
The unbanked population includes some of the hardest working
people in the country — essential workers and those who keep goods moving
through the supply chain, especially young workers and recent immigrants. But
they are invisible to traditional banks, which don’t have these consumers’
financial data to produce FICO or credit scores. FICO scores, for example,
don’t include earning data, so it’s not possible to build a complete picture of
this customer segment’s economic behavior. Until recently, market realities
like this kept unbanked and underbanked people from accessing the services they
The incumbents — traditional banks — failed to build a more
personalized financial solution based on these customers, so the current credit
system just doesn’t work for the millions of underbanked Americans. Even where
traditional banks do have insight into the customer journey, they elect not to
serve customers with a thin credit history or low credit scores.
This reveals a need for innovation in the financial services
space to disrupt the current financial system and make it more
inclusive. Fintech startups are now catering to the unbanked population,
acquiring data that will change the way businesses serve these customers in the
The Problem With Being Unbanked
Why are so many people unbanked? The primary reason is that
they haven’t had time to build a solid credit history. Many are
first-generation immigrants who distrust banks and/or have limited English
skills, and traditional banks aren’t eager to serve them due to their lack of
credit history. Others are students and young adults who are just starting out
and are trying to avoid banking fees. Some may need a second chance after
having accounts closed or other issues that arise due to the customer’s lack of
experience dealing with banks.
Whatever their reasons, people in this situation lack access
to financial services and aren’t able to build a credit history, so they’re
vulnerable to fraud, predatory lenders and the physical risk of having to carry
large amounts of cash. When they make a major purchase like a vehicle or
appliance, they’ll often have to deal with dishonest vendors who sell
substandard products and charge sky-high interest rates to finance loans. They
are likely paying much more to cash checks, obtain money orders for bills and
pay interest on loans than they would incur in banking fees.
This is a demographic that is employed and paying taxes.
Non-U.S.-born taxpayers’ spending power exceeds $1 trillion, and every fifth
small business in the country is owned by an immigrant, adding another $1.5
trillion in sales to their economic impact. But since banks ignore them, they
haven’t had other options. So they work hard, but they don’t get ahead. It’s a
vicious cycle, and fintech is changing that.
Fintech To The Rescue
Tech startups are disrupting the financial services sector
by taking a new approach to an old problem. Consumers are clearly interested in
app-based services, like the ability to use Apple, Google and Samsung mobile
wallet services to shop securely in stores or online. Fintech believes
consumers will be willing to pay a fair subscription rate to open an account
with no credit checks, minimum balances or overdraft fees to access the
financial services most of us take for granted.
There are several other ways fintech companies are stepping
up to fill the gaps left by traditional banks, including offering investment
opportunities. Unbanked people now have access to investment apps that allow
them to open accounts without a minimum balance and participate in stock
trading without paying commission fees. There are also fintech apps that allow
users to open a secure line of credit against a percentage of their personal
savings, which can help them build a credit history. Still other fintech apps
help immigrants who have an established credit history in another country to
convert that international credit data into a format U.S.-based underwriters
can use to evaluate creditworthiness.
What Access To App-Based Financial Services Means For The
Fintech startups aren’t directly competing with traditional
banks because, as noted, the unbanked consumer is invisible to banks, which
won’t likely change. But it’s a consumer cohort that’s worth watching since
it’s young, so their peak earning years are ahead, making it an ideal time to create
loyal customers in this group.
Fintech companies can build a complete portrait of a
customer’s economic behavior. This puts this sector in an ideal position to
build an alternative to an archaic system, creating personalized financial
products based on a comprehensive account of the customer journey, enabling
better, faster decision-making and more agile pricing than incumbents.
The need to deliver services to this demographic will only
grow because, according to U.S. Census data, the population is projected to
grow more from international migration than natural increase in coming decades.
These newcomers will need banking providers who understand what services they
need and what they are able to afford as they build a life for themselves and
Fintech companies are addressing the current inequality in
financial services, striving to level the playing field. But because fintech
businesses run on data, solving these problems for the unbanked also opens new
possibilities by yielding rich data on this consumer segment’s income, spending
habits, needs and wants.
Economic patterns are a powerful discovery instrument, and by
tapping into data that was simply unavailable before, fintech companies gain
influential insights to help customers succeed. This drives innovation that can
deliver efficient, highly personalized services beyond banking, such as a
lifestyle services ecosystem that lets hardworking people truly access the
American dream. It all starts with fintech.
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