The next Fintech frontier for the growing newly financially fragile class
This week I am inspired to write about the financially underserved. We have been focused on the unbanked, the underbanked, and financial inclusion for over a decade. All these terms have become umbrella terms as the reasons for becoming underbanked or financially excluded are diverse and growing. Alex Johnson covers this in detail in his May `22 article `The underbanked Triangle`.
The Fintech subsector of affinity banking services has grown especially in the developed countries (US, UK, Europe) where account ownership has been high. We have banking for immigrants, for women, for farmers, and on and on. But it seems that the pace of macro-economic deterioration, structural changes in the job markets, and the long-lasting effects of the pandemic, are outpacing Fintech innovations.
On the one end of the spectrum, there has been great progress in terms of improving global account ownership. Financial institutions and mobile money providers have helped this cause. According to the latest Findex Report there were 2.5 billion people with no account in 2011. Six years later, in 2017, this was reduced to 1.7 billion and by now we have 1.4 billion adults that are still unbanked. The progress is mainly due to low levels of account ownership in developing economies and the large populations in India and China, that have benefited from the widespread adoption of Fintech solutions. We have clearly reached a level in terms of unbanked lacking accounts, that is difficult to improve. Bear in mind, that 54% of the remaining excluded population lives in only seven developing economies.
On the other end of the spectrum, ironically there are increasing reasons that people become underserved, underbanked, and financially excluded. These people face difficulties mainly accessing credit despite the existing and growing variety of credit options.
They consider underserved those that meet one of the three following criteria. This means they are Not including in their stats and survey any unbanked or deep subprime participants (imagine if they did).
Here are some of the reported facts:
- #AndTheIronyIs — Over the past six years, the % of the UK population that is underserved has grown and this growth is expected to continue and even to accelerate.
- The pandemic has had a lasting effect in the economy. In the UK, 1 in 5 people joined the group of people with variable income which often means they can’t withstand an unexpected expense and are `Financially Fragile`.
- The study claims that a £300 unplanned expense, would force 16m people to have to borrow!
- The rising cost of living has not only forced people to adjust their budgets but has led 1 in 12 UK adults to use BNPL for basic costs in the last 6 months (as the COVID19 subsidies are terminated)
- #AndTheIronyIs — Over the past six years, the number of UK residents with no credit history has grown 29%!
- 11m UK residents have no credit card and don’t plan to get one.
- #AndTheIronyIs — Rent payments are still not included in credit reports like mortgage payments, while we know `Generation Rent` is booming.
- Gig workers and self-employed are increasing and a much larger % of these groups (58%) are financially fragile and thus underserved (compared to 37% of the overall population).
What becomes clear to me from these statistics is that on the one hand Fintech adoption and penetration skyrocketed over the past 6 years BUT the unexpected, long-lasting, and global changes that we have witnessed over the past 3 years have confronted us with a NEW set of challenges, unmet needs, and an increasingly fragile society. Can Fintech innovation, Saas, Baas adoption catch up with these deep changes?
I wonder at the 35,000 feet level:
- Financial Fragility has to be re-evaluated because it has become more complex due to the changes in job markets, monetary policies, and geopolitics.
- Has the Financially Fragile population in the developed countries, doubled in the last 3yrs?
- Can Fintech solutions serve this sudden spike in this uncertain macro-economic environment, or will it have to look after its own survival much like Banks had to after the 2008 crisis?
Seems to me we need a whole new Fintech batch that will focus on these completely new realities. These Fintech solutions will not look at filling in the gaps, the banks were not willing or capable of serving. They need to look at the new systemic Financial Fragility that has a high probability of spreading really fast and design solutions that can empower these people. This will be a test of how to design Fintech innovation to serve the needs of the people that have changed and are the newly financially fragile. This population is very different than the traditional upgrading and uplifting of the excluded, the poor, the ones born into financial exclusion.
We are now witnessing a recent and painful Downgrade of large parts of populations in developed societies. These people are not natively born into financial exclusion, and they are suddenly becoming underserved. They not only have a very different set of liabilities compared to those natively financially fragile but also a very different behavioral profile.
Can Fintech innovate to empower the growing class of newly financially fragile or will its own funding fragility and valuation downfall prevent this from materializing?
We need to size the growing problem of newly financially fragile people and create new compassionate Fintech solutions for them.
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