BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

How FinTech Companies Are Closing The Banking Gap

Following
This article is more than 6 years old.

According to the World Bank, there are two billion people globally who currently have no access to banking services. There are many reasons for this: they may not have built up enough traditional credit history, they may have bad credit because of poor financial choices in the past, or they may live in an area where access to credit and other financial services are limited.

FinTech companies and investors are trying to find solutions to this problem so that those on the margins can become “bankable” – and it is women and people of color who are on the forefront of this movement.

For instance, Jennifer Tescher, founder and president of The Center for Financial Services Innovation (CFSI), has helped launch financial inclusion initiatives by incubating startups addressing U.S. financial health through their Financial Solutions Lab. Some of these startups include Propel, which streamlines the food stamp process; Bee, a mobile alternative to potentially predatory financial services for low-income people; and popular startups that aim to assist with savings and debt repayment including Digit, EarnUp and LendStreet.

Other startups are attempting to compile a holistic view of a person in order to bring them into the financial ecosystem, rather than solely relying on an individual’s FICO score, the main indicator used by lenders to determine an individual’s creditworthiness. Startups addressing this market are tapping into alternative data to assess risk in different ways, widening the pool of potential consumers. A mover and shaker in this space, who also happened to be incubated at CFSI’s FinLab, is Nicky Goulimis, cofounder of Nova Credit, a startup promising instant access to overseas credit reports. The idea for Nova Credit was rooted in personal experience: all three of the company’s founders are immigrants who have experienced first-hand the challenge of obtaining access to credit upon moving to the U.S. Without credit, consumers could be denied credit cards, mortgages, personal or business loans, and frequently pay higher premiums on both credit and insurance.

“This market is comprised of millions of creditworthy people who've arrived in the U.S. but are denied the help they need to get started," Goulimis said in an interview. “According to the U.S. census bureau, immigration is going to be the greatest driver of population growth. So, the challenge of how we serve new arrivals to America is the banking challenge of this decade.”

Founder and CEO Shivani Siroya, of California-based Tala, is trying to fix the challenge of low access to financial services by providing alternative credit scoring and instant credit delivery via mobile wallet. A mobile, or virtual, wallet like Apple Pay is a way to store money on your mobile device.

There is a global movement toward mobile wallets—an area where the US notably lags. Mobile wallets tend to see greater adoption in cash-heavy economies, versus economies that have heavily adopted card payments. Mexico, for instance, sees 38% mobile wallet use, compared to 17% overall in the US, even though 93% of Americans have access to financial services. Startups are using mobile wallets to lend to consumers and businesses without the need for the consumer to ever enter a bank branch.

Companies that address social good often face a stigma that they are “soft,”  or don’t drive returns at the same rate as less impact-driven firms. At the Empire Startups FinTech Conference’s “Underbanked” panel earlier this year, Monica Brand Engel, Partner at Quona Capital, addressed this stigma by saying: “We believe in profits with purpose… but there is no way [our investors] invested in us with the goal of a concessionary return. We have to deliver risk-adjusted return.”  (Disclosure: I work for Empire Startups)

Empire Startups

Introducing new, tech-enabled tools to solve issues with access is a step in the right direction. However, financial illiteracy is a worldwide epidemic, and adoption of new tools to increase inclusion and promote financial health will fail if energy is not also put toward improving financial literacy across the board, from millennials to retirement-aged women to consumers in international markets who are new to financial services.

A few venture capital firms seem to understand that investing in financial inclusion is a win-win: for both impact and returns. From Omidyar Network, launched back in 2004, to Accion launching their Venture Lab in 2012, financial inclusion is becoming a priority. In fact, Salesforce Ventures announced a $50 million impact investing fund this month focused on inclusion.

With FinTech companies and investors focused on inclusion, we will move closer to closing the banking gap.

Follow me on Twitter or LinkedIn