In a time where two billion people worldwide are living outside the financial system, we are entering a golden age for empowering the underbanked. Traditional banking is being expanded to reach every corner of the globe, and the FinTech industry is lighting the way forward. New companies and services are emerging to offer new ways to deliver financial services many of us take for granted, giving the financially underserved new tools and resources to better save and invest.
In the VC community, we have many ways to support this historic initiative. By both investing in the next crop of promising companies delivering affordable banking resources and supporting greater financial education, we can be better advocates for financial literacy. We can also help ensure all public schools introduce financial education early in their curriculums, where two learning streams are needed: one that equips students with the financial skills to manage daily life, and a second that prepares students for the evolving job market, so their skills are relevant to employers.
The Vicious Cycle
When you look at the numbers, some staggering statistics emerge.
Six percent of U.S. adults are unbanked, meaning they have no bank accounts at all. Meanwhile, sixteen percent of U.S. adults are underbanked: they have a bank account, but rely on alternative financial providers for their banking needs—usually for a fee.
Why are so many people underbanked or unbanked in the first place? It can be expensive just to have a bank account at all. Many people are unable to meet the mandatory minimum balances to keep a bank account. ATM, maintenance, and other fees are an added burden. Some people have no credit or bad credit, which makes it difficult for them to open a bank account, apply for a credit card, and make major transactions like leasing an apartment.
Boxed in with nowhere to go, often their only other option is to resort to payday lenders and check cashers to perform the financial services a mainstream bank would do. Fees from these providers can add up to over $40,000 in a typical career span. This results in people who are stuck in the cruel catch-22 where it is too expensive to have a bank account and too expensive to not have one.
FinTech Product Highlights
FinTech is promising a glimmer of greatness in rising to help the un- and underbanked escape from the confines of check cashing and payday loans. No-fee mobile banks like Chime and T-Mobile Money have no credit history requirements. Microloans are a way for individuals without credit history to start their own businesses or simply alleviate poverty. Branch serves Kenya, Tanzania, Nigeria, Mexico, and India; and Tala, a Los Angeles-based startup, serves Kenya, Mexico, the Philippines, and India. The non-profit Kiva serves more than 80 countries and crowdfunds business loans to entrepreneurs with business in the U.S. who can’t access other fair and affordable sources of credit. Others, like the software company Propel, have created Fresh EBT to cater to those on food stamps. The app allows users to track their EBT balance, manage benefits, and even explore job opportunities.
While these are all a promising start, cash accounts, and microloans are ultimately not the solution for the socioeconomic disadvantages that keep millions of U.S. households outside the financial system. FinTech offers us a helping hand in supporting the unbanked and underbanked, but without a strong financial education and relevant training opportunities it won’t be sufficient. Instead, financial literacy is required to bring about permanent economic change to these groups.
Three organizations are good examples of resources for increasing such literacy. The National Endowment for Financial Education (NEFE) is a nonprofit national foundation providing free courses, self-help websites and resources to help individuals and families make informed financial decision making. NAF1 (formerly known as National Academy Foundation), solves some of the biggest challenges in high schools and the economy by bringing education, business, and community leaders together to transform the high school experience and prepare students to enter the workforce. NFTE,1 the Network for Teaching Entrepreneurship, activates the entrepreneurial mindset and builds startup skills in youth from under-resourced communities to ensure their success. There are more such organizations locally, regionally and nationally that are available to contribute to the education of the underbanked and unbanked.
FinTech and innovative banking programs are shifting the norm of financial services every day. This is forcing us to reexamine how the world’s wealth is distributed, and it is putting a spotlight on the financial needs of the underserved. By investing in more products that anchor the underbanked and supporting more programs that provide early financial education and relevant training opportunities, we can help break the generational cycle that traps many – leading to less financial stress, greater financial independence, and more prosperity over the coming decades.