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What role for Fintech in tackling financial exclusion?

What role for Fintech in tackling financial exclusion?
  • United Kingdom
  • Financial services
  • Financial services - Digital Financial Services

10-10-2018

Guest contribution from Adam Moy of the Fairbanking Foundation*

October 2018

Financial exclusion can affect people across a wide range of demographics and social groups. Fintech can play a role in alleviating financial exclusion by applying a set of approaches focused on the individual in the wider social context

Lack of access to mainstream banking and financial services, both appropriate and affordable to an individual’s needs, still remains a key social issue. An estimated 1.5 million people in the UK continue to be unbanked, whilst many more afre reliant on sub-optimal financial products for day-to-day living needs.

Through technological and product innovation, the Fintech community is increasingly cited as offering potential solutions to solving financial exclusion. However, Fintech that is specifically targeted at financially excluded customers remains at the early stages of development.

Why does financial exclusion matter?

Financial exclusion can affect people across a wide range of demographics and social groups including the unemployed, low paid, the elderly, young people, people with disability or poor physical and mental health, and those in poverty.

People who are locked out of “mainstream” banking are penalised by having to incur a “poverty premium” for everyday services and products because, for example, they cannot access (cheaper) online pricing. This in turn may lead to over-indebtedness. Of increasing concern is the wider negative health impact that financial exclusion perpetuates through an individual’s persistent financial “un-wellbeing”.

There is a clear link (and business case) between what Fintechs can seek to solve in financial exclusion which in turn delivers significant effects in improving health and wellbeing.

Is policy and regulation making a difference?

Policy, regulatory and legislative reforms currently seeking to address financial exclusion comprise a variety of approaches, including the UK's Financial Conduct Authority’s focus on high-cost credit products and in understanding consumer behaviours to inform regulatory interventions. Other initiatives include consideration of a duty of care for the provision of financial products, a possible effect of which might be to align the banking sector more closely to regulated utilities in ensuring universal access to financial products. Open Banking and GDPR are further avenues to drive product innovation through greater access, transfer and control of data by consumers. However, not all of these initiatives may ultimately assist people who are digitally or financially excluded.

There also needs to be a constant balance between seeking fto facilitate safer, affordable products suited to individuals in their context, and the necessity for financial providers to operate secure markets by applying uniform risk criteria, a key outcome of which may be the continued exacerbation of financial exclusion of the individual.

The Fintech market is well positioned to deliver alternatives to the incumbent landscape. By utilising newer technologies and digital innovation, it can capture comprehensive customer data (and contextualised experience) as to product utilisation across different exclusion situations in relevant social and environmental contexts. Armed with such data, it is arguable that Fintechs can offer a far more holistic and measured approach to assessing customer risk than currently exists.

Through lower operational costs delivered through technology – and the ability to “test and see” product approaches – Fintech has a market opportunity to properly serve this underserved population by being responsive and tailoring products to their needs. But how can Fintech best optimise such a pivotal opportunity?

Optimising product development to alleviate financial exclusion

The Fintech community has the potential to play a more significant role in addressing financial exclusion through the implementation of the following approaches centred around the needs of customers viewed in their wider contexts:

  1. Understanding a customer’s lived experience of financial exclusion - Evidenced based research can inform a human centred design approach to product development to specifically understand the needs and wants of the individual and how products can be designed to be responsive. Through a process of “listen, learn and act” the Fintech sector has considerable advantage in being able to implement, amend and update products and services in a swift, responsive and dynamic process.
  2. Understanding the social, cultural and community context - The Fintech sector could promote physical interaction at frequent touch points (e.g. through field agents, and mobile and PC applications) designed to be responsive to customer behaviours in their specific settings, as a key to establishing a strong and mutual trust relationship.
  3. Nudges and behavioural economics - Utilising nudges to encourage “positive behaviours” in financial services, such as a regular savings or budgeting habit, is key to the Fintech’s role in alleviating financial exclusion. Nudges that are capable of being utilised alongside tailored products, in context, can offer a powerful and effective supplement.
  4. Financial capability and education - Fintech can offer valuable financial capability and education opportunities at important financial life episodes alongside active product use, thus building self-confidence and motivation. Financial capability components of Fintech products must give credence and validity to the individual’s own capability and agency in order for providers to better understand and appreciate customer motivations and behaviours in context.
  5. Stakeholder collaboration – The Fintech community is able to combine its technological advantage with the expertise of other stakeholders (e.g. not for profit, charity, public sector) to understand the social, psychological and behavioural contexts of persons and communities in financial exclusion. Through collaboration and a multi-layered stakeholder engagement, a more sophisticated model and approach to developing products can be fostered.

Summary

Fintech is uniquely placed to challenge and modify the “one size fits all” approach to banking which has failed many by adopting the approaches described above. The Fintech community can combine technological innovation and physical interaction to deliver a more sustainable product from the customer’s perspective. A Fintech provider that can successfully deliver measurable outcomes to solving financial exclusion may also benefit from social investment capital such as may achieved through social impact bonds. Wider society can benefit as we transition from a financial inclusion/exclusion policy to one where financial products and providers are primarily assessed (and trusted) on the extent to which they consistently meet customer needs and wants in context on a sustainable basis.

About us

Eversheds Sutherland has a dedicated Fintech team, drawing together lawyers and consultants from across our practice areas. We would be delighted to assist you to understand Fintech developments in more detail and how they impact your business.

* The whole text of the White Paper “Can FinTechs Solve Financial Exclusion” from Adam Moy can be downloaded here.