The UK might be hailed as the global home of finance, but with an estimated 2m adults living in the country without a bank account and half of them saying they actually don’t want one, it’s not news financial services are failing to serve everyone. Of course, it’s this gap between the so-called unbanked and traditional financial organisations that’s created the opportunity for new entrants offering alternative products from fairer credit scoring to prepaid schemes to loans to gain momentum.
As financial services continue to shift away from the high street and onto phones and computers, the relationship between digital and financial access is only getting closer. So how can fintech help drive financial inclusion and how can these companies work with traditional finance players to better serve consumers? That was the question posed at Innovate Finance’s financial inclusion event, hosted at RBS this week. The consensus was that for such a complex issue, there is no single solution. While technology is already playing a central role in boosting financial inclusion it is the collaboration between new entrants and traditional financial organisations that will really unlock this opportunity.
Improving access to banking
First stop is understanding why people aren’t accessing financial services. Sian Williams from Toynbee Hall in Tower Hamlets, which works to get people out of poverty, pointed out that assumptions here are often misplaced as many people actually choose not to have a bank account because they can manage their money better in cash for example. To get a better picture of consumers’ relationships between digital and finance, Lloyds launched a Consumer Digital Index a couple of months ago, following the launch of its index for businesses last year.
It estimates that 13.1m people living in the UK have low or no ‘financial capability’, as in they are less able to deal with unplanned bills or costs and less likely to achieve financial 'wellness'. Meanwhile 11.1m people have low digital capability – which means they trouble accessing and benefiting from online services such as price comparison sites. The index also estimates online consumers save £744 per year, or £516 in low income households. Speaking at the event Lloyds’ digital inclusion senior manager Heather Grant said the bank is working to bring down those numbers but acknowledged that banks can’t go it alone.
“We’re over 250 years old, we’re really old and we have a lot of ageing infrastructure,” said Grant. “We can’t move as quickly as we’d like to so we have to work with more agile organisations. We really need to collaborate so we welcome more partnerships.”
On the business side, there have been notable partnerships between fintech startups like Funding Circle and banks including RBS to defer customers that the bank cannot serve. It sounds l like we can expect to see more of this on the consumer side too.
Fintech and the future of finance
Commenting at the same event on the opportunity for technology to improve access to financial services, Rhydian Lewis, CEO of P2P lending firm Ratesetter, pointed to the opportunities of new business models and big data.
“Clearly fintech has this fantastic opportunity for two reasons," said Lewis. "One is the blank piece of paper in terms of the business model – the magnificent opportunity now is that people can calibrate new models purely with the financially excluded in mind. There is a big opportunity because big organisations simply cannot justify these products. We know banks don’t charge for most rudimentary product: the current account, the route into the financial world. If banks could rewire their model they would do a great job of bringing more people in but right now their model prevents them.
"The other thing is big data, which enables new players to look beyond financial status as a determinate of creditworthiness.”
The disruption of traditional credit scoring, which fails people like new immigrants to a new country is a key trend in fintech right now and one that is set to play an important role in improving access to basic financial products. Credit Kudos is one of the players in this space (others include Aire, Credit Karma) and speaking at the event, its co-founder Freddy Kelly explained why he set up the business.
“The idea came about after I came back to the UK after living in the states for a year,” said Kelly. “I found it incredibly difficult to get any form of credit even though I’d been working the whole time and I realised the way affordability is measured and creditworthiness is incredibly antiquated. We enable lenders to plug new sources of data and make decisions on borrowers.”