Fintech disruption needs to open door for UK underserved

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This week saw the release of a report from the Fintech innovation Lab and Accenture called ‘The Future of Fintech and Banking: Digitally disrupted or reimagined?’ which showed the massive ongoing shift in financial services towards fintech. Investment in financial-technology (fintech) companies grew by 201% globally in 2014, compared to 63% growth in overall venture-capital investments, confirming this sector in the words of the report, “as a hot ticket.”

Arguably, this figure moves fintech beyond a ticket, to being the only game in town soon for financial services. But if a tipping point is being reached in the role of fintech for financial services provision, surely there is an opportunity being missed to open the door for the financially underserved.

The financially underserved, those from low income groups who have traditionally had limited access to financial service provision (relying on alternatives such as payday lenders to fill the void) seem conspicuous by their absence as a focus for fintech in Europe. In the UK alone we have approximately nine million who we would class as underserved (according to the New Economics Foundation). This is not far off 1 in 6 in the UK, a quite shockingly remarkable figure.

It is true that Europe is a smaller market than other parts of the world. But as the Fintech Innovation Lab report shows, of the $12.21 billion invested in 2014, the US makes up the lion’s share, but Europe experienced the highest level of growth, with an increase of 215% (year-on-year). Fintech investment growth in the UK and Ireland was slightly slower (up 136% to $623 million) although the region accounted for 42% of European investment. But in this report (which is not atypical in anyway) there is no mention of the underserved. So why is this?

It is in part a legacy of seeing the underserved as an issue solely of social welfare policy. An extremely interesting report in the summer from the Centre for Social Justice, titled Future Finance: A new approach to financial capability’ summed this up well in its recommendations. Pointing out the way to encourage ethical and affordable financial services without subsidies, it states:

“It is necessary to change the way low-income households are considered by politicians and financial firms, so that they are seen as a different cohort of customers rather than as people who must be served as a matter of social welfare policy.”

The government’s access to financial services policy area (from the coalition government of 2010-2015) seemed to reemphasise this point calling on banks to develop a suite of simple savings and protection products for the underserved and reinvesting heavily in credit unions. Credit unions do a fantastic job and have even taken to using Fintech (at least in the US) with the launch at the end of September of the CU wallet a collaborative credit union-owned and -directed mobile payments technology provider. But more than basic products will be needed to supplement credit unions to pick up the 9 million underserved we have in the UK.

Seeing the underserved as solely an area of social welfare policy also reinforces an incorrect view that somehow, the underserved are of low commercial value to providers. In the past, pre fintech, this may have been the case, as providers struggled to make a commercially viable way to get value out of small value transactions that low income groups can engage in. But, ironically this was one of the main reasons for the start of fintech. Namely, to develop ways to help those (in newly industrialised and emerging nations) who had never had access to financial services get them. In fact, it was a grant from the UK Department for international development that in part launched the most successful global mobile wallet, M-Pesa, with this goal in mind.

And this ethos of bringing more of the unbanked and the underserved has continued to drive fintech development outside of Europe. The underserved are seen as new and valuable potential customers to be serviced.  This plethora of growing services led Bill and Melinda Gates in their 2015 annual letter to predict that by 2030, two billion more people who are unbanked today will be storing money and making payment with their phones. And by then, mobile money providers will be offering the full range of financial services, from interest-bearing savings accounts to credit to insurance.

So if it is not about the tools to access this group, is it the commercial value of the underserved as a segment (i.e., the size of the market) that still marks the UK underserved as an area of social welfare policy. Well again it should not be, and for evidence here we should look to America. In 2014, the Centre for Financial Service Innovation launched a report on the size of the US underserved market the ‘2013 Financially Underserved Market Size’ report. They found that financial services for the 63 million underserved consumers in the US constitute “a diverse and continually growing marketplace, encompassing 26 products and $103 billion in spending in 2013.” Doing a rough calculation for the 9 million underserved we have in the UK, this would put a market size of around $14 billion or £9.1 billion pounds. Surely this is a market of a scale that should entice any commercially interested financial services provider, whether fintech disruptor start up or mainstream bank.

So with the new future of fintech that we are looking towards in the UK, perhaps it is time to form a new legacy around how we look at low income customers and the underserved. Namely, as new and valued potential customers who should be equally included in the focus for new fintech products. It makes both social and economic sense!

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About the Author

About the Author: Crispin Oyen-Williams is the Director and Founder of Business Innovate. .

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