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2.5 Billion People are Unbanked. Can Fintech Change That?

By Brian Riley
March 26, 2018
in Analysts Coverage
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The Unbanked Population in the U.S. is Decreasing*

The Unbanked Population in the U.S. is Decreasing*

Access to basic financial services remains a challenge for billions of unbanked consumers around the world, particularly in developing markets where traditional banking infrastructure is limited or nonexistent. Without bank accounts, formal credit histories, or reliable identification, many consumers are forced to rely on expensive micro-loans that often carry extremely high interest rates. As financial technology companies expand mobile-based lending and digital banking solutions, the question is increasingly whether fintech can help close the financial inclusion gap by delivering lower-cost, more accessible alternatives to traditional lending models for the global unbanked population.

It is hard to think of life without a bank account.  Remember the passbook account your parents set up when you were 7 or 8?  And, if 2.5 billion does not seem like a big number, 5 billion people lack the credentials to get a loan.

Is that a problem to fix or an opportunity for FinTech?

  • The current model for these products is far from efficient, with high operational fees which translate to interest rates around 35-40%.
  • It has even been said that micro-loans promote poverty. From the lender’s perspective, the product carries a high risk since until now, there were no tools to assess the creditworthiness of the borrower. Is there a better solution for this problem?

Think of the irony.  Many people in developing markets need loans for urgent or small business needs.  There is little infrastructure so you need to charge very high-interest rates.

  • Since most of these companies operated in rural communities, they relied on a personal banking model, where an agent would sell the service after carefully explaining the benefits and evaluating the borrower’s ability to repay the loan.
  • The process required a substantial workforce to present the offer and then to process the applications. Just the agents’ commissions alone made up a significant part of the interest, becoming a real burden for the borrower.
  • Yet, the current model for these products is far from efficient, with high operational fees which translate to interest rates around 35-40%.

No doubt about the social good, but investments like these call for help by the World Bank, unless FinTech can figure a way to deliver through mobile phones.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

Read the quoted story here

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