A significant portion of the U.S. population is active in the digital world but remains invisible to financial institutions. These consumers are actively seeking a bank or financial firm that can help them access an economy that, for the most part, is out of their reach.
In a recent PaymentsJournal webinar, Joshua Linn, Senior Vice President of Product Management at Socure, and Christopher Miller, Emerging Payments Analyst at Javelin Strategy & Research, examined how vulnerable populations are affected by the lack of a financial footprint and what organizations are doing to reach these consumers.
Digitization Challenges
Gen Z and new-to-country consumers are growing segments of the U.S. population, but when they apply for an auto loan, government benefits, or an apartment, they are often denied. As Socure found in its recent report, America’s Digital Ghosts, these consumers are tech savvy and plugged into the digital world, but unable to use the financial system to build their economic lives.
“Digital ghosts aren’t some spooky internet phenomenon, they are real people,” Linn said. “It could be your younger cousin who just started college or a neighbor who recently moved in from another country. The U.S. financial system relies on credit histories and traditional documentation, which leaves many immigrants, minorities, and young adults out.”
Though the U.S. has an advanced and well-established financial system, roughly half of Gen Z consumers and many millennials are locked out of the economy. Digital ghosts are comfortable with apps and online banking, but the systems aren’t set up to recognize them.
“It’s a phenomenon that in many ways is the inverse of what we have seen with other digitization challenges,” Miller said. “It is an onboarding challenge for folks who are already participating in digital systems, but the systems haven’t caught up to that reality.”
Many of the regulations governing banks were established in the wake of the financial crisis and were designed to protect banks and consumers from over-leveraging. While the intentions were good, these regulations have made it more difficult for consumers under 21 to qualify for credit cards.
The affected portion of the population isn’t a small group—approximately a third of Gen Z say their biggest hurdle is accessing services that require a digital financial footprint.
“It means Gen Z has gotten a late start on building their credit histories, which are the benchmarks used to identify them in the financial services space,” Linn said. “It goes further than credit cards—Gen Z is less likely to own homes or cars and less likely to have driver’s licenses than previous generations. The criteria that financial companies use to verify their clients aren’t as relevant to Gen Z.”
Immigrant Sentiment
Roughly a third of the U.S. immigrant population is in a similar situation, which has caused an overwhelming sense of frustration and disillusionment.
“Imagine coming to the U.S. full of hope and ambition and finding out your financial history doesn’t count here, and you have to hit the reset button on your economic life,” Linn said. “Nearly half of the immigrants surveyed said getting financial services approved in the U.S. is more complex than back home. For some immigrants, it takes over two years to rebuild their financial footprint.”
Many immigrants were denied access to jobs because of identity verification issues, and a disturbing number of immigrants believe they will never be able to build the financial footprint to be on equal footing with U.S. citizens.
Despite these obstacles, most immigrants still have a strong desire to participate in the U.S. financial system. Because credit and other financial vehicles aren’t available to digital ghosts, they are using every means to participate in the U.S. economy.
“From a payments perspective, one of the intriguing things is the persistence of cash and the continued interest in cash on-roads, like cash reloading of prepaid cards as a payment mechanism,” Miller said. “These are ways for consumers who can’t get into the system to participate in a digitized economy. The persistence of cash counters the narrative that we’re moving inevitably towards a completely digitized economy.”
Rethinking Sources
The continued use of cash among younger populations goes against the long-time belief that older consumers would be most resistant to digital payment methods. However, any reliance on cash among Gen Z users is not by choice—they will likely abandon cash once they gain full access to the digitized economy .
To create a financial system that can support them, institutions will have to rethink their data sources. That means considering rental payments, utility bills, or student records instead of the sole reliance on credit histories.
For Gen Z consumers, which often lack traditional identifiers, there’s an opportunity for tighter collaboration between educational systems and financial services providers.
“There is an intersection between underage verification and parental consent and digital identity which can be hard to navigate,” Linn said. “Just under half of the Gen Z demographic do not have bank accounts, so they’re starting from a tricky place. When you add in the parental consent angle, you’re trying to connect two potentially ghostly digital identities. It’s like trying to tie two invisible strings together.”
However, school systems have already verified information for both students and parents, which could present a path forward. The biggest hurdle is to create a system that is secure enough that parents and students can tokenize their identities and relationship to form a multi-factor authentication method that translates to the digital world.
Another potential verification process for digital ghosts could come through social media platforms. Many social media companies now require identification of both parents and minors, so a social media account could also be used as a digital token to verify a user’s identity for financial institutions.
For immigrants, institutions should find ways to translate financial histories from the consumers’ home countries. There are also immigrant resources that are currently used for employment verification that could be used for financial services evaluation.
“A potential solution for any digital ghost is a risk-based approach,” Linn said. “Instead of an all or nothing process, an organization could create tiered access to the consumer, given they can verify some basic information. They can establish a relationship with the consumer and then ramp up the services that are available to them over time, based on their behavior on the platform.”
Impossible to Ignore
There is a perfect storm of factors that makes digital ghosts impossible to ignore any longer. The U.S. population is at a significant demographic tipping point—in six years, the number of deaths will outnumber births for the first time.
The country’s economic growth will be reliant on the immigration population just as Gen Z becomes the largest workforce demographic, making it critical for institutions to build inroads with the most important segments of the population.
“Creating financial inclusion is important enough on its own,” Linn said. “But the U.S. economy can benefit from the talent and potential that this segment of the population can bring to the table. It’s not just about helping digital ghosts; it’s about helping the U.S. level up as a society.”
