Slowly but surely, the world is moving away from cash toward electronic payments. This is a relatively easy transition … if you have a bank account.
But for the roughly 22% of Americans who are unbanked or underbanked – that’s 55 million people – the path to electronic payments is challenging, and tasks such as obtaining cash, storing value and making remittances, often are unattainable.
Many unbanked or underbanked people who live in rural and urban areas will often fall victim to predatory payday lenders and check cashing storefronts. Rollbacks in consumer protections have made this situation even more precarious, as an estimated $8 billion in fees and other charges are targeted against this community each year. And that’s just in the United States, not even taking into account citizens in developing countries who are feeling the effects of an increasingly cashless world.
In order to address these concerns, we expect to see a number of budding startups within the fintech space developing solutions as investors eagerly follow their progress. Savvy investors should keep an eye out for companies looking for innovative solutions aimed at the areas who need these resources most. When considering startups serving the unbanked and underbanked populations, keep an eye out for companies that prioritize the following areas.
Mobile payment solutions
We are probably all familiar with the lack of physical cash that storefronts experienced in the early part of the national lockdown. Yet lack of access to cash is a regular struggle for certain populations and neighborhoods throughout the country. On a most basic level, a lot of these communities can even lack ATMs. And those that do have access to ATMs are often faced with unreasonably long lines or worse, empty machines. To tackle this problem, startups in the space are turning to both micro ATMs and digital first solutions.
Micro ATMs are a cost-effective solution to expensive, stationary ATM services. In combination with local agents, these portable, card swiping machines can provide vital cash withdrawal services for those who do not have access to a physical bank or traditional ATM. Moving beyond geographic concerns, solutions like these also benefit populations who may be restricted to their homes like the elderly. By focusing on mobile and digital solutions, startups can create increasingly accessible banking services.
Where many of us have become familiar with the term “food desert,” “banking deserts” have not drawn the same amount of attention. These deserts are particularly prominent in rural areas, where banks may be discouraged by the potential lack of profit returns due to smaller population size. As a result, many members of these communities often lack access to not only cash, but also basic banking services.
Without access to traditional financial institutions, residents are forced to use higher cost alternatives like using money orders, pawn shop loans or expensive check cashing services that can figuratively break the bank. In working with local communities, startups can leverage existing networks of neighborhood grocery stores, bodegas and the like to increase cash back options and access.
Investors should also be on the lookout for companies embracing B2B solutions, as well. For example, in communities where it is too costly or otherwise prohibitive to operate free-standing cash machines, startups can ensure cash access for local business through virtual ATMs. Startups can also work with businesses to empower them to address their day to day payment needs. For example, payment apps for delivery agents can significantly ease the burden of what may appear to be routine transactions.
How fast will the change occur? Maybe not as quickly as one might expect due to factors such as the custom of using cash, resistance to change, and distrust of “the system.”
“The underbanked and unbanked are adopting digital payments to replace tedious processes like check cashing. However, it would be unwise to underestimate the resilience of these consumers continuing to use cash or other traditional methods of payment, especially when considering the issues surrounding store of value for digital payments,” says D’Ontra Hughes, CEO of digital cash startup SPARE. “With the last year seeing a 9.4% increase in cash in circulation, 25% of the population is continuing to use physical tender for small transactions. Digital payments will one day become a preferred method of transacting, especially if that method avoids swipe fees and lowers transaction costs however, I don’t see that happening as expeditiously as some have assumed.”
Fintech startups addressing the ongoing financial needs of small business owners will continue to see growth. There are more than 31 million small businesses in the U.S. according to the SBA, yet many lack access to the necessary financial tools needed to maintain their cash flow and grow their business. The fintech startups bridging the gap to offer digital solutions to better manage sales data, review available funds, automate savings, and more will be a top priority for investors expanding their portfolio.