Viewpoint: Fintech Is Driving Inequality in the Digital Economy (And 3 Ways to Reverse the Trend)
Fintech innovations are creating convenience and economic value for both digital natives and newcomers: faster payments, easier access to credit, etc. But as these innovations digitize commerce, banking and investing, they are, also inadvertently increasing the cost of using cash for the 67 million Americans who lack traditional banking relationships (according to the FDIC). For the under and unbanked, the rate of fee-based transactions for the various conversions (check-to-cash, cash-to-check, paying for cash for electronic bill payments or remittance transfers, loading cash onto prepaid debit cards) is increasing, which is also increasing the cost of earning, spending and saving whatever money is left.
Instead of leveling the playing field, the Great Fintech Revolution is driving inequality between those with easy access to the digital economy and those without. A 2013 study from Tufts University’s Fletcher School examining the cost of cash in the U.S. identified key costs that consumers incur when using cash. Among the findings:
- The unbanked pay about $3.66 per month more than banked consumers to access their money;
- Workers receiving salaries on prepaid debit or payroll cards incur fees four times higher than those with bank direct deposit; and
- While the average consumer spends about 28 minutes each month traveling to the point where he accesses cash, part-time workers, retirees and the unbanked spend even more.
- Check cashing fees average between one and three percent of the value of the check (plus potential fees for loading those funds to a prepaid card);
- Payday advances cost an average of $15 for every $100 borrowed; and
- A check to pay a bill costs $0.64 at nonbank provider and a money order at a bank is $3 to $4.
To reduce the cost and frequency of conversions, fintech must do a better job of:
- Retrofitting the customer acquisition process: A major obstacle for cash-based consumers interested in obtaining banking services is the enrollment process itself. Failing the identification checks to satisfy anti-money laundering regulations affects more than 16 percent of new applications (not including consumers who are reluctant to apply for fear of rejection or accounting for those lacking experience with the traditional in-branch application process or convenient branch access). Fortunately, know-your-customer (KYC) validation is moving beyond traditional bureau data to include digital sources, such as online social information and behavior, not only for verification but also risk scoring. Similarly, ID image capture is enabling mobile onboarding and, in the process, providing convenience and comfort to the consumer, reducing application errors, and further contributing to the accuracy of identity verification. Moving from traditional in-person-and-on-paper to digital/mobile applications reduces applicant apprehension, increases convenience and results in fewer application failures. It also reduces customer acquisition and management costs for banks, lowering the profitability threshold.
- Embracing Alternative Financial Service (AFS) Providers: AFS providers are the primary providers of cash-conversion services for paying bills, sending funds to others and loading prepaid cards. But recent regulatory efforts (such as the FDIC’s high-risk merchants list and the Department of Justice’s Operation Choke Point) put hundreds of small AFS providers out of business–despite the fact that many operators were providing quality services to consumers. The latest in the assault on AFS providers is the CFPB’s rules for the payday lending industry, which by all accounts also will put a significant number of those providers out of business. Losing those storefronts will not only reduce access to short-term loans but all the other services AFS providers offer. There should be more concerted efforts to help these providers lower consumers’ costs through the use of technologies that facilitate greater visibility into good funds, better credit information and digital delivery of services. Instead, higher regulatory burdens and reduced competition have kept consumer fees high and reduced access to these services for the people who need them most.
- Expanding the Accessibility of Mobile Banking: According to the FDIC, underbanked consumers make greater use of mobile banking as their primary means of account access than banked consumers by a significant margin: 6 percent versus 8.7 percent, respectively How consumers with less education and lower incomes are more advanced in this respect than their banked peers is a mystery, but it shows that cash-based consumers are more sophisticated than many give them credit for and will use technology that benefits them. Unfortunately, most banks offer mobile banking solutions only to fully banked customers. Deploying mobile apps for prepaid card users would enable them to make mobile check deposits, locate the nearest (and possibly least expensive) cash-loading retailer, plus pay bills and send funds to others (funded by the prepaid card). This accessibility also would drive greater card usage and interchange. The likely outcome would be more competitive conversion fees and greater convenience for consumers plus greater profitability for card issuers.
Fintech innovations are beginning to fulfill early promises of making our financial lives better, but participants in this industry, including investors, technology companies and financial services organizations, are obliged to ensure that our efforts pull everyone forward—especially those most at-risk financially. Let’s keep that in mind as we build on our success.
Glen Fossella is EVP of enterprise growth at Urban FT, a provider of white-label digital banking platforms. Fossella has more than 25 years of experience in directing business development, business strategy, B2B sales, product marketing and product management in the technology industry. He was previously vice president of enterprise business development at Ingo Money Inc., where implemented a partner based program to bring Ingo services and solutions to several core and Check 21 platform vendors. Fossella may be reached at [email protected].
In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.