26 April 2022 |

The Root of the [Inclusion] Problem


Were you attracted to fintech by its opportunity to improve financial inclusion worldwide?


If your hand went up, you’re in the right place. 

We, for the most part, are aspirational about fintech’s power. The industry can lower servicing costs, increase speed, and allow for more tailored and inclusive financial services at scale. 

Fintech, so far, strives to uphold that promise. 

Over the last decade, 1.2 billion previously unbanked adults gained access to financial services. Plus, the unbanked population fell by 35%, primarily boosted by the increase in mobile money accounts

Globally 1.7 billion adults remain unbanked. Yet, it’s undeniable that fintech is helping make financial services accessible to an increasing number of people.

Fintech operators still face a common question:

Is inclusion profitable? 

Reading my newsletter might immediately say, “of course!” But, for the rest of the world, financial inclusion needs to be an excellent way to make money, like anything else.

Profitability Problem 

The financial system is fundamentally flawed. The system designed did not intend to serve people who don’t have much money. (i.e., low and middle-class households). 

At major banks, such as Wells Fargo, Chase, and Bank of America, 25 to 40% of checking accounts are not profitable and are described as “money-losing.” 

This sparked banks to charge overdraft fees (some have recently ended this), among other possible charges. 

And when 64% of the U.S. population is living paycheck to paycheck, these charges are impossible to avoid. The options for banks are to serve the underserved, lose money, place customers into debt, or don’t sign them up at all. 

Banks have little incentive to change this model. Banks, by and large, are revenue-focused businesses. They’ve spent decades building legacy technology that would be too costly to overhaul. 

Technology, however, is a customer-driven business. So it’s up to fintech platforms to leverage technology to build inclusive business models and prove they’re profitable. 

Many execs are working on the issue of inclusivity. A few sat on a panel during Empire Startup’s NY Fintech week, including Ahon Sarkar, Q2; Zuben Mathews, Brigit; Ami Kumordzie, Sika Health; Jimmy Chen, Propel. 

I had the pleasure of meeting with Ahon Sarkar from Q2 during the conference. Cross-legged sitting on the conference floor, we talked through the hurdles of financial inclusion. 

Helix by Q2 is an embedded finance product. The platform lets fintech companies offer personalized banking products. In addition, the company obsesses over lowering costs to serve the underserved (aka the root of the problem).

Fintech companies can reduce the cost of serving low-income customers and go from losing money to making money on the same customer. Suddenly, the industry has an incentive to build solutions for them. 

But it’s not that simple. 

Context Is King

As innovators, it’s our responsibility to build by thinking about the root cause of the problem – otherwise, we’re just putting lipstick on the pig. 

Take lending, for example. Today, customers deemed “risky” have to pay more. But the only reason they are labeled a risky borrower is because legacy institutions have a “one-size-fits-all” way of telling someone is worthy of credit. 

There’s no question that credit and business models orient around the assumptions people make around credit and credit risk disadvantage segments of the population.

Legacy systems don’t consider cash flow context, KYC context, or a company’s payroll. However, fintech companies are capable of using technology for different contexts. 

And when that level of change is on the horizon, we have to bring in the big guns: Regulators.

Fintech operators have to almost partner with regulators because we’re changing how financial systems work. And we all know how much regulators love change.

It’s the industry’s responsibility to find opportunities and present them, no matter how long it takes. 

But it’s hard work. On another side, convincing VCs that capitalism can work in favor of helping everyday humans instead of just making the rich richer is no small feat. 

Propel, for example, is a free app that helps Americans with low income manage their government benefits and their money. 

Founder and CEO Jimmy Chen said the company had fought a battle to convince investors that his company was genuine. However, helping people and creating social good can be a viable business model is still hard to understand.

Positive Future

People often ask me how I continue to cover financial inclusion when there’s so much to be cynical over. My answer is simple: I don’t have time to be anything other than aspirational. 

Yes, we have a ton of work ahead. Finding pockets of data on demographics requires new technologies and infrastructure players who do things with data never done before. 

But that’s what makes inclusion in fintech so damn exciting. 

Now it’s possible to build companies that make inroads into positive impacts. We’re being more creative about how business models can make inclusion profitable. 

And that’s something worth holding on to hope.