01 June 2022 |

Can Crypto Solve The US Unbanked Problem?



Can Crypto Solve The US Unbanked Problem?

When I first got into fintech, one of the facts that perplexed me the most was the fact that there were so many people in the US that were under or unbanked. Those are two different problems, by definition: the Federal Reserve says that unbanked Americans are folks who don’t have access to traditional banking systems, underbanked Americans are people who had a bank but used “alternative financial services,” like “money orders, check cashing services, payday loans or payday advances, pawn shop loans, auto title loans, and tax refund advances.”

To me, it didn’t make sense that a country that was so prosperous could also have so many people that didn’t have access to financial services. But I realized that the line was much closer than it appeared—as many other young people in NYC, I was living paycheck-to-paycheck when I first moved to start my career as a journalist (where salaries…aren’t that high). Like many other Americans, I probably couldn’t sustain a big unexpected expense. 

It’s still a critical problem to solve, and one that’s still pretty prevalent. Earlier this month, the Fed published its annual “Economic Well-being of US Households” report for 2021, which featured a ton of data on the underbanked and unbanked problem in the US. 

13% of Americans are considered “underbanked” and used alternative financial services, and 6% of those surveyed didn’t have a bank account. More alarming, though, are the demographics—out of underbanked respondents, 23% didn’t have a high school diploma. 27% of unbanked were Black Americans and 18% were Hispanic. Out of unbanked respondents, 24% didn’t have a high school diploma, 13% were Black and 11% were Hispanic. On the income side, there are actually more unbanked Americans than I expected—12% of folks who made $50-$99k were underbanked. 

On the bright side, the numbers are trending in the right direction—since 2015, the underbanked rate has decreased 7%. On the downside, the Fed literally says they don’t know if its because financial inclusion is improving: “while use of these alternative financial services have declined, people may have substituted away from the products and services asked about in the survey to other nonbank offerings that are harder to measure.”

For the longest time, fintech folks held out hope that the unbanked problem would be solved by a fintech company—though the data is hard for the Federal Reserve to compile, its looking like fintech is making a dent. However, the Fed specifically asked questions around crypto usage (for the first time) which is worth highlighting. 

12% of adults held or used crypto in the past year, with 11% saying they had crypto as an investment. Only 2% used crypto to buy something or make a payment in the last 12 months, and 1% used it to send money to friends and family. 

Most of the respondents were using crypto as an investment and had bank accounts and 46% made $100k or more. But, for those using crypto for transactions, the data is vastly different: 60% of them had an income of less than $50k, 13% didn’t have a bank account, and 27% didn’t have a credit card. 

In more developing regions like Latin America and Africa, where there’s a larger percentage of underbanked and unbanked folks compared to the US, crypto is a more established but still burgeoning way to make transactions. It can be safe to assume that the US underbanked and unbanked market might play out the same way. In the US, the main issue for underbanked and unbanked Americans are fees—53% of underbanked respondents paid an overdraft fee in the last year. 

In theory, crypto solves this: you get a “bank account” when you download and set up a wallet on apps like Rainbow or Coinbase, and by design there are minimal fees to transfer funds to another user or account. 

As folks get more comfortable with crypto, I wonder if underbanked and unbanked Americans might be better suited with banking products built on crypto versus traditional fiat rails. According to the data, crypto might already becoming a solution in its native form. But as I’ve been thinking a bit more about the intersection of fintech and crypto, something like Chime or Cash App built on crypto rails could not only be a user-friendly solution but be super cheap to maintain and launch globally from Day 1. 

Like anything, this would be hard to build—for instance, you need to have really solid compliance and the team would need to be really efficient and skilled at growth marketing in order to reach the right audience. But with so many problems yet to be solved in the financial ecosystem—particularly the US unbanked problem—I wonder if retrying old solutions on crypto could be worth exploring.