Fintech and Financial Inclusion: Bridging the Gap in Access to Financial Services

5.9 million households in the U.S. do not have bank accounts, while millions more prefer to use alternative financial services over their bank accounts, reports the FDIC. The discrepancy between banked, “unbanked” and “underbanked” households highlights a stark gap in access to financial services. New fintech innovations can help extend financial services to underserved populations, promoting financial inclusion.

Low-cost banking

Not having enough money to meet minimum balance requirements is the most cited reason for not having a bank account in the U.S. To challenge the norm of traditional banks, many fintech companies have created their own exclusively online banks, also known as neobanks. Companies like Chime notably offer free checking accounts with no minimum balance requirements, monthly fees or late fees. The company also does not charge fees on overdrafts greater than $200, whereas traditional banks like TD Bank will charge $35 for overdrafts of more than $50. Chime and other companies’ no-fee offerings are practical and useful for underserved individuals who may be new to banking.

Building Credit

For individuals with no or low credit, taking out loans, buying a home or buying a car become close to impossible. Using data collection and analysis, fintech companies are reimagining the credit scoring system by looking at alternative factors such as mobile phone usage, education, utility payments and Internet behavior to generate a credit score for users. Companies like Self allow users to build credit for free through paying rent; by linking their bank account to the app, Self reports the rent payments to the United States’ top three credit bureaus.?

Microloans

Microloans are commonly utilized by start-ups and small businesses. At $50,000 or less, expanded access to microloans fosters entrepreneurship and small business growth. 4ToldFinTech, which partners with Mastercard, uses a generative AI chat platform that asks prospective borrowers demographic questions and gathers documents like a driver’s license. The AI takes that data and matches the borrower with a lender, who will then back or deny the loan, without needing to rely at a credit score.

Cash Advance

Payday loans are commonly utilized among underserved populations because they do not require a credit check. They can have annual interest rates as high as 900%, however, which can quickly sink a borrower into debt. In contrast with the predatory practices of payday lenders, fintech companies are increasingly offering cash advance apps that deliver the money much faster and charge little to no interest. While cash advances still hold risk for borrowers, it is important that ethical and practical options are available in the event customers need them.

What’s Next?

Lack of internet access is a major driver of global poverty, with over 2.6 billion people (a third of the world’s population) lacking access to online financial services. Offline payments is a largely untapped market and faces significant technological and security hurdles. Through advancements in QR codes, digital wallets, and NFC (near field communication?which powers “tap to pay” transactions), financial services can be extended to remote, offline areas, bridging the world’s gap in financial inclusion.