Future Fintech Part 1: Financial Inclusion

Growth in difficult times

Fintech is currently wearing its bruises for all to see. A combination of factors has come together to reduce valuations, dry-up investment, increase costs and shorten runways.

But it’s not all doom and gloom. There are still opportunities for growth.

One of the areas we'll see continue to grow over the coming years is in financial inclusion. There are potentially huge markets which remain untapped or barely serviced by mainstream providers. And a combination of technology, nimbleness and innovation means they can be serviced profitably by our up-and-coming fintechs.

Inclusion can be a key point of differentiation.

Financial inclusion doesn’t have to mean providing a service to the unbanked or for poorly paid workers (though we will look at that below). It can also include businesses. One of the reasons Funding Options by Tide was originally set up was to help business owners find finance when they were excluded by banks. In the four years I was Marketing Director there, we grew to help thousands of businesses find the vital finance denied them by traditional banks. We even became part of the official Bank Referral Scheme, created to mandate a referral to alternative finance platforms when the banks said no.

Today’s banks are a little more interested in helping business customers than they might have been back then, but it’s still difficult to deal with the smaller end of the market. That’s where embedded finance and lending-as-a-service players such as one of my current clients, Satago , fits in – but we’ll address that in a later article.

The focus of this article is on consumer services, the sharp end of financial inclusion. Below, we’ll look at the lifecycle from getting paid (with Wagestream), to getting a loan (with Plend) and a novel look at a group you might not immediately think of as ‘excluded’ (with Nosso).

Getting paid is the easy part, right?

Not according to Emily Trant of Wagestream . With around 50% of the UK population on hourly pay and with the potential to work irregular hours (gig work, overtime etc.), there’s a huge demographic who don’t know what they’re going to get paid this month. Given they tend to be the lowest-paid workers, it’s a double-whammy: low and irregular income.

Emily speaks a lot about the Poverty Premium – the idea that those least able to afford it pay the most for many services. The costs of paying by instalment for insurance or your TV license, for pre-paid electricity and sub-prime credit all add-up (to an estimated ￡500 or more a year).

Wagestream seeks to address some of this by rebundling financial services around the employer. This makes perfect sense. Employers are the people who directly pay us, deal with tax through PAYE and pay into a pension. But there's more they can do to help the lowest paid if they are given the right tools.

It makes sense for employers to get involved – according to recent research from Zellis, 54% of workers say financial stress has had a detrimental effect on their work productivity.

How Wagestream helps

As a marketer, I’m always talking about identifying your customers thoroughly, seeking to understand their pain and how your product can bring value. Wagestream has done this to great effect.

The Wagestream app has access to shift and payroll data to provide visibility to the employee. Knowledge is power. As Emily says, having access to the data “enables people to make a decision as to what's happening with their financial life right now and do something about it.” That knowledge means they can work extra shifts or find a way to cut expenditure before it’s too late.

One side effect of this knowledge is that it exposes payroll errors long before payday. For many businesses, keeping on top of ever-changing shift patterns is difficult and mistakes are frequent. With Wagestream, when a worker has access to their data ahead of payday, they can see that Friday night’s extra shift they pulled hasn’t been included and can get their boss to rectify it.

Not only that, but many Wagestream users are able to actually draw-down on their earnings ahead of payday. This turns the concept of payment on its head. What Wagestream changes is the realisation that your employer is a creditor. You’ve done the work for them already but they’re only going to pay you at the end of the month.

As Emily points out:

“When you actually think about it, why is it okay that my company has chosen when to pay their debt to me? In any other debt or creditor situation it's actually the creditor who's in control. If my bank lends me money, they tell me when I have to pay it back, they're in control.”

For many of us, this arrangement doesn’t really matter. After all, we have access to credit-cards and overdrafts if we need them. But many of these people don’t have access to credit at all. With an estimated 1million people in debt to illegal loan sharks in the UK, there has to be a better way. And for many, drawing down on what you’ve already earned can be it.

That “early” settlement of wages earned can be a real benefit to the employer too. One of Wagestream’s largest customers employs around 40,000 people. They were suffering persistent absenteeism and an inability to fill shifts at the end of the month.

“The reason was people were running out of money and they were too embarrassed to say ‘I can't get to work’. And if you've run out of money and you don't have something else, you don't have an overdraft you can lean on or you don't have another way of paying for things. You're just stuck. So it enables people getting to work and working more.”

The combination of legacy payroll tech, fintech and a deep understanding of the customer delivers a solution which benefits all.

But what if I need a loan?

Wagestream is helping people get through the day-to-day, month on month. But what about those who are excluded from the credit market but need a loan – whether that’s to pay-off an expensive credit card bill or to fix their roof? Or even to purchase solar panels (more on that later)?

Well, we can get a loan from the bank, right? For millions of people, the bank is still going to say no.

Plend | B Corp founder Robert Pasco knows only too well how difficult it can be to get finance when you have an incomplete credit history or worse, a poor credit history.

When he first came to the UK, Robert had no credit history despite having a good job. The only credit he could get was an expensive 40% credit card. Unfortunately, he racked-up a lot of debt on that card and the punitive interest rates meant he couldn’t pay it back. A debt management programme got him back on track, but years later his credit report is still less than excellent.

Millions of people in the UK have no credit rating, thin files or credit ratings which include problems or mistakes from years ago. Yet many of these people, like Robert, are in good jobs earning a decent wage.

How does Plend help?

Traditional lending – based on credit scores – fails to serve these customers but fintech players such as Plend can help. Using technology including Open Banking (and some manual underwriting), Plend is able to offer life-changing finance to a new segment of the market. ?

Life-changing? Yes. Debt consolidation can be life-changing. Moving everything into a single loan at a sensible rate (maybe half what you might pay on a sub-prime credit card) is life-changing.

Technology allows Plend to offer near-prime and some sub-prime customers a loan at a sensible rate because they calculate risk differently. Looking at salary details and expense data through Open Banking allows them to take a much more nuanced approach than traditional credit-score underwriting. ?

This enables Plend to offer finance to people who are traditionally excluded. Around a third of their customers earn less than ￡18,000 a year. As Robert says, “Lenders wouldn't even touch this market. But there are other factors to consider. Someone may be living at home for example, so their expenditure isn't as large as those who rent or have a mortgage.” A nuanced and in-depth approach to underwriting allows Plend to serve new markets – and those customers tend to be loyal and profitable.

They’re not just there for debt consolidation either. I first came across Plend when I was working at MakeMyHouseGreen & Switchd , the green home tech platform. Plend’s tech-first approach enabled them to be embedded in the purchase process, allowing potential solar-panel customers to find out in real time if there was a chance of them getting a loan to pay for the installation. But embedded finance is a topic for another day.

It's not all about the lowest-paid

There are numerous apps and accounts available for people who want to get into saving for the first time. Indeed, Wagestream is addressing the savings issue for many through their app. However, the app I want to talk about is for a group which may not necessarily see themselves as financially excluded.

Traditional finance is built around a single person. Investments, savings accounts, ISAs and pensions are all structured around an individual rather than a couple of a family unit. Although these families can be relatively well-off middle-income people, mainstream institutions don’t cater for them adequately.

Nosso is seeking to redress that. Youssef Darwich , points out the lack of innovation in this space:

“If you look at the underlying financial products that exist in the market today and compare them to 20 or 30 years ago, not much has changed…it's all still very much based on a single user, so savings accounts are for one person. And investment accounts are the same thing. ISAS (obviously), the same thing. Pensions, same thing.” But that’s not the way many families want to work. They share rent or a mortgage, they share bills. But they can’t share investments or savings accounts.

Using fast and secure online KYC and efficient digital onboarding, Nosso can enable multiple parties to pay into a single Junior ISA. Parents, grandparents and others are all able to pay into the same account.

Nosso also allows families to gain a simple overview of all the family finances. As with Wagestream, knowledge is power – having an understanding of family finances allows for better planning and the ability to reach financial goals. It’s early days for Nosso and there are lots of ideas for how the product can evolve in the future by focusing on a group often overlooked by traditional finance.

Inclusion can be the future

One of the areas where financial start-ups will prosper in the coming years is not by being a me-too app looking to put a Gen-Z gloss on a traditional service, but by identifying a part of the market that is underserved. You've got to have a passion to want to serve that market and to think laterally about how to do it profitably. That process leads to the creation of innovative products, using an ever-improving digital ecosystem. When the ideal route to market is discovered and the right messaging structure is in place, success will surely follow.

Financial inclusion benefits the end customer, potentially their employer, the financial provider and indeed, the economy as a whole.

?