FinTech and the American Dream

Technology is powering a more inclusive form of financial services

The longstanding belief among the American workforce has been that if one works hard enough, one can eventually afford a higher quality of life. This belief is being challenged as market dynamics change. The recent election proved that there are many communities that are feeling left behind for various reasons, including a lack of access to adequate financial services. However, technology is allowing startups to reach this segment in a cost-efficient way, giving FinTech the potential to empower the approximately ~67 million underbanked Americans.

It’s Expensive to Be Poor

According to the Center for Financial Services Innovation, financially underserved individuals spent $141 billion for financial services in 2015, 5.9% more than 2014. Many financial service providers take advantage of the lack of alternatives that many Americans face by providing poor service while taking every last penny they can from consumers, with no regard as to how this behavior will impact their customers or the future of their own business models. Recent history provides many examples of ill-advised and antiquated practices by traditional financial firms, which are providing an opening for innovative companies that put their customers first.

• Payday lenders aim to help individuals receive wages earlier, which in theory, should assist them in their budget management. However, these companies typically charge outrageous interest rates of close to 400% APR (!!). How does this type of predatory lending translate into a sustainable business model when you are putting your customer base into financially crippling debt traps?
• In the latest of a long list of big bank scandals, in September 2016 it was revealed that Wells Fargo employees created 2 million fake accounts since 2011. As part of the scheme, employees transferred customers’ money to these new accounts, causing existing accounts to incur overdraft charges. Shady activity by big banks certainly does not help engender trust with customers.
• Access to credit has been limited within underserved communities, who have traditionally been perceived as “too risky” by banks. The funding gap has stifled potential economic growth and opportunities for advancement for this segment. However, it is becoming increasingly clear that traditional credit risk scoring models are becoming antiquated.

The Middle Class is Hurting Too

Think that that you have to be living in poverty to be in a state of financial insecurity? Think again.

Almost half of Americans have less than $400 in savings to pay for an emergency.

As an article in The Atlantic details, many middle-income (and even some-upper income) individuals are struggling to make ends meet due to financial mismanagement. Over the past century, financial products have become increasingly complex and the population’s financial sophistication has not kept pace, resulting in sub-optimal personal finance decisions.

The financial industry has many bad actors as well as companies that are blind to the market opportunity that exists not only within the underbanked segment (as defined by the FDIC), but also for everyone else struggling to achieve financial security. As income disparity in the US continues to increase, we all need better solutions.

Many FinTech startups have identified areas in financial services where there is large market opportunity as well as the potential to change the lives of millions. Below are five subsectors which I believe will create the greatest value over the next decade for Americans struggling to maintain financial security.

1. Financial Literacy

Only 57% of Americans are financially literate. Many financial companies have long taken advantage of this by selling poor financial products and services (for an extreme example, consider the aggressive selling of mortgage-backed securities leading up to the Great Recession). Startups that increase financial know-how among the population will better allow consumers to avoid bad actors and contribute to financial stability, and also position them well to launch their own financial products or become interesting acquisition targets for companies looking to acquire a loyal user base.

Napkin Finance is building a community of young professionals with the aim of making financial literacy fun and simple. NerdWallet provides advice, research, and reviews regarding all types of financial products. Wealth Factory provides financial education targeted toward entrepreneurs, health care professionals, and small business owners.

2. Budgeting

A significant portion of the “gig economy” is composed of millions of individuals who have to deal with budget uncertainty that is typical of contracting work. Additionally, as previously mentioned — almost half of Americans do not have $400 in savings to cover an emergency. The fact that so many are living paycheck-to-paycheck makes proper budgeting of paramount importance.

Albert connects to all accounts a user owns and provides actionable recommendations to help users improve their financial health. Even helps workers with volatile earnings to save more during periods of high earnings which in turn supplement one’s spending during periods of low earnings. Debitize encourages responsible credit card usage by automatically setting aside funds from a user’s checking account for every credit card purchase that is made.

3. Investing

Almost half of Americans are not invested in the stock market, meaning that a large proportion of the population has not benefited from the increases in the broader stock market since the Great Recession. Two factors behind this include the fact that many are not financially sophisticated enough to invest with confidence and/or flat-out do not trust financial advisors to act in their best interests. Investing is critical for wealth accumulation, and many startups are making it easier than ever for anyone to do so.

As the first free robo-advisor, WiseBanyan is democratizing access to professionalized portfolio management services. Aspiration provides affordable banking services and low minimum investment mutual fund products. Digit is an automatic savings app that will set aside amounts you can afford to a savings account on a weekly basis.

4. Lending

Millions of individuals and businesses haven’t had access to credit due to either low FICO scores or a lack of credit history. However, FinTech companies are leveraging the increasing availability of data to create algorithms using non-traditional metrics that correlate to creditworthiness. Using methods that banks are either unwilling or unable to adopt, these startups are empowering previously ignored customer segments.

Camino Financial provides loans to underbanked Hispanic-owned businesses and helps them take steps to build their credit score. Fig Loans provides emergency loans to individuals with low credit scores at a fraction of payday loan costs and with friendly repayment terms. ModernLend allows international citizens to build up a credit score through a credit card that doesn’t require applicants to provide a social security number or have a US credit score.

5. Insurance

Long characterized as an unsexy industry that has maintained its archaic practices, this $1.2 trillion market is ripe for a shakeup. Agencies, which are the main players distributing policies, have a commission compensation structure that leads them to underserve individuals who qualify for lower premium/less profitable policies. Additionally most insurance policies offered reflect the slow pace of innovation of their underwriters and do not meet the dynamic needs of consumers, resulting in inefficient policies.

Simple Disability Insurance is aptly named — it takes the inefficiency out of the signup process by partnering with insurers to provide a more efficient underwriting platform that leverages big data and lowers cost, allowing the more than 100 million uninsured Americans a simpler way to get disability insurance. Similarly, Bungalow Insurance is partnering with insurance companies to make renters insurance coverage easier and faster to sign up for, again lowering costs for insurance companies and consumers. Metromile is allowing drivers to pay for car insurance by the mile, which allows those that drive less to pay for coverage that is more commensurate with the time they spend on the road.

A Future With Greater Financial Security

As FinTech continues to reshape the financial landscape, I expect it to have a great impact on segments of the population who have been largely ignored or taken advantage of. Everyone needs banking services in order to conduct transactions, save for retirement, and borrow. Without access to these services, economic progress is stifled and everyone pays the price in some shape or form. A more inclusive financial ecosystem will go a long way toward building a more equitable society where upward economic mobility is possible, as long as one works hard enough for it.