The Federal Deposit Insurance Corporation’s (FDIC’s) most recent “National Survey of Unbanked and Underbanked Households” reports that 19 percent of American households are financially excluded, which includes both the unbanked and underbanked. Financial exclusion drives a wealth gap, leading to long-term individual and socio-economic impacts. People in these households face several challenges because of being financially excluded, including the high cost of financial services, greater financial instability, and limited opportunities for improving their financial health. On a societal level, financial exclusion exacerbates the wealth gap and entrenches large groups of people outside the global economy. Fortunately, technology, including artificial intelligence (AI), is being used more to build innovative products and services that address the obstacles that keep people financially excluded.
Obstacles that keep households financially excluded
The FDIC determined that people in the United States are unbanked or underbanked because they either can’t meet minimum balance requirements or don’t trust banks. Other common barriers include living in a financial or digital desert. These neighborhoods lack local bank branches or the digital infrastructure that allows residents access to online banking.
Lack of trust in banks as a primary reason for being unbanked indicates that some individuals remain financially excluded despite having access to financial services. Some of these individuals may simply have poor financial literacy, which hinders their understanding of how banking impacts their financial health. In some communities, being unbanked is simply the social norm, perpetuating a cycle of financial exclusion. These factors highlight the complex nature of financial exclusion beyond mere access issues. Both financial institutions and fintech companies have a role in leveraging innovative technologies to address these varied reasons for financial exclusion. There are three ways technology is contributing to more access to financial services.
Banking as a Service (BAAS)
BaaS is a model that uses API frameworks to let non-banking entities offer financial services. This technology enables fintech companies and other third parties to integrate banking functions directly into their products, creating a seamless financial experience for users. By allowing nontraditional players to offer banking services, BaaS extends financial reach into areas lacking physical bank branches. Potentially, it also provides an opportunity for known local organizations to become access points for online services in areas where households may have unreliable digital infrastructure.
For individuals distrustful of traditional banks, BaaS offers an alternative. By partnering with trusted community organizations or popular brands, these services can reach those who might otherwise avoid financial institutions. For example, a local community center could offer essential banking services through a BaaS platform, leveraging existing relationships to build financial trust.
The BaaS model reduces the costs and complexity of offering financial services, enabling more companies to enter the market. The increased competition drives innovation and lowers prices, resulting in more affordable, accessible services for underserved consumer segments.
Alternate credit scoring
Traditional credit scoring often excludes individuals with limited or poor credit history, preventing them from accessing basic financial services like bank accounts or credit cards. To address this, AI-driven alternate credit scoring methods are emerging as a powerful tool for financial inclusion.
These innovative systems leverage AI, machine learning, and deep learning algorithms to evaluate creditworthiness using nontraditional data sources. For example, an alternate credit scoring model can analyze mobile phone usage, both its structured and unstructured data. This could include data usage patterns, call frequency, and length to analyze text messages and viewing content. Other unstructured data sources that an alternate credit scoring model could use include social media activity and online reviews. The AI models use these new types of data to infer behavioral patterns and financial responsibility and assess the risk an individual may present.
Fintech company Nova Credit uses alternative credit scoring in its Credit Passport® product that helps immigrants without a credit history in their new country. Branch uses an alternate credit scoring model to provide microloans via its mobile app. The company, partnered with African mobile payments service Vodacom M-Pesa, analyzes smartphone data to assess creditworthiness. Branch uses the resulting credit risk assessment to offer small, collateral-free loans, from US$2.50 to US$500, to users without traditional credit histories. A study on its entry into Tanzania and Kenya found that for 22 percent of its customers, Branch was their only credit product. Alternate credit scoring models can reveal patterns and insights that traditional methods miss—potentially opening doors for millions who don’t score well on traditional credit reviews.
These methods also raise concerns about privacy and its potential abuse as the basis for a social credit system. Alternate credit scoring models often require access to personal data beyond traditional financial information. Striking a balance between expanded financial inclusion and data privacy remains a key challenge in the wide adoption of alternate AI-based credit scoring models.
Blockchain and distributed technologies
Blockchain-powered smart contracts enable direct peer-to-peer transactions globally, providing new options for people to transfer money, make payments, and obtain loans. The ease of access via mobile app and lowered costs increase access for the financially excluded.
Simultaneously, distributed technologies transform regulatory compliance through regulatory technology (RegTech) solutions. These technologies help traditional financial service providers operate more efficiently and cost-effectively by streamlining regulatory monitoring, reporting, and compliance processes. The resulting savings can be passed on to customers, making traditional financial services more affordable and accessible to a broader population.
Using technology to improve financial literacy
Many unbanked or underbanked individuals may meet financial requirements but exclude themselves due to poor financial literacy or confusion. Technology is bridging this gap through various methods, including digital literacy and personal financial tools that provide accessible financial education, such as YNAB and EdX, and BaaS platforms that incorporate financial literacy modules, combining access with education. AI-enabled tools offer personalized guidance through financial decisions, providing real-time feedback on spending habits and budgeting and micro-investing apps allow those with limited resources to start building wealth through fractional investing options, with many incorporating automated robo-advisors.
These technology solutions make financial literacy more accessible and engaging. This helps break down personal barriers some unbanked or underbanked may have about actively moving towards financial inclusion and better financial health.
Financial inclusion is an opportunity for everyone
The path to financial inclusion runs through fintech innovation. While the unbanked and underbanked may not access traditional financial services, most have smartphones. By developing and offering products that address barriers to financial inclusion, fintech companies provide a means for consumers to create the circumstances that allow them access to traditional financial services. Moreover, these tools can build trust and loyalty, positioning them as long-term financial resources even as a user is no longer financially excluded. The opportunity for fintech to reach the unbanked and underbanked promises to unlock their economic potential and reduce financial inequality.
About the Author:
Sri Phani Teja Perumalla is a product director with a multinational banking and financial services holding organization. He has a proven track record of launching high-profile consumer-facing products and platforms. He has a Bachelor of Technology and a Masters in International Business. Connect with Sri on LinkedIn.
