The scale of the underbanked population is staggering, even in developed nations. In the U.S., nearly 19 million households are underbanked, while about 6% of Americans remain completely unbanked, disconnected from traditional financial systems. To put this into perspective, that’s almost half the population of Canada, relying on alternatives like payday loans and prepaid debit cards for basic financial services.
In Canada, the situation isn’t much brighter. Around 15% of the population, approximately five million, fall under the underbanked category. Globally, the statistics are even more jarring: 1.7 billion people, including one billion women, are excluded from formal financial systems.
For many, payday loans or money marts become a financial lifeline, but at a devastating cost. Payday loans often carry APRs upwards of 400%, trapping users in cycles of debt. The average borrower takes out nearly ten payday loans annually, spending over $500 just on fees for borrowing $375, according to the Consumer Financial Protection Bureau. These predatory alternatives highlight the urgency for accessible, affordable financial solutions.
Governments are stepping in with strategies to promote financial Inclusion, such as the U.S. Treasury’s National Strategy for Financial Inclusion, to expand safe and affordable financial services. But meaningful change requires more than policy. It demands innovation and collaboration.
Why banks struggle to innovate for the underserved
Banks face significant technical and strategic challenges in serving underbanked populations. One of the primary technical hurdles is the limitation of legacy systems. These outdated infrastructures lack the flexibility to create personalized financial packages tailored to the diverse needs of underbanked consumers. For instance, developing products that offer incentives like financial literacy rewards or bundled accounts with microloans is a monumental task within these rigid systems.
Strategically, banks often rely on traditional KYC (Know Your Customer) processes that depend heavily on formal financial records. This approach excludes individuals new to the financial system, such as immigrants or those without extensive credit histories. The inability to assess creditworthiness beyond conventional methods means many potential customers remain unserved.
Alternative credit scoring presents a solution by evaluating non-traditional data sources like rental payments, utility bills, or social media activity. This holistic assessment provides a clearer picture of an individual’s financial responsibility, enabling banks to extend services to those previously excluded and promoting greater financial inclusion.
Banks grapple with risk aversion and regulatory compliance, which can stifle innovation. Strict regulations and the perceived high risk associated with underbanked markets discourage banks from investing in new product development for these segments. Additionally, cultural disconnects and a lack of market understanding lead to ineffective offerings that do not meet the actual needs of underbanked communities.
The role of banks and neobanks: Profitability meets purpose
Neobanks are recognized as innovators for their digital-first experiences but often focus on affluent, tech-savvy customers. Traditional banks, hindered by legacy systems, are slower to adopt new technologies and are not typically seen as innovators. Both face challenges in profitably serving the underbanked, leaving these individuals vulnerable to predatory lenders like payday loan providers.
The key opportunity lies in investing in adopting flexible platforms that enable banks to integrate and manage diverse data sources. With this approach, banks can accommodate different KYC processes, utilize alternative credit scoring methods, and offer financial literacy programs tailored to underbanked populations.
Banks can create tailored financial propositions by understanding each customer’s cohort and specific needs. Empowering underbanked individuals to achieve financial stability involves developing financial packages that balance profitability with purpose, such as combining savings accounts, microloans, and financial literacy incentives. This system opens a new customer base and justifies the investment in technological advancements, enhancing efficiency and scalability across all market segments.
Zafin: A bridge to financial inclusion
Zafin plays a transformative role in helping banks craft personalized financial packages tailored to the unique needs of underbanked cohorts in developed markets like North America and Europe. Through our Innovation and Orchestration (IO) platform, we empower banks to become market makers by creating valuable propositions that integrate services across industries such as fintech, telco, insurance, and financial education.
For example, banks can develop bundled offerings that combine mobile services with savings accounts, credit-building programs, and educational tools. Customers may receive discounts on their telco bills for participating in financial literacy modules delivered through their phones. These modules could include interactive lessons on budgeting, credit management, and saving for the future. Banks can leverage our platform to offer innovative solutions that address challenges like predatory lending, limited access to affordable credit, and insufficient financial literacy, effectively expanding their reach, promoting financial inclusion among underbanked individuals, and tapping into opportunities even in wealthier markets.
Zafin’s IO platform powers these innovative use cases by enabling banks to integrate and orchestrate data from various sources, creating tailored solutions for specific customer cohorts. Together with our partners, we are committed to making a meaningful impact, helping to build a world where everyone can access the financial services they need to thrive. Zafin is dedicated to improving the world through innovation and inclusion.
Examples of how banks can become market makers of cross-industry innovation propositions
Banks, telcos, and fintechs can collaborate to bundle financial products with educational components tailored to specific demographics. For example:
- Students and young adults: A package could include a student checking account, tools to track spending, and financial literacy modules focused on managing student loans, building credit, and saving for the future. Completing these modules could unlock rewards like reduced interest rates or cashback on purchases.
- Gig economy workers: With growing numbers of freelancers and contractors, banks could offer products that help these workers manage irregular income streams. Bundled solutions could include prepaid debit cards linked to savings accounts with automated features that allocate a portion of each payment to savings or tax reserves. Educational content on budgeting and tax planning could round out the offering.
- Newcomers and immigrants: Alternative credit scoring models can play a critical role here, enabling banks to evaluate financial responsibility using non-traditional data. A bundled package for newcomers could include:
- A basic checking account.
- Educational content on navigating the financial system.
- Pathways to build credit through everyday activities like paying rent or utility bills.
Using Zafin IO to integrate innovative credit scoring tools can aid in creating these journeys. With Zafin’s platform, banks can create hyper-personalized offerings that combine financial products with incentives, rewards, and education. These solutions address underserved populations’ immediate needs and nurture long-term financial health, trust, and engagement.
A call to action
Targeting the underbanked has long been considered unprofitable. But the narrative can shift. Banks can turn financial Inclusion into a social impact and business growth driver by leveraging technology and partnerships.
Technology solutions already exist! Banks just need to act with purpose, strategy, and the right partners. The future of financial Inclusion depends on it.
