Brian Knight
Associate Director, Financial Policy, Center for Financial Markets
Banking and Business and Capital Access and Capital Markets and Finance and Financial Innovations and FinTech and Global Economy and Job Creation and Public Policy and Regulation and U.S. Economy
Brian Knight is an attorney with significant experience in new sources of capital, financial technology, and entrepreneurial issues. He is interested in the interplay between technological, regulatory, and market innovation and how best to improve access to capital for businesses of all sizes.
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FinTech – expanding the client pool for traditional services

By: Brian Knight
April 14, 2015

According to the FDIC, approximately 28 percent of U.S. households are un-or underbanked. This means that more than a quarter of them either do not have access to an FDIC (or equivalent) insured institution or have access but obtain financial services or products from non-insured institution (such as a non-bank lender or check casher). While some un- or underbanked households are that way by choice – either because they just don’t like or trust banks or because they find alternative financial products to be a better fit for their needs – many people are unable to use traditional financial services as much as they would like because of a lack of money or credit, or because the traditional services simply cannot move fast enough.

To look at things from the financial institution’s perspective, it is too difficult to assess the risk or provide sufficient service to these individuals profitably. This leaves many of un- and underbanked households using services that are not a great fit for their needs and that may be much more expensive or burdensome. Fortunately, financial technology (FinTech) innovations are providing possible means to address these issues, giving those who want to participate in traditional financial services a way in.

One example of the problem, and a possible solution, is the credit score. The credit score is used not only by financial institutions and businesses in deciding whether to extend credit but also by employers, landlords, and others when assessing whether a person is trustworthy. A credit score largely determined by how much credit a person has access to and how they have handled previous balances, which creates a possible Catch-22. A lack of credit history or failing to use credit (such as preferring to pay in cash) can make it hard to get credit in the first place. While many young people in “banked” households get their parents to co-sign their first credit card, giving them an onramp into the system, people in un- or underbanked homes are less likely to get access, and are more likely to rely on less desirable alternatives like pay-day loans.

Fortunately advances in FinTech are creating new access points. For example, the Fair Isaac Corporation (the company behind the FICO credit score), in conjunction with LexisNexis Risk Solutions and Equifax, are engaging in a pilot program that will allow credit card companies to use a new score based on data types that aren’t traditionally included in determining a score, like paying utility and phone bills. This use of “big data” to incorporate new sources of information from transactions of the un- and underbanked could help them get access to traditional credit and move away from more expensive alternatives.

Another where FinTech innovation may be providing help for people outside the banking system is payment speed. Payments from one bank account to another in the United States are not done in real time. Instead they usually rely on a system that processes payments in batches during a set point in the day. This is the system that is used to directly deposit your paycheck into your bank account. While this system is very economical and works well for many people, it can take up to three days for a payment to settle. For the un- and underbanked, who are more likely to have very limited financial reserves, this delay can be an expensive problem. For example, if a person is paid on a Tuesday and their rent is due on Wednesday, if they use a bank they may not be able to get the money to their landlord in time to avoid a late payment fee. Meanwhile a check-cashing provider can provide cash instantly, but usually at a significant cost. The ability for banks to provide near-real time payment transfers via FinTech would make formal bank accounts more viable for people in need.

Both the U.S. Federal Reserve and NACHA (the governing body for the private ACH system) are working on systems that allow payments to move faster, while still remaining economical for banks and their customers. The hope is that by modernizing the system and taking advantage of innovations in payments technology, the formal financial system will be able to meet the needs of the un- and underbanked in ways that are safe, efficient, and both cost-effective for households and profitable for financial institutions.