Beyond the Surface: The concept of Underbanked in Developed countries

When we think about the concept of financial inclusion and more particularly about underbanked and unbanked populations, we often picture developing countries where access to banking services is limited. However, it might surprise you to learn that even in developed European countries, where banking services are abundant, a sizable portion of the population remains excluded, falling into the category of the "underbanked".

The term "underbanked" refers to individuals or businesses that lack access to the financial services they require to help them manage their money and improve their economic well-being and this at a reasonable (acceptable) cost.
This issue is more prevalent than commonly acknowledged and extends beyond financially disadvantaged individuals.

There are four primary causes of being underbanked:

Niche Needs: Some customers have highly specific requirements, rendering the market too small to support dedicated services or products tailored to their needs.
Risk Considerations: Certain customers carry a level of financial risk that surpasses what financial institutions are willing to bear at an economically viable cost.
Compliance Complexity: The enormous burden of regulatory compliance, such as Anti-Money Laundering (AML) or Know Your Customer (KYC) requirements, can make it impractical for financial institutions to serve certain customers in a cost-effective manner. The enormous penalties associated with non-compliance only amplify this challenge.

These exclusions have become more pronounced, driven by increasingly stringent regulations and the fact that financial institutions are increasingly monitoring the individual profitability of each customer. If a customer’s profitability is negative or falls below a certain threshold, institutions are more inclined to deny service. Moreover, when one financial institution makes the math, others will follow their example.

Let us have a look at some illustrative examples:

People with a history of cancer or advanced age seeking life or medical insurance.
Individuals with a history of accidents or traffic fines pursuing car insurance.
Residents of high-risk regions facing difficulties obtaining a car or bike insurance.
Elderly who do not have sufficient digital skills to use all digital tools offered by the financial institution.
People not having proper access to the internet or a smartphone, e.g. those who live in rural or remote areas.
Politicians encountering regulatory or ethical barriers due to their status. This can be for regulatory reasons, as PEP (Politically Exposed Persons) individuals have severe additional KYC and AML requirements, but also for ethical/sustainability reasons, when it concerns politicians of more extreme parties. Cfr. the recent stories of Coutts (private bank owned by NatWest) closing the banking account of Nigel Farage or Jeremy Hunt being refused to open a banking account at Monzo.
Freelancers and gig-workers grappling with income instability impacting their creditworthiness.
Immigrants, regardless of education and income, facing credit history gaps.
Individuals who defaulted on past credit struggling to access credit in the future.
Residents of high-risk countries or nations with additional regulatory demands, e.g. US citizens, facing additional regulatory efforts under the FATCA regulation, even when residing in another country.
Workers in certain industries such as sex work, pornography, tobacco, or soft drugs.
Individuals with criminal records
Companies with owners who faced a bankruptcy in the past
Businesses with intricate structures, making owner identification complex.
Companies with subsidiaries in precarious countries.
Companies dealing in phone and gift cards.
High-risk sectors like Horeca and construction prone to financial instability and money laundering.

These rejected customers could potentially form a niche market for specialized financial institutions, yet turning a profit with this demographic is more difficult than with clients accepted by the mainstream institutions.

If there is not a well-regulated alternative for those individuals and companies, they will be compelled to operate outside the financial system, resorting to cryptocurrency, payday loans, or cash transactions. Such practices can trap them in cycles of debt and financial insecurity. Moreover, this circumvention hampers economic growth, social mobility, and inadvertently fosters money laundering and unreported labor – outcomes that contradict the intent of stricter regulations set by governments.

This means financial exclusion can have profound consequences for individuals and companies and society as a whole. Governments must therefore undertake necessary corrective measures, which could involve streamlining counterproductive and resource-intensive regulations, mandating financial institutions to serve a minimum percentage of "underserved" customers, or providing subsidies to institutions that effectively cater to the underbanked. Simultaneously, governments and financial entities should improve financial literacy by offering education and awareness programs.

Addressing this issue is paramount for fostering economic growth, minimizing disparities, and elevating the financial well-being of individuals and society as a whole.

Comments

Transforming the insurance sector to an Open API Ecosystem

1. Introduction "Open" has recently become a new buzzword in the financial services industry, i.e. open data, open APIs, Open Banking, Open Insurance …, but what does this new buzzword really mean? "Open" refers to the capability of companies to expose their services to the outside world, so that external partners or even competitors can use these services to bring added value to their customers. This trend is made possible by the technological evolution of open APIs (Application Programming Interfaces), which are the digital ports making this communication possible. Together companies, interconnected through open APIs, form a true API ecosystem , offering best-of-breed customer experience, by combining the digital services offered by multiple companies. In the technology sector this evolution has been ongoing for multiple years (think about the travelling sector, allowing you to book any hotel online). An excelle...

Are product silos in a bank inevitable?

Silo thinking is often frowned upon in the industry. It is often a synonym for bureaucratic processes and politics and in almost every article describing the threats of new innovative Fintech players on the banking industry, the strong bank product silos are put forward as one of the main blockages why incumbent banks are not able to (quickly) react to the changing customer expectations. Customers want solutions to their problems and do not want to be bothered about the internal organisation of their bank. Most banks are however organized by product domain (daily banking, investments and lending) and by customer segmentation (retail banking, private banking, SMEs and corporates). This division is reflected both at business and IT side and almost automatically leads to the creation of silos. It is however difficult to reorganize a bank without creating new silos or introducing other types of issues and inefficiencies. An organization is never ideal and needs to take a numbe...

RPA - The miracle solution for incumbent banks to bridge the automation gap with neo-banks?

Hypes and marketing buzz words are strongly present in the IT landscape. Often these are existing concepts, which have evolved technologically and are then renamed to a new term, as if it were a brand new technology or concept. If you want to understand and assess these new trends, it is important to reduce the concepts to their essence and compare them with existing technologies , e.g. Integration (middleware) software ensures that 2 separate applications or components can be integrated in an easy way. Of course, there is a huge evolution in the protocols, volumes of exchanged data, scalability, performance…, but in essence the problem remains the same. Nonetheless, there have been multiple terms for integration software such as ETL, ESB, EAI, SOA, Service Mesh… Data storage software ensures that data is stored in such a way that data is not lost and that there is some kind guaranteed consistency, maximum availability and scalability, easy retrieval...

IoT - Revolution or Evolution in the Financial Services Industry

1. The IoT hype We have all heard about the "Internet of Things" (IoT) as this revolutionary new technology, which will radically change our lives. But is it really such a revolution and will it really have an impact on the Financial Services Industry? To refresh our memory, the Internet of Things (IoT) refers to any object , which is able to collect data and communicate and share this information (like condition, geolocation…) over the internet . This communication will often occur between 2 objects (i.e. not involving any human), which is often referred to as Machine-to-Machine (M2M) communication. Well known examples are home thermostats, home security systems, fitness and health monitors, wearables… This all seems futuristic, but smartphones, tablets and smartwatches can also be considered as IoT devices. More importantly, beside these futuristic visions of IoT, the smartphone will most likely continue to be the cent...

PSD3: The Next Phase in Europe’s Payment Services Regulation

With the successful rollout of PSD2, the European Union (EU) continues to advance innovation in the payments domain through the anticipated introduction of the Payment Services Directive 3 (PSD3) . On June 28, 2023, the European Commission published a draft proposal for PSD3 and the Payment Services Regulation (PSR) . The finalized versions of this directive and associated regulation are expected to be available by late 2024, although some predictions suggest a more likely timeline of Q2 or Q3 2025. Given that member states are typically granted an 18-month transition period, PSD3 is expected to come into effect sometime in 2026. Notably, the Commission has introduced a regulation (PSR) alongside the PSD3 directive, ensuring more harmonization across member states as regulations are immediately effective and do not require national implementation, unlike directives. PSD3 shares the same objectives as PSD2, i.e. increasing competition in the payments landscape and en...

Trade-offs Are Inevitable in Software Delivery - Remember the CAP Theorem

In the world of financial services, the integrity of data systems is fundamentally reliant on non-functional requirements (NFRs) such as reliability and security. Despite their importance, NFRs often receive secondary consideration during project scoping, typically being reduced to a generic checklist aimed more at compliance than at genuine functionality. Regrettably, these initial NFRs are seldom met after delivery, which does not usually prevent deployment to production due to the vague and unrealistic nature of the original specifications. This common scenario results in significant end-user frustration as the system does not perform as expected, often being less stable or slower than anticipated. This situation underscores the need for better education on how to articulate and define NFRs , i.e. demanding only what is truly necessary and feasible within the given budget. Early and transparent discussions can lead to system architecture being tailored more close...

Low- and No-code platforms - Will IT developers soon be out of a job?

“ The future of coding is no coding at all ” - Chris Wanstrath (CEO at GitHub). Mid May I posted a blog on RPA (Robotic Process Automation - https://bankloch.blogspot.com/2020/05/rpa-miracle-solution-for-incumbent.html ) on how this technology, promises the world to companies. A very similar story is found with low- and no-code platforms, which also promise that business people, with limited to no knowledge of IT, can create complex business applications. These platforms originate , just as RPA tools, from the growing demand for IT developments , while IT cannot keep up with the available capacity. As a result, an enormous gap between IT teams and business demands is created, which is often filled by shadow-IT departments, which extend the IT workforce and create business tools in Excel, Access, WordPress… Unfortunately these tools built in shadow-IT departments arrive very soon at their limits, as they don’t support the required non-functional requirements (like h...

An overview of 1-year blogging

Last week I published my 60th post on my blog called Bankloch (a reference to "Banking" and my family name). The past year, I have published a blog on a weekly basis, providing my humble personal vision on the topics of Fintech, IT software delivery and mobility. This blogging has mainly been a personal enrichment , as it forced me to dive deep into a number of different topics, not only in researching for content, but also in trying to identify trends, innovations and patterns into these topics. Furthermore it allowed me to have several very interesting conversations and discussions with passionate colleagues in the financial industry and to get more insights into the wonderful world of blogging and more general of digital marketing, exploring subjects and tools like: Search Engine Optimization (SEO) LinkedIn post optimization Google Search Console Google AdWorks Google Blogger Thinker360 Finextra … Clearly it is not easy to get the necessary ...

The UPI Phenomenon: From Zero to 10 Billion

If there is one Indian innovation that has grabbed global headlines , it is undoubtedly the instant payment system UPI (Unified Payments Interface) . In August 2023, monthly UPI transactions exceeded an astounding 10 billion, marking a remarkable milestone for India’s payments ecosystem. No wonder that UPI has not only revolutionized transactions in India but has also gained international recognition for its remarkable growth. Launched in 2016 by the National Payments Corporation of India (NPCI) in collaboration with 21 member banks, UPI quickly became popular among consumers and businesses. In just a few years, it achieved remarkable milestones : By August 2023, UPI recorded an unprecedented 10.58 billion transactions , with an impressive 50% year-on-year growth. This volume represented approximately 190 billion euros . In July 2023, the UPI network connected 473 different banks . UPI is projected to achieve a staggering 1 ...

AI in Financial Services - A buzzword that is here to stay!

In a few of my most recent blogs I tried to demystify some of the buzzwords (like blockchain, Low- and No-Code platforms, RPA…), which are commonly used in the financial services industry. These buzzwords often entail interesting innovations, but contrary to their promise, they are not silver bullets solving any problem. Another such buzzword is AI (or also referred to as Machine Learning, Deep Learning, Enforced Learning… - the difference between those terms put aside). Again this term is also seriously hyped, creating unrealistic expectations, but contrary to many other buzzwords, this is something I truly believe will have a much larger impact on the financial services industry than many other buzzwords. This opinion is backed by a study of McKinsey and PWC indicating that 72% of company leaders consider that AI will be the most competitive advantage of the future and that this technology will be the most disruptive force in the decades to come. Deep Lea...

Bankloch

Search This Blog