Many Americans at the lower end of the economic ladder struggle with money management issues. Numerous households live paycheck to paycheck, saving too little and considering investment too late. The poor and minority groups are often subject to debt traps, high-risk lending practices and redlining. Those without access to banks are faced with paying high fees and additional charges from check cashers, payday lenders and other alternative financial services. As policy action has yet to assist such groups, the market has shifted to address the needs of poor and minority groups. Financial technology companies (FinTech) are bringing banking services to those that want to manage their spending, save money and plan for their financial future. These services were once almost exclusively offered by banks but now FinTech has brought these money management services to this underserved population.
FinTech has now made it possible to access transaction and underwriting services for all. Individuals can select from a number of financial services from financial technology companies, including:
FinTech companies have been attractive to venture investors. During the first half of 2015, FinTech startups raised almost $12.4 billion. Many FinTech companies require existing bank accounts and they are unlikely to entirely replace the banking system. However, traditional banks are now having difficulty maintaining low-margin services as FinTech offers customers alternatives to traditional banking’s more lucrative and profitable banking services.
Banks offer a range of services that begin with a loss leader pricing strategy. Checking accounts are offered at a loss to attract new customers and stimulate sales of loans and other profitable products. As FinTech offers these profitable services to customers, banks are taking a loss. Banks and other traditional financial players are looking at a range of strategies to increase their profits. Many of these strategies will not be welcomed by the average customer. Traditional banks are considering:
Low-income households may be significantly affected by the changes to come to their traditional bank. Account ownership may decline if banks raise charges and fees on checking and savings accounts. The Federal Deposit Insurance Corporation reports that high or unpredictable account fees is a contributing reason cited for one in three households without a bank not to own an account. Underbanked households, on average, spend $2,412 annually on interest and fees. This is a significant amount of money spent for those on a limited budget. Changes to the fee structure of one of the most basic and least expensive of banking services may drive away more low-income customers. However, the alternative of bank closures has already directly impacted and occurred in low-income neighborhoods. When statistically viewed from 2008 on, 93 percent of bank closures occurred in neighborhoods with household income levels below the national median. Individuals in such neighborhoods may have even fewer traditional banking options in the near future.
Another approach that banks are thinking about is to buy FinTech companies using their superior resources. The five largest banks have approximately $15 trillion in assets. Capital One took this approach in 2015 when it acquired Level Money. Level Money is an app assisting users in tracking spending. However, banks may still be looking to cut costs that will impact those that can least afford such changes.
A fresh approach to banking is necessary and may create new opportunities for underserved consumers to access needed financial services. FinTech startups are a disrupter and may be bringing to the table a vision sorely lacked in the traditional banking system. FinTech companies are tailoring their services to the emerging market of the underserved consumer, and are a boon in developing companies using mobile banking and other technological advances to serve more of the population.
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