Andrew Rabbitt is the CEO of incuto, a SaaS banking technology which is taking on pay day lenders and the poverty premium faced by those on lower incomes with a new platform for credit unions, community banks and community development financial institutions (CDFIs). Here he discusses how the rise of fintech has the potential to make credit unions more ethical:
Fintech for financial inclusion
Up to now, Fintech has taken something of a back seat in the ‘tech for good’ revolution. The boom in technology designed to address both social and environmental challenges has been well-documented, from the use of AI in healthcare, to apps which assist and improve the lives of adults and children with a wide variety of social and educational needs. Much of this ground-breaking technology is being developed in the UK, with Nesta’s recent European Digital Social Innovation Index (EDSII) naming London as the best European city to develop and grow digital ‘tech for good’ solutions.
The link between Fintech and promoting social good isn’t always obvious, but innovation in this space has a key role to play in financial education and inclusion for millions of lower-income individuals, families and households across the UK. We tend to think about financial technology only in the context of challenger banks or improved services for the average banking customer – but what about the 1.5 million people in the UK who do not have a bank account. Enter new technology which is already helping the ‘unbanked’. Fintech for social good is levelling the playing field for individuals who may have struggled to access financial services, something that many of us take for granted.
The Poverty Premium
Individuals and families on lower incomes often find themselves subject to a poverty premium which manifests itself in different ways. For example, having to use extremely high-cost rent-to-own models to purchase household items, or, for those who don’t have access to bank accounts and debit cards, being forced to use expensive, cost-per-transaction, pre-paid card providers.
Limited access to banking services and loans, perhaps due to poorer credit scores, is also indicative of this group. These individuals often find themselves side-lined by mainstream banks, and so resort to expensive pay day lenders typically charging between 800-1200% APR when they need to borrow money.
Access to affordable, responsible finance is at the heart of eradicating the Poverty Premium. Namely, giving the financially excluded better access to bank accounts, debit cards and lower interest loans so they are paying similar costs as the majority of borrowers and not facing long-term, crippling debt. In today’s technology driven world, Fintech can empower organisations who work with low-income families and households to offer a viable alternative to high-interest, pay-day loans and bank charges.
Community-based banking and lending
The key to tackling the poverty premium in financial services must lie with those organisations who can offer fairer and more ethical approaches to lending. Credit unions and community-based banks and building societies are well placed to take on this role, but they must innovate and transform the service they offer to members
For example, credit unions often offer their members limited branch networks (some have no more than two branches servicing a given geographical area), plus they are struggling with legacy technology and paper-based systems which make their service extremely inaccessible, especially compared to high-street banks and pay day lenders. It seems unthinkable in our digital world that you would have to physically go into a branch to either withdraw or pay in money, but this is still the case with many credit unions across the UK.
Unfortunately, UK credit unions and community-based banks have struggled to compete with pay day lenders, which succeed in capturing the market via easy, online access and high-profile advertising campaigns, but this is now changing. For instance, our own technology offers credit unions and community-based banks paper-free, automated applications; automated communication to increase engagement; 24/7 access including pre-authorised amounts and rates, pre-filled applications and e-signatures; automated ID verification, AML, affordability and credit scoring and underwriting; a self-service web portal for Members to view and manage their accounts and, as mentioned already, access to banking services including a debit card, an account number and sort code. A digital offering that increases access and ease of use for all credit union members.
Any technology solution for credit unions must be all encompassing. After all, it’s not just about enabling people to manage their money or apply for loans online in a faster and more efficient way. It’s about giving them financial freedom and access to services, plus the ability to pay in money at a wider network of outlets and the same level of interaction and engagement that they would receive from a high-street or online bank.
Becoming more competitive through innovation
The solution is simple. Open up the services credit unions can offer and give access to a wider audience through technology. Better branch access via partnerships with other branch networks, plus a debit card, bank account and sort code (rather than simply a Membership number) would allow the financially excluded to access additionally services at the same price as the wider population and better online access and automation.
The technology is out there, and it’s time for credit unions and community-based banks to seize the opportunity of enhancing and improving their services. With many credit unions falling behind in a digital world, it’s more imperative than ever that these organisations embrace technology and subsequently address the problem of financial exclusion and education.