In financial services, creativity and innovation have opened doors to financial opportunities for the once overlooked. Various initiatives and technological advancements have changed the way we manage our money and how we access it.   

Creative Financial Services Initiatives 

Traditionally, there are sections in society that battle to get access to financial services. The irony is that it can be expensive to be poor. It seems unfair, but poorer people often face higher costs to access finance as they are seen as a greater risk to the institutions. 

New immigrants to a country are an example of those who face uphill struggles to enter the financial systems. They often find it difficult to conduct transactions via the established banking routes and end up being exploited by check cashers who charge hefty fees.  

These sensitive situations require fresh thinking, such as the steps Western Union took in the US in the early 2000s. Western Union introduced a prepaid card program to address the financial needs of immigrants who lacked access to traditional banking services. This initiative allowed individuals to load money onto a card, much like your regular Visa or MasterCard card, providing them with a viable alternative to conventional bank accounts. While the program saw success, it also faced challenges, including consumer mistrust of banks and some places not accepting cards.  

Another noteworthy innovation was the introduction of payroll cards, enabling employers to deposit employees' pay directly onto a card, reducing the need for costly check-cashing services. However, there was some initial reluctance from businesses as many were hesitant to cover the associated fees, even though they were as low as $1 a month per employee. It showed a cold lack of care for employees, but thankfully, things have changed since then and more businesses are embracing this type of wage payment. 

Technology has Forever Changed the Financial Landscape 

Advancements in technology, such as chip technology and the emergence of companies like Stripe, have significantly altered the world of financial services. These developments have led to an explosion of new products and services in the prepaid card industry, ultimately reducing the number of people in the United States without bank accounts. In fact, to facilitate chip technology, it basically required the entire point of sale infrastructure of the country to be upgraded and replaced. 

Furthermore, the rise of digital wallets and mobile banking, coupled with increased competition among financial service providers, has ushered in a new era for the industry. And the advances in embedded financing have completely changed how people transact, for example, how people pay Uber and Airbnb. 

While progress has been made, challenges in achieving full financial inclusion persist and it remains expensive for lower-income individuals due to fees associated with certain financial products. 

Hurdles to Achieving Full Financial Inclusion 

In the United Kingdom, approximately five million adults lack a financial footprint and are considered invisible to credit reference agencies. Despite efforts to promote financial inclusion, this number has plateaued over the last 10-15 years, indicating persistent barriers to accessing banking products.  

"It's interesting that the number of credit invisible individuals is quite sticky." Dan Blagojevic, Director of Decision Sciences & Machine Learning at Optima Partners 

And there are people who are afraid of getting into debt and who have seen the damage that uncontrolled debt can inflict. To address these barriers, there is a growing push to offer credit builder products that help individuals establish credit references, thus enabling access to more affordable debit and credit products. Payment service providers like Apple Pay, Google Pay, Tesco, Sainsbury's, and M&S Money are exploring this space by offering payment mechanisms linked to other products, but not necessarily a current account or credit card. 

But in the end of the day, if you look into what segments of consumers are essentially unbanked, there's going to be a segment that doesn't want to be banked or is suspicious of banks. So, for them, cash is the best control mechanism that they have, and even though we see the usage of cash as a tender type fall dramatically in the US, there's always going to be a stubborn segment out there for whom cash is king. 

Future Trends and Opportunities 

Another consideration are the new consumers coming into the market. In the US, in the region of three to four million people turn 18 every year, so establishing early relationships with young consumers is important, as it often leads to long-term customer loyalty. 

"If you're looking to build a financial services franchise, there's competition in every single segment, but where you're going to have the most opportunity to influence and build loyalty is with that younger consumer segment." Sean O’Toole, FinTech and SaaS Advisor 

This is also true for Europe and the UK. Take for instance Revolut's success in Ireland, where they have acquired over a million customers. Offering products tailored to younger individuals, such as student and holiday loans, can influence their financial decisions and foster lasting relationships with customers. Revolut also offers an under 18 card that is linked to a parent’s account, which is a clever move as many people stay with the bank they first signed up with for their entire lives. 

Moreover, entities that have not traditionally been in financial services but have access to vast datasets, like purchasing histories, are increasingly impacting the financial services and payments industry. Companies like Apple and Amazon are expanding their presence in these markets, leveraging their data resources.  

Apple started their venture into this space by having Goldman Sachs underwrite their Apple Card, but now the training wheels are off and they are managing their Buy Now Pay Later themselves. 

The Challenge of Data-Driven Decision-Making 

Many people are credit invisible because they don't have a credit score and they can't get started into this into the system. It's an example where the data is blind and therefore management is also blind- data sometimes hides in plain sight and it doesn't reveal.  

"Real insights, when you can get them, are gold." - Paul Sweeney, Chief Strategy Officer at Webio 

While data is invaluable for uncovering trends and patterns, it may not always provide the deeper insights gained through direct customer interactions. The reality is, overreliance on data can lead to the creation of customer profiles that do not accurately reflect real needs and behaviours. To address this challenge, go out and talk to customers firsthand to learn why they behave as they do and what problems they are facing. Financial institutions need to strike a balance between data-driven approaches and customer engagement. 

Conclusion 

Broad-thinking financial services initiatives, technological advancements, and changing consumer behaviours have reshaped the financial services industry. While progress has been made in expanding access to financial services, challenges in achieving full financial inclusion still remain. Looking ahead, the industry must continue to innovate, foster early customer relationships, and strike a balance between data-driven decision-making and meaningful customer engagement to navigate the evolving landscape successfully. 

This blog is derived from a Credit Shift podcast hosted by Paul Sweeney (Webio) and Dan Blagojevic (Optima Partners) where they talk to Sean O’Toole (FinTech and SaaS Advisor). Listen to this episode of Credit Shift.   

More from the podcast: The Psychology of Credit Choices