Highlights:

• An introduction to open banking, its key concepts, and implications for payments industry participants 
• A framework for understanding open banking principles
• Adoption and usage statistics

What is Open Banking and Why Does it Matter?

Over the last few years, the concept of open banking has gained popularity with numerous banks and fintechs eager to upend the traditional banking experience. Driven by regulation and market dynamics, open banking is taking root around the world. To guide this global phenomenon, open banking regulations are going into force in Russia, China and Southeast Asia. Mexico, Brazil and Japan have announced their plans for formal regulations. In the U.S. open banking has primarily been market driven, however the CFPB has signaled their intention to propose regulation.

In light of these announcements and already existing regulations in Europe (PSD2 and GDPR) and the U.K., we at Glenbrook believe it is useful to provide an introduction to key open banking concepts for those not already familiar with the topic.

At a fundamental level, open banking is the permissioned exchange of banking information from traditional financial institutions to third-party providers (TPPs) in order to facilitate innovative applications and services. Third-party providers can be defined as organizations or intermediaries using APIs to access customer financial data or as providers using this data to create new products and services. Examples of TPPs include: 

• Fintechs
• Networks
• Financial Institutions
• Payment Service Provider
• Merchants
• Credit Rating Agencies

Glenbrook’s Framework for Understanding Open banking Principles

Follow the three C’s: Control, Competition, and Choice:

• Control – Open banking recognizes that consumers are the owners of their data, have the authority to grant permission to third parties to access that data, know where their data is being used, and have the ability to revoke permission at any time.
• Competition – Open banking increases competition on multiple fronts. Breaking the former monopoly on customer data, TPPs can create innovative products and services that challenge financial institutions as well as other providers. Furthermore, by reducing the burden associated with switching banks, consumers can more easily move accounts, forcing financial institutions to compete to attract and keep customers by providing the best experience.
• Choice – Building on the tenets of control and competition, open access to customer data creates a foundation for innovation, which in turn gives consumers more choice when it comes to the financial products and services they use.

How Open Banking Affects Payments Industry Participants

 Open banking carries the potential to disrupt key members of the financial services industry. In most cases the participants—FIs, TPPS, and consumers—enjoy clear benefits, but those benefits come at an asymmetric cost: 

• Financial institutions will have to invest time and resources to API-enable their core systems. Such overhauls require a massive level of effort and investment.
• TPPs will have to integrate with the financial institutions in order to create compelling customer use cases. In some cases, financial institutions will be working on both simultaneously.

Financial Institutions

Financial institutions, with their traditional monopoly on customer financial information, are the party with the most to lose. By exposing customer data and payment initiation capabilities to third parties, financial institutions face the salient risk of relegation to a background, purely utility role while the customer relationship shifts to the TPPs. The TPP builds the new improved customer experience while banks are stuck holding deposits and performing back-office tasks like compliance.

However, opportunities exist for banks in the open banking world. Smaller financial institutions, credit unions and large commercial banks can all benefit, with creative opportunities for innovation and partnership. However, financial institutions will not experience the paradigm shift the same way: 

• Smaller financial institutions and credit unions remain dependent on their core processors for enabling open data access via new APIs. Furthermore, these institutions almost always lack the budget and resources to execute a digital transformation. 
• Large commercial banks carry the two-fold burden of updating their infrastructure to enable data access through APIs while creating products and services to compete with other financial institutions and new third-party providers. They benefit, on the other hand, from large customer bases and established channels to expose new products and services.

Freedom to Develop and Integrate

While banks are required to provide access to TPPs—by regulation in some jurisdictions, by the market in others—there are no restrictions on banks acting as TPPs themselves. This means that banks can take advantage of other providers’ APIs to build a better customer experience for their own users.

In the UK for example, HSBC shifted its open banking ‘Connected Money’ app that includes account aggregation and folded those capabilities into its base mobile banking app. Barclays recently went further and created a payment initiation use case, which allows consumers to make payments from other financial institutions within their Barclays interface. In the U.S., banks have released their own APIs and developer portals for other banks and fintechs to leverage.

Examples include Capital One, Wells Fargo and Citi with numerous financial institutions using open banking and APIs to improve the customer experience.

API-enablement lets financial institutions improve technical efficiency. Screen scraping is taxing on physical infrastructure as a result of its high data load, bandwidth, and data storage requirements. Jeff Bezos famously required all departments within Amazon to expose data and functionality via APIs or risk getting fired. As a result, the business enjoyed enhanced internal performance and the opportunity to expose functionality to third parties. While initially daunting, wise banks are following the same path.

Finally, where not restricted by regulation, financial institutions can monetize open banking. Depending on the data value and the quality of the API access, organizations or developers may be willing to pay a premium for enhanced API access. 

Neobanks

Neobanks are arguably the greatest beneficiaries of open banking. Digital-first and built on modern tech stacks, neobanks are able to easily digest banking API’s and provide real time account updates. Use cases vary by region with more mature models existing in markets driven by regulatory requirements. In the UK, for example, Atom Bank announced a partnership with Plaid to provide small business loans.

With access to historical transaction data and Plaid’s Payment Initiation API, the bank can streamline the lending process and provide real-time decisioning. In the U.S., many neobanks are forming partnerships with data aggregators to fund customer accounts and perform account verification/validation functions.

As adoption of open banking APIs expands around the globe, we expect to see even more uptake and nuanced use cases take flight.

Third-Party Providers

All participants of the payments and financial services ecosystem can participate in open banking as TPPs, an inherent characteristic of the new regime. Fintechs, networks, financial institutions, merchants, and even credit rating agencies can actively participate as both users of the information exposed by APIs to improve internal processes and as providers of new products and services. Arguably, any actor in the payments value chain can use open banking to its advantage.

Third-party providers, represented by both incumbents and new players, see ample opportunity in the market. Access to customers’ permitted financial data, previously enjoyed only by financial intuitions, creates opportunities for new business models, products, services, and revenue streams. 

Potential examples could include:

• A fintech such as Wealthfront might use a bank’s “Customer Data API” or a data aggregator such as Plaid or Yodlee to get permissioned access to consumer banking information in order to drive a personal financial management (PFM) app. 
• TAB Bank leveraging Mulesoft’s Anypoint Platform to quickly process small business loans. The bank could connect to MuleSoft’s APIs to get real time banking data and speed up lending decisioning for its customers. 

From independent app developers to large technology companies (e.g., Apple, Facebook), open banking has leveled the playing field for delivery of financial services and what those services look like. Having greater variety in providers with unique perspectives and resources increases innovation and improved products. With a clear view of a customers’ finances, consumer-centric TPPs can provide targeted offerings that should increase customer loyalty and improve the customer experience. 

No Open Banking Standardization Just Yet

A key challenge TPPs face is in implementing open banking APIs, and in cases where they do not exist, weighing the risks and benefits of alternative data access methods. Despite regulation in some markets, there is still fragmentation and lack of standardization in open banking API offerings.

For example, in the EU, PSD2 did not mandate specific standards. Rather, various standardization efforts emerged such as the Berlin Group, the Open Bank Project, and the Open Banking Implementation Entity. In the U.S. there’s several industry associations advocating for standardization.

The most notable is the Financial Data Exchange (FDX), a consortium comprised of financial institutions, fintechs, data aggregators and industry participants that sets technical standards for open banking APIs. In cases where APIs are not available, many TPPs are still utilizing screen scraping to gather banking data into their applications, posing a large security risk for customers and banks.  

Accountholders and Consumers

The cooperation and coordination between financial institutions and TPPs benefits consumers and business customers alike. If open banking’s goals are realized, consumers will have more financial services and products on offer as well as improved functionality. They should benefit from better insight into their financial lives that enables them to make better choices and reduces the stress of financial management. The competition open banking enables, and the innovation it brings about, should raise the quality of products and services.

Finally, in a world where real-time payments are more prevalent with funds pushed instantly and irrevocably from account-to-account, well implemented open banking should improve the security of consumer banking login credentials.

Security Concerns

Despite the potential benefits, there are real risks in exchanging sensitive financial data. Without standardized security protocols, third parties are free to store and use data as they wish. Many third parties are still using old standards of data exchange and storage, which increases the risk of data compromise from bad actors. Even when third parties take the appropriate steps to increase security, there is still potential for other types of poor consumer outcomes. 

As with any new technology, participants are still adjusting to the API ecosystem. In some cases, there are still issues with API availability leading to unsuccessful API calls. Downtime due to large-scale platform outages prevents consumers from accessing vital financial information, creating a poor customer experience, at best, and potential financial loss.

Potential Impact

We’ve seen some key global indicators that demonstrate this increased interest in and adoption of open banking across the industry. Financial institutions have responded with a massive spike in open banking platforms around the world. Developer adoption of the OpenAPI specification increased by over 68% between Q3 and Q4 2020. (Platformable). Adoption by consumers is increasing. The Financial Data Exchange (FDX), published their Spring 2021 API usage stats depicting steady growth in North America, touting 16M customers. 

As we continue to witness higher adoption, we expect increased innovation and more sophisticated use cases within the space. There are opportunities for all parties in the value chain to benefit as long as steps are taken to address security and privacy concerns.

Questions for Stakeholders

Open banking offers substantial opportunities for third party providers such as fintechs, data aggregators and financial institutions. Incumbents tied to their existing business model face a looming threat. Some key questions remain for stakeholders participating in this ecosystem:

Third Party Providers

• As providers of products and services to end users, where are there opportunities to innovate? What are key areas of exploration and investment? How can financial institutions, account holders and other providers benefit from innovation in this space? Will fintechs be at the forefront of innovation or will third party providers rely on innovation from financial institutions?
• How can permissioned financial data be leveraged to improve business performance and aid in additional revenue streams? Are there additional opportunities to monetize data paired with unique product features or value added services?
• With APIs at the forefront of secure data exchange, do you have the technical capability to connect or digest proprietary banking APIs? What are you doing to ensure sensitive information is used appropriately and safe from data compromise?
• What types of strategic partnerships can be formed between financial institutions or other providers to gain additional customers and propel more sophisticated use cases? Who have you identified as competitors or potential partners in the space? 

Financial Institutions

• What is the right strategic response to open banking? What role does your institution need to play? How well positioned are your existing partners to support an open banking initiative? What are your direct competitors doing about open banking? Is competition, cooperation or a coopetition-based strategy the right way forward?
• What services based on open banking and fintech can be brought in-house through internal development or through provider partners?
• Serving the fintech community requires specific technical and business competencies. What is your level of readiness to address this market? What strengths in the areas of compliance, risk management, network sponsorship, and technology exist? How long will the window be open to serve the fintech providers before their needs are met by other banks?

About the Author. Heather Cerney has followed open banking regulations around the world since its inception in 2015. Heather helps lead Glenbrook’s research on banking innovation and open banking initiatives. Her background is in banking, having worked at Wells Fargo and Bank of the West prior to joining Glenbrook.

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Highlights:

• ACH, though a 50-year old payment system in the U.S., continues to grow
• The ACH ecosystem is evolving to meet modern-day needs:
  • Nacha, the rule-making body, plans to implement a series of enhancements that address shortcomings in ACH usability
  • Dynamic payment service providers (PSPs) and fintech infrastructure players are innovating on top of this legacy system to provide cost savings and benefits, such as safety and security, to businesses and consumers alike 

The ACH Ecosystem Expands

Electronic payments saw accelerated usage due to the COVID-19 pandemic and ACH was no exception. 2020 ACH transaction volumes increased 8.2% over the previous year, continuing a 10-year growth trend.

Some of this growth was due to the unique circumstances caused by the pandemic. However, as economic recovery continues, will the ACH system continue its steady pace of growth? Will consumers increasingly prefer having a “pay with my bank account” option as an alternative to card payments? 

Data from Q1 2021 shows early indication of continued growth:

Source: Nacha

There is no doubt that ACH has its benefits: it’s low cost, it’s a “workhorse,” and it’s ubiquitous. But it is also not without its challenges. As such, Nacha is implementing a series of enhancements to address shortcomings. For example, new Account Validation and upcoming Data Security Rules will help originators reduce exceptions and better manage risk. An additional settlement window and increased transaction limits should increase Same Day ACH utility.

Furthermore, payment service providers (PSPs) that specialize in bank transfers want to make payment acceptance more cost-effective for merchants by offering an alternative to cards, and more consumer-friendly by providing easier ways to use a bank account to make a payment.

Let’s take a look at some of the trends and developments we’ve observed in the ACH payments ecosystem, first within ACH itself and then through enhancements from solution providers.

ACH Had a Banner 2020

ACH Transaction Count (billions):

Source: Nacha, Glenbrook

ACH transactions saw an 8.2% increase in 2020, compared to debit card transactions, which grew about 6%, and credit card transactions, which remained relatively flat (Nilson Report, February 2021).

While one-time stimulus payments delivered via Direct Deposit contributed to some 10% of the total 2 billion in incremental transactions last year, overall network growth reflects a broader shift away from check payments. 

Same Day ACH, although representing less than 2 percent of total ACH transactions, grew 39% year over year. Some of last year’s growth can be attributed to the increased transaction limit, from $25,000 to $100,000, which went into effect in March 2020. As of March 2021, a third Same Day ACH settlement window went into effect to better accommodate West Coast originators. By March 2022, the transaction limit will be increased to $1 million. The new upper limit will be particularly beneficial for B2B transactions, but will increase ACH fraud concerns.

Same Day ACH Transactions relative to Standard ACH (billions):

Source: Nacha, Glenbrook

Enhanced Validation Necessary to Reduce ACH Exceptions

With increasing volumes and transaction limits, ACH shortcomings become more important to address. There is no authorization function, as in the card networks, to determine sufficient funds and guarantee payment. The lack of authorization, or even a simple way to verify account balance prior to debiting an account, often leads to revenue uncertainty for merchants, and costly NSF fees for consumers (in 2020 alone, banks reportedly made $30B in NSF fee income). Furthermore, the traditional methods to verify account ownership have been somewhat lackluster – both prenotes (zero dollar test to validate bank account information) and microdeposits are time-consuming. 

As of March 19th, 2021, Nacha’s account validation rule for WEB debit entries went into effect to address the issue of excessive returns and exceptions. The rule specifies that originators implement a fraudulent transaction detection system that, at a minimum, verifies an account is open and valid. The rule does not specify that originators validate ownership of the account. 

Nacha does not prescribe a specific way to meet its requirement. Nacha’s guidance indicates that standard prenotes and microdeposits can still be used. However, the rule making body also suggests a series of “preferred partners” and “certified vendors” that offer functionality above and beyond these traditional approaches. 

Nacha defines two categories of validation providers: 

• Data Consortium Vendors rely on pools of data to validate account information
• Credential Validation Vendors rely on online banking credentials to access account data such as balance information and transaction history
• Some providers offer a combination of both

Source: Nacha Account Validation Resource Center

Solution Providers Build on ACH 

Glenbrook has been watching various solution providers, noted for their differing approaches to making the ACH system more usable for broader use case adoption. Examples include:

• Nivelo
• Trustly
• GoCardless
• Square
• Plaid

Nivelo.io has introduced a real-time risk scoring mechanism that leverages various data partners to confirm validity of routing number, account number, and identity. When combined with historical cash flow analysis and machine learning, Nivelo’s approach helps determine the likelihood that a transaction is subject to security threat or failure (for more on Nivelo, check out our Payments on Fire® episode with CEO and Founder, Eli Polanco, here).

Other providers specializing in ACH processing include payment service providers (PSPs), such as Trustly and GoCardless (we recorded a podcast with Chief Product Officer, Duncan Barrigan), which make ACH more merchant-friendly. Their core value proposition includes lower payment acceptance cost and fewer exceptions. While both companies initially started in Europe, they have since expanded into the U.S. market. They charge an ad valorem fee, and are betting that businesses are willing to pay a premium over standard ACH fees, because the cost is still lower than that of credit or debit acceptance. In some instances, they will offer a payment guarantee. Trustly, in particular, offers account validation through direct connections with banks, in addition to its bank transfer money movement service. 

Square has partnered with Plaid for bank account validation, and recently announced that it will support ACH acceptance for invoiced transactions, charging a 1% processing fee (for reference, other SMB providers such as Intuit and Bill.com charge about $0.50 and 1%, respectively, for ACH acceptance).

The Plaid Bank Transfers beta will combine Plaid’s account validation and data aggregation services, with money movement as well. (Plaid’s plans to actually move money on behalf of its customers is among the many reasons the Justice Department vetoed Visa’s acquisition of the company. Visa would own two dominant payment networks.) As many of us in the industry are familiar with the now infamous volcano diagram, it will be interesting to see the company’s messaging around a more public launch of the product.

What’s on the ACH Horizon?

ACH will likely see further growth as the industry continues to digitize payments, and as Nacha implements additional rules and enhancements. Some of the upcoming Nacha rule changes for the remainder of 2021 include:

• Data security requirements. Requires that Originators protect deposit account information, similar to tokenization standards set forth by PCI-DSS for card information
• Limitation on warranty claims. Limits the length of time in which an ACH payment can be charged back, providing Originators with greater payment certainty
• Meaningful modernization. Attempts to simplify the ACH user experience through guidance on authorization processes, technologies and channels, setting the stage for Request for Payment messaging 

ACH is a ubiquitous and systemically important payment system. Even with faster payments slowly gaining traction, thanks to Nacha’s efforts to remedy various system pain points and the growing set of solution providers, use cases for overnight and Same Day ACH will continue to be plentiful.

Considerations for Implementers

• The economics of ACH transactions are compelling, while risk management is complicated. The right combination of management tools and processes requires in-depth examination of risks at each point in the transaction flow, from initiation to completion via interbank settlement.
• ACH is a ubiquitous payment system. Can added risk management functionality for ACH debit transactions render it “good enough”? Or is there a need in the market for instantaneous, push-only payments via real-time rails like RTP and FedNow? The trade-off is specific to use case and stakeholder.
• How important is the speed of payment when considering Same Day ACH vs. alternatives?
• Will consumers be more inclined to use bank transfers as a payment method if the provider combines superior UX design and experience with additional security measures in place to protect sensitive account information?

About the Author. Nicole Pinto is a self-proclaimed payments nerd and enjoys monitoring the competitive landscape across the payments value chain. She is particularly interested in non-card rails such as faster payments and ACH, and how fintech players are driving changes in payments and banking.

The post ACH is Hot appeared first on Payments Views.

It’s expensive to be a low income American, driven in part by the high cost of financial services available to such consumers. In this post, we break down where cost comes from, and how fintechs are changing the way working class Americans are able to access affordable financial products.

Fintechs have an opportunity to displace the traditional, high-cost services that target low income consumers. Through the consumer profiles we discuss in this piece, we can see that using fintech products instead of traditional services has a material impact on the financial wellbeing of low-income consumers.

Who Pays to Pay?

On the periphery of the payments ecosystem, a subset of Americans are paying millions of dollars each year just to transact. While payments professionals expect consumers to rely heavily on cards and ACH transactions, many financially marginalized consumers pay with cash, prepaid cards, and money orders. Many must take out payday loans for short term credit. The Financial Health Network estimates that in 2020 the financial services industry serving this market cost American consumers $255B. 

But what does that number mean for individual consumers? And how can the industry improve the financial lives of at-risk consumers? To find out, we developed three consumer profiles and simulated the cost of financial services for each over the course of a year. 

We take a look at how these three consumers get paid, save money, transact, and borrow. Our consumer profiles are informed by Glenbrook’s ongoing research into financial inclusion in the U.S. including conversations with stakeholders and desk research.

The “Conventional” Consumer

Figure 1: A year in the life of a conventionally well-served consumer

Let’s start by talking about the sort of consumer we, as payments professionals, are likely to have in mind as we develop new products. 

Meet Andrew, a digital marketing professional in Los Angeles. He makes around $65,000 a year which is paid to him over the ACH network via direct deposit, costing him nothing to receive his paycheck. On top of that, he saves money in his Citi Savings account, which accrues very modest interest. 

Even though he’s well-served, Andrew’s financial picture isn’t perfect. He relocated to LA to take his digital marketing job and needed to cover moving expenses. He had to take on a $1,000 revolving balance on a Capital One credit card. At an 18% interest rate, this costs him around $180 over the course of the year.

For everyday purchases, he uses his Chase Freedom Unlimited credit card and, after an annual spend of $22,000, earns about $331 in cashback rewards points.

Upon settling into his new apartment, he decided to buy an iPad for himself to catch up on reading for $300. He put this large ticket purchase on his Target credit card, and gets $15 back on the purchase.

His AT&T communications bill and his utility bill amount to $600 each month, and he pays them through Citi’s bill pay portal at no additional cost. He pays his $1,400 rent via ACH on his landlord’s website each month, which is also free to him.

After a year, Andrew has accumulated $169.53 in net income simply through his payments activity as illustrated in Figure 1.

The Traditional Underserved Consumer

Figure 2: A year in the life of a traditionally underserved consumer

Next, let’s meet Ross, a low income consumer using traditional solutions who works as a line cook at a restaurant in Ypsilanti, Michigan.

He makes $35,000 a year and is paid by check. He receives his salary biweekly and pays $3 to cash each check at the local Kroger grocery store. Over a year, he spends $72 on check cashing.

To cover some expenses between paychecks, he takes out a payday loan. He typically borrows around $300 dollars on a two-week loan at CashAdvantagePlus (not a real store, but representative of the sort of local financial centers that dot low income communities). This local payday lender charges $15 on every $100 borrowed. So the total cost of the loan to him is $45. If, on average, he takes out one of these loans per month, he spends $540 over the course of the year.

He makes his everyday purchases using cash, so that doesn’t cost him anything over and above his cost for receiving cash from CashAdvantagePlus or Kroger’s check cashing service. 

Like Andrew, he purchased a $300 iPad, although Ross is buying his as a gift for his boyfriend’s birthday. To take advantage of a sale online, Ross purchases a prepaid card at Walgreens for $4.95 in cash and uses this payment method to buy the iPad from an internet retailer. 

Ross pays his bills by postal money order. His AT&T and utility bills are each less than $500, so those money orders cost him $1.25 each. His rent is $725, so that money order costs him $1.75. He spends $4.25 per month at the post office in order to pay his bills, adding up to $51 for the whole year.

At the end of the year, his net impact in Figure 2 shows that he has spent over $667 on financial services. At least partially because of this burden, he hasn’t saved any money. He’s also spent a lot of time going to different stores and service providers, time that’s really valuable if you’re working long hours or multiple jobs. And it costs money to get around, an additional cost that’s not reflected here.

The Fintech Consumer

Figure 3: A year in the life of a consumer using new fintech products

Ross’s picture is bleak. He pays a lot and saves nothing. Now, let’s look at what the picture might look like for someone with the same salary but using fintech alternatives.

Meet Lena. She is a gig worker in Atlanta working for a (hypothetical) company called LocalDash, delivering goods from local stores to customers across town. She uses Cash App as her bank account, and receives her income via direct deposit thanks to the Lincoln Savings Bank account that sits behind her Cash App account. 

Lena used to worry about when her paycheck would arrive in the mail and occasionally used payday loans to cover some emergency expenses in the past, but she can now access her funds two days early through earned wage access provider PayActiv. This costs her $5 a month, which is PayActiv’s membership fee. If you calculate that in APR terms assuming a loan term of two days, it amounts to around 16%, which is much more reasonable than what a payday lender would charge and lower than the rate charged on credit cards at this end of the market.

For her everyday spend, she uses Cash App’s Cash Card debit card product, and pays nothing to do so.

She also bought a $300 iPad to help with a creative side project she’s working on. Like Andrew, she purchases it at Target, but she checks out using Affirm. She takes out an Affirm buy-now-pay-later loan at a 20% APR over 12 months, which works out to around $33 in interest charges. 

Thanks to the bank account that powers her Cash App experience (my colleague Laura touched on the mechanics of this in the previous post in this series), she’s able to pay at no cost her AT&T bill, utility bill, and rent via ACH.

As Figure 3 shows, she spends $65 on financial services over the course of the year, far less than the $677 that Ross had to pay. While Lena uses Cash App, Venmo or a neobank like Chime or Dave offer similar economics. Consumers in this space are savvy shoppers who might turn to Cash App for one set of services and Chime for another, or may stick to one provider to take advantage of the convenience of having everything in one place. Regardless, the end result is that underserved consumers now have greater opportunities to save, and fintechs are better positioned than ever to meet their needs. 

What’s Next?

Fintech is not a panacea for the financial hardship faced by low income Americans. Black, Hispanic, and Indigenous communities remain disproportionately underserved by the financial industry. However, an increasing number of solutions offer bank-like services, often with FDIC insurance, direct deposit, etc. As we have demonstrated, these solutions are often less expensive and offer compelling value to consumers.

We hope that fintech providers will continue to create new affordable solutions for low income consumers. We’re watching this space closely to see how providers are stepping up to the challenge of better supporting financially vulnerable populations.

If this topic interests you, please reach out! We would love to hear from you.

About the Author

Justin Pituch helps lead Glenbrook’s research on financial inclusion in the U.S. Justin recently co-hosted a Glenbrook webinar discussing the potential for financial technology to alleviate the cost burden of financial services for low income Americans. Justin’s background is in treasury and banking consulting, but his first job was at a community bank in the Chicago suburbs.

The post The True Cost of Being Underbanked appeared first on Payments Views.

Time to Read: 7 minutes

Highlights:

There is a set of high payoff steps necessary to increase financial inclusion of women in South Asia and other markets

Collaboration across the stakeholder ecosystem accelerates female participation in financial services

Glenbrook’s framework is an approach to evaluation and roadmapping

As financial inclusion efforts continue to scale across the globe, there has been a steady increase in women’s ownership of financial services accounts. However, the total growth can obscure the persistent gender gap in many regions. Despite that, digital financial services (DFS) promise to be an effective tool to help close the gender gap. 

For example, a recent study on the uptake of M-PESA, a mobile money platform in Kenya, shows that 194,000 Kenyan households have been lifted out of poverty between 2008 and 2016. Women have shown the greatest benefits (MIT). Female-headed households saw far greater increases in consumption than male-headed households. This demonstrates the possibility of closing the gender gap and highlights the societal value of doing so. Closing the gender gap is essential to improving multiple aspects of a woman’s life including autonomy and empowerment, better outcomes for households and children, and overall poverty reduction.

Account Ownership by Gender

Characterizing the Situation

Recently, Glenbrook hosted a virtual workshop on International Women’s Day in South Asia to examine gender gap impact and determine potential mitigation strategies. Our global practice group has engaged in similar efforts to improve gender equity around the world through improved access to financial services by women.

Traditional and Digital Financial Products

Women utilize both traditional and digital financial products in the South Asia region. Providers have created products catering to women for different use cases. Given the multiple roles women fill and their limited access to financial products, female-centric offerings are prime for innovation.

For example, a local bank we spoke to has created niche credit and microfinance products for female entrepreneurs and small business owners. Oftentimes these products require no upfront collateral, helping to drive adoption by women. Additionally, USSD-based products have high adoption rates by women and are successful at driving access and usage of DFS.

Through our work, Glenbrook developed a framework to apply a gender-conscious lens to financial inclusion across three dimensions: product, communication, and account onboarding. When applied, this framework can help lower gender-specific barriers to digital financial services.  

A framework to guide organizational change aimed at eliminating the gender gap

Product Characteristics

Our user research focused on women in South Asia. Their views on DFS were assessed using focus groups and in-person interviews.

The principal findings revealed that women are most concerned with security and convenience when it comes to accessing financial services. 

Security and Privacy are Essential

Women tend to distrust digital access of financial services. Female users voiced concerns over the use of a personal phone number to sign up for an account as well as over a lack of data protection methods to prevent fraudulent use of their phone numbers. Similar concerns were found over account balance notifications that lack privacy controls. Women expressed their need for autonomy and confidentiality in their use of DFS. 

To address these concerns, trust building product features and services are necessary. Examples include dispute mechanisms for mobile PIN issues (PIN reset procedures, linkage to personal information) and digital receipting to reinforce payment confirmation.

Targeted Messaging for Women

Several communication tactics proved to be most effective across multiple channels. This is a departure from the typical provider’s approach to ignore women and the impact of the gender gap on financial inclusion. 

The Right Channels

Social media marketing and advertising campaigns are very effective because smartphone penetration is starting to increase among women in this region. Radio works to reach women without smartphones. Additionally, door-to-door is very effective when banks and organizations dedicate brand ambassadors. This person-to-person contact is especially important in rural areas and where financial literacy is low. 

Opportunity exists to harness the power of agent banking to improve outreach to women. There is particular value in hiring and training female agents, as they are both trusted and adept at teaching women how to use mobile money products through such personal interactions. 

Messaging Matters

Messages focusing on the female journey are effective. Meena is an example of a nationally recognized personality able to deliver an effective message to women. Meena’s messages address gender, child rights, education, protection, and development. Her story promotes social issues in an appealing and provocative way. Messages tied to women’s lifecycle events (marriage, childbirth) are also effective ways at gaining women’s attention.

Simplifying Account Onboarding

Beyond the development and communication of female-centered DFS products, women are often excluded at the point of access, facing logistical and legal barriers when trying to open a new account. Some jurisdictions require the presence of a male guardian (i.e., husband, father) for women to receive or renew an identity card. Competing needs, lack of reliable transportation, and exclusion from legal residency documents (e.g., property deeds, leases) raise further barriers. These impacts combine to drive down the issuance rate of government identity among women to a mere 55% in lower-income countries compared to 70% for men. 

To be inclusive, providers should consider alternative or no-KYC requirements for products catered to women. Glenbrook previously analyzed how this can be done safely and securely, with more information found here.

Surging Interest in Serving Women

The good news is that NGOs, nonprofits, ICT (Information and Communication Technology) providers, and governmental organizations are working on these issues. Coordination among these players will increase the effectiveness of their efforts. 

Glenbrook looks forward to supporting and strengthening this ecosystem of supporters as it works to improve women’s access and usage of digital financial services. The benefits to women, their children, families, and national well being are indisputable.

We welcome the opportunity to discuss this, and related, issues with you. Please contact the authors or simply connect here.

About the Authors

Heather Cerney focuses on the topic of financial inclusion in the U.S and around the globe. She’s particularly interested in the emergence of digital financial technology as an enabler to facilitate access and usage of banking products in underserved communities. She comes to Glenbrook with previous experience in the digital banking space.

Zachary Kazzaz is passionate about financial inclusion, having worked on programs in more than 15 emerging countries. He focuses on the strategy underlying new financial infrastructure and the associated products and services that encourage usage among vulnerable populations. 

The post Raising Women’s Financial Inclusion in South Asia appeared first on Payments Views.

To begin that examination, we look at the state of financial inclusion in the US and what are companies doing to address it. We look at some of the reasons why people remain financially excluded and why this remains a problem. In subsequent posts Glenbrook will delve further into the myriad solutions directed at financially underserved and vulnerable consumers.

Financial Inclusion in the U.S. Today

According to a 2018 Federal Reserve Report, six percent of American households are considered unbanked. Another 16 percent of American households are considered underbanked. These people must reach outside of the banking sector to meet their financial service needs. This represents 22 percent of American households, or about 56 million adults.

Definitions

Unbanked: No one in the household has a checking or savings account.

Underbanked: While they have a bank account, these households have used an “alternative financial service” like a check casher, non-bank money order, or payday loan in the last year.

Why Are So Many Americans Unbanked?

In its biennial survey of unbanked households, the FDIC asks respondents why they are unbanked.

The most frequent reason, cited by nearly 50% of respondents in 2019, was “not being able to meet the minimum balance requirements set by banks.” This makes sense when we consider that “free” checking accounts often require a minimum balance or deposit activity to stay “free.” For example, Bank of America’s Advantage Plus checking account has a $12 monthly maintenance fee if deposit activity falls below $250 every month, or the daily minimum balance is lower than $1,500.

For low-income Americans living paycheck-to-paycheck, meeting those minimum balances is often not practical.

The second most cited reason may be more challenging for bankers to address. Thirty-six percent of respondents indicated a lack of trust in banks as a factor in not having a bank account. Distrust in banks has actually increased since the FDIC began asking this question in 2015. Over just four years, the percentage of respondents who listed not trusting banks rose from 30 to 36 percent of respondents.

This “I don’t trust banks” answer suggests that even if banks respond by eliminating minimum balance requirements and overdraft fees, there will still be a portion of the unbanked population that will continue to distrust financial institutions.

These gaps have opened up opportunities for fintechs to offer bank-like services without the baggage of “banking’s” reputation.

Why the Bank Account Gap Matters

When designed with low-income consumers in mind, bank accounts support financial security. Direct deposit, deposit insurance, debit cards, free ATM withdrawals, and access to affordable credit products like mortgages and auto loans, all contribute to financial wellbeing.

Let me be clear that having a bank account is not a cure for financial vulnerability. Wage growth has lagged well behind the rise in basic household costs during this century. Having a bank account isn’t going to make any of that go away, but the lack of one increases costs and challenges.

Without a Bank Account, It’s Harder to Save

The FDIC data shows that, among American households earning less than $30,000 per year, being unbanked is correlated with a significantly lower savings rate than for banked households. 46% of banked households reported saving for unexpected expenses in the last 12 months compared to only 24% for those without.

Why this correlation with higher reported savings? One hypothesis is that it is harder for the unbanked to save because the alternatives like cash or valuables carry significant risk of theft or loss. You could also save using a prepaid card, and while this may be a better option than cash, most reloadable prepaid cards come with bank-level monthly fees.

Alternative Services Cost More

Those without bank accounts are also much more likely to turn to alternative financial services that often come with hefty fees. Take check cashing for example. According to the FDIC data from 2019, those without bank accounts were almost 8 times more likely to report using non-bank check cashing in the past 12 months compared to those with bank accounts.

Check cashing, together with payday lending is a big $11B business. While individual fees vary wildly, even one of the more affordable check cashing options, Walmart’s Money Center, charges $4 to cash a check of up to $1,000. If a customer cashes a sub-$1,000 paycheck every other week, this still comes out to over $100 a year in check cashing fees. Fees would double if the paychecks were for more than $1,000 each.

Contributing to Inequality

Given the savings implications and the need to turn to these often expensive alternative financial services, being unbanked is another factor contributing to U.S. inequality. The unbanked rates for Americans of Color and low-income Americans are much higher than for White or high-income Americans.

Surging Interest in These Customers

Despite the starkness of the problem, the good news is that there has been renewed interest in serving the unbanked and the underbanked. An article recently published in American Banker describes how entrepreneurs are increasingly seeking to launch banks to cater to Black and Hispanic communities.

Fintechs are also becoming increasingly attractive bank alternatives. There are a growing number of fintech / bank partnerships — like Cash App and Lincoln Savings Bank — that provide bank-like features to unbanked fintech customers. The fintech manages the customer relationship; the bank operates in the background to provide ACH routing numbers, card network sponsorship, and FDIC deposit insurance. Through such partnerships, fintech customers get “kind-of” a bank account, likely without even knowing it.

Some customers may wish to work directly with a bank and don’t mind transacting digitally. For this group, the rise of digital-only banks has provided a host of options that tend to be low or no fee, often without minimum balance requirements. For example, Chime offers a checking account option with no monthly fee.

Consumers today have more alternatives to the conventional bank offerings of accounts, credit cards, direct deposit, and bank portals than ever before. Next gen fintech alternatives include mobile wallets, neobanks, buy now – pay later installment lending, and earned wage access are filling some of the gaps we have discussed. The traditional “alternatives” of the past like cash, payday loans, check cashing, and money orders are seeing declining use as these next generation solutions emerge.

The jury is still out on whether these next gen alternatives can solve the financial inclusion problem in the US. What is certain is the amount of momentum and excitement around this issue today.

Stay tuned for further posts on financial inclusion in the U.S. and what is being done about it. And reach out if you’d like to discuss this important concern with us.

About the Author

Laura Dreese is a Senior Associate with Glenbrook’s Global Practice. She comes to Glenbrook with 8 years’ experience working in microfinance credit and technology solutions on a global scale. Laura holds an MBA from Columbia University and a BS from the University of Wisconsin Madison.

The post Where is Financial Inclusion in the U.S. Today? appeared first on Payments Views.