5 tech trends helping the unbanked access financial services

October 31, 2022 3:48 PM

Mobile banking is way up. Online payment services are in.

These are two of the findings in the Federal Deposit Insurance Corp.'s 2021 National Survey of Unbanked and Underbanked Households, a biennial survey that measures the ways and degrees to which Americans access safe and affordable banking services. The agency partnered with the U.S. Census Bureau to collect answers from more than 30,000 households in the U.S. in June 2021.

This year's survey had a number of takeaways with implications for bank technology, including the prevalence of mobile banking as a primary form of account access, the patterns around usage of online payment services, and the technologies that potentially helped more people get banked or find alternatives to predatory services. Even as the national unbanked rate has fallen, there are persistent problems with access to banking among minorities — an issue that has technological implications not discussed in detail in the report.

"We've had nearly a decade of broad-based digitization of financial services and a mass adoption of smartphones," said Sarah Morgenstern, a venture partner at Flourish, a venture firm that invests in startups focusing on financial health. "That has helped to drive down the cost and increase access to fairly priced financial products, especially for low and moderate income consumers."

Young adult African american girl sitting indoors doing mobile payment online.

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People mostly bank through their smartphones

Mobile banking has shot up in popularity.

In 2017, 15.1% of banked households used this channel as the primary method to access their accounts, compared with 37% that used online banking, 24.8% who visited a bank teller and 19.5% who dropped by an ATM or kiosk. In 2019, 34% of households said mobile banking was their primary channel. Mobile outranked all the other options, which also included telephone banking. In 2021, 43.5% of households said they mostly bank through their smartphone. While mobile banking was rising in prevalence, online banking was dropping. It now sits at 22% of households, the second most-common primary method.

Even some segments of the banked population that traditionally have shunned mobile banking saw sharp gains between 2019 and 2021. For example, households aged 65 and older almost doubled in choosing mobile banking as their primary method of account access, from 8.3% in 2019 to 15.3% in 2021.

"The mobile experience should be the highest priority," said Jordan Sternlieb, a senior partner at consulting firm West Monroe.

Underbanked households were slightly more likely to use mobile devices as a primary method of bank account access, at 48.8%, than banked households, at 42.5%. Underbanked households have bank accounts but also rely on one or more financial products that are commonly used among the unbanked, such as money orders, check cashing, or payday loans.

Morgenstern says this is in line with Flourish's research. "The underbanked's adoption of smartphones from the outset has been at least in line with the banked if not outpaced it," she said.

These findings are also consistent with an annual survey by the American Bankers Association. The report, released Oct. 31, found that 45% of bank customers rely on mobile apps as their top option for managing their bank account, followed by 27% that favor online banking via a laptop or computer.

Mobile is increasingly popular in commercial banking as well, added Sternlieb. "If you're working in the finance function of an organization, you may want to slip out early to go to your kid's soccer game," he said. "Being able to sit there in the bleachers and approve accounts payable while you're on the go" is one example of the many use cases he has seen.

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Unbanked households turn to online payment services for core needs

The 2021 survey's new questions about nonbank online payment services such as PayPal, Venmo and Cash App revealed patterns about who is using these products and why.

Almost half of households surveyed, or 46.4%, reported using online payment services in 2021. That appears to be an increase from 2019. "A similar (although not directly comparable and somewhat narrower) result from the 2019 survey found that less than one-third of households (31.1 percent) were using nonbank person-to-person (P2P) payment services at that time," reads the report.

Online payment services are more prevalent among banked households, with 47.7% reporting they used them, compared with 18.1% of unbanked households. Households that use these online payment services tend to be higher income and more educated than households that do not. Two-thirds of households younger than 35 transact with online payment services.

Among the unbanked households that use these products, usage is heavier than among the banked. Unbanked households that use online payment services typically turn to them for multiple types of transactions; almost half used them to conduct four or more types of transactions in the past 12 months, more than twice the share of banked households with online payment services.

They are also much likelier to rely on them for core financial needs than banked households. For example, 64% of the unbanked households that say they use online payment services pay bills this way, compared with 27.2% of banked households. In contrast, banked households more typically think of nonbank online payment services as complementary to their banking products.

Technology has created a “unique bankable moment”

The number of households in which no one has a checking or savings account at a traditional financial institution is falling to record lows.

There are approximately 4.5% unbanked households in the U.S. as of 2021, according to the survey. This is the lowest unbanked rate since the survey began in 2009; it peaked in 2011, where 8.2% of households were classified as unbanked.

The pandemic helped drive some of this improvement. About one-third of recently banked households, which had a bank account at the time of the survey in June 2021 but did not at some point in the preceding 15 months of the pandemic, reported that receiving a government benefit payment was a factor in motivating them to open a bank account during the pandemic.

Advances in mobile and online account opening technologies also helped create a "unique bankable moment," according to the survey.

Innovations in fintech have helped propel this trend. "It's a theme throughout banking that there has been so much innovation outside of the traditional regulated banks to improve the digital experience," said Sternlieb. "Many banks are going to fintech partners or buying fintech solutions to enable better digital customer engagement, including online account opening — a major use case."

Morgenstern points to Mantl, an account-opening technology provider for community banks and credit unions, and Unit, a banking-as-a-service platform, as two companies in Flourish's portfolio that illustrate the kinds of services that boost inclusion. Unit, for example, lowers the barriers to innovation. "Historically, it cost so much money to get a startup off the ground," she said. "The easier you can make it to get new startups in financial services, the more folks you have with ideas focused on low- and moderate-income consumers who can build for them in a customized way."

Some predatory financial services may be supplanted by fintech alternatives

Check-cashing and some consumer credit products, such as payday or pawn shop loans, have declined in usage among consumers over the past decade. A burgeoning supply of online and mobile alternatives could be a factor.

In 2021, the share of households that used nonbank money orders and nonbank check cashing in the past year was half of what it had been in 2011. Nonbank credit products such as rent-to-own services and payday, pawn shop, tax refund anticipation, and auto title loans declined 40% in 2021 compared with 2013. These changes could mean consumers no longer need the services. They could also mean consumers are turning to fintechs and online payment services that do similar things, such as buy now/pay later services.

Morgenstern also points to the use of alternative data to underwrite credit in a more inclusive way, or services like Petal that help people with thin files build their credit, as two encouraging trends.

The survey pointed out there may be new consumer protection concerns with fintechs and alternative credit options. It also acknowledged there is still a lot to learn about the extent to which consumers "disaggregate" financial services. "As households combine bank and nonbank products in new ways, banks may need to work harder to distinguish themselves from nonbank providers and demonstrate the unique value and protections they offer consumers," the report states.

Gaps in the banked rate persist, and fintechs work to fill them

Even though the national unbanked rate fell to a record low in 2021, unbanked rates are higher among lower-income households, less-educated households, Black households, Hispanic households, working-age households with a disabled family member, and single-mother households. For example, 2.1% of white households were unbanked in 2021, compared with 11.3% of Black households and 9.3% of Hispanic households.

The disparities are gradually improving in several segments of the population. For example, the unbanked rate in households with income of less than $15,000 has steadily fallen from 25.7% in 2017 to 23.3% in 2019 to 19.8% in 2021. The unbanked rates of American Indian or Alaska Natives saw the sharpest drop between 2019 and 2021 among all household "characteristics" studied, including income, education and race or ethnicity: 9.4%. Black and Hispanic households saw improvements of 2.5 and 2.9 percentage points, respectively.

Still, "we've been watching a new generation of startups that are focused on that problem and speak to that traditionally underrepresented group," said Morgenstern. She cites Greenwood Financial, a neobank for Black and Latino customers, and Guava, a neobank for Black small business owners, as two examples. There is also a proliferation of fintechs expressly for Hispanic customers.