Can fintechs help plug banking gaps for struggling Black consumers?
A handful of fintechs are attempting to tackle a problem that has existed for years and been exacerbated by the coronavirus pandemic — many Black Americans are underbanked.
In 2017, the Federal Deposit Insurance Corp. found that 47% of Black Americans were underbanked, compared with 20% of white Americans.
The pandemic is worsening the economic plight of the Black community. A Pew Research survey in April found that 73% of Black adults did not have emergency funds to cover three months of expenses; 47% of white adults reported the same problem.
Forty-four percent of Black Americans said they or someone in their household had experienced a job or wage loss due to the coronavirus outbreak, compared with 38% of white adults.
The following examines how two of the companies, Stoovo and Current, are trying to help improve those statistics.
Where traditional banking falls short
To understand why there’s a need for better alternatives for the Black community, it helps to consider why so many are underbanked in the first place.
Hantz Fevry, co-founder of Stoovo, said a major factor is that many people in Black communities earn low wages.
“I wouldn't say the banking system is not relevant for the black community,” he said. “I would say that the banking system was not designed to help people who are living paycheck to paycheck or people who have high income volatility.”
Banks’ traditional answer to income volatility has been the credit card, he said.
“The credit card was a great invention, and credit is good if you can pay it back and if you're educated financially,” Fevry said. “A lot of people in financial stress are not financially educated. When you push financial products like credit cards to them, they get into a rabbit hole of debt, and they cannot get out.”
In Fevry’s view, the emphasis many banks and fintechs have on personal financial management still neglects lower-income groups' challenges.
"After Mint.com there was a focus on personal finance management and aggregation,” Fevry said. “Years later, people are still working on aggregation, but users aren’t seeing the immediate value of all their finances in one place. This disparity is glaring in low-income communities. If you present them with a shiny technology not addressing their immediate needs, that alone is not really a solution to their problems."
Jillian Williams, investment principal at Anthemis, pointed out that the kinds of fees banks charge hurt people with low incomes.
“A lot of the traditional financial services institutions have account minimums, higher overdraft fees and high annual or monthly costs that are definitely prohibitive” to Black or Hispanic people who are underbanked, Williams said.
She also said that many large banks have been closing branches in poor neighborhoods, even before the pandemic.
“There’s basically a drought in terms of financial institutions for a lot of these neighborhoods and demographics, because, for instance, they can’t walk down the street and see a Bank of America,” she said. “So they are underserved not only by the products themselves, but also by physical access to a bank account.”
The challenger banks that serve less-affluent Americans have a huge opportunity with the Black community, she said, because a lot of the features of their products — no minimum balance, no overdraft fees, no monthly fees, quicker access to money — align with its needs.
The next challenge is helping the community to understand that these products and services exist, she said.
One fintech's discovery
The challenger bank Current recently surpassed 1 million users; 50% are Black, according to the company, which bases its count on user-profile photos.
Current did not set out to be a fintech for the Black community. It started out as a bank for young people.
“We started with teens early because we were building our own software and infrastructure,” said Stuart Sopp, Current's CEO. “And when you're building as you go, you're going after the smallest, most solvable problem, and that turned out to be young adults who just needed a card and some software.”
As the company grew and added more financial services, including a checking account, it focused on people who live paycheck to paycheck, who have the greatest need for formal financial services.
“The mix happens to overindex in the Black American community,” Sopp said. “We will help anyone who needs access to affordable financial services.”
Users have incomes of $50,000 or less and an average age of 27. Forty percent have never had a bank account. Many work at companies like Amazon, Walmart, Instacart, DoorDash and Uber. Some are nurses, and others are in the military.
“What we now know, which we didn't know a year and a half ago, is that we’re banking essential workers,” Sopp said. “That's effectively the people who are keeping America going.”
These types of jobs are disproportionately done by Black Americans.
“For us, focusing on wealth inequalities is super important,” Sopp said. “We get to help try and close the wealth and inequality gap that’s been created and will persist for many years to come.”
Like other challenger banks, Current offers customers access to their paycheck funds as soon as the payroll provider sends its notification, rather than waiting for the funds to clear.
“What we've seen, and the pandemic has highlighted this, is that banks are just ill-equipped to deal with people who live paycheck to paycheck,” Sopp said. “Hourly workers are paid on a Friday, we pay them on a Wednesday or Thursday because we don't monetize their deposits like a bank does. The way we make money is by the interchange" income from Visa debit cards that come with its accounts.
Current offers basic banking and help with financial education. It charges $36 a year for a teen account subscription. Its premium checking account comes with a fee of $4.99 per month.
Current does not offer short-term loans but says its ability to give people access to their pay two days early helps those living on the edge.
“Typically when you're getting a payday loan, it's because you can't make a bill,” Sopp said. “Maybe there's a health care event, or maybe you had a flat tire, or your car is not working, [or] something is happening to an ill family member. And you've had like an external shock that’s quite big.”
Getting access to pay early can help such customers avoid late fees on services like cellphones.
Current also offers an overdraft facility of up to $100 with no fee and no expectation of repayment to those who have their paycheck deposited in a Current account.
“That gets people to the next week as well,” Sopp said.
About 80% of Current users regularly use the overdraft facility, Sopp said.
“We’re using our balance sheet to help those who work for chronically underpaying, large corporations in America,” he said. “It's kind of crazy, in my view, but that's where we are.”
Most Current users have a FICO score under 600, so they’re not eligible for credit. Some have a thin credit file or no file.
Current has been growing its customer base at a rate of 1300% per year, which Sopp characterizes as “insane.”
About 40% of its marketing is through YouTube influencers. It’s also on Snapchat, TikTok, Facebook and Instagram.
“We use lifestyle bloggers and influencers that you and I would have not watched and probably don't know who they are,” Sopp said.
Helping gig workers
Stoovo, a fintech that’s just emerging out of stealth mode, gets at the heart of the problem many Black Americans struggle with: low wages.
Fevry grew up in Haiti, where about 80% of the jobs are gig-economy jobs.
“So people live paycheck to paycheck and job to job,” he said.
When he went to college, he sometimes overdrafted on his bank account. He also had some time on his hands. It occurred to him there ought to be a platform he could use to quickly find work and replenish his bank account.
Stoovo uses artificial intelligence to help users find better-paying gig work in their area.
It aggregates data from on-demand work platforms like Uber, DoorDash, Postmates and TaskRabbit. It also draws data from partner companies that offer part-time work. It lets users set goals, then recommends the jobs that will help them reach those goals.
“We're seeing more people doing those sorts of assignments,” Fevry said. “But a human cannot process all that data and be able to make the right choice to have the right income to address their needs.”
Helping users make smarter decisions about which part-time jobs to pursue can relieve a lot of stress, too, he said.
“This is why you see that the gig economy is rife with frustration,” Fevry said. “As an individual joining the gig economy, you feel exploited. A lot of workers overwork to make ends meet.”
The app will tell people how much companies like Uber and Lyft are paying in their area. It can predict where there will be surges of demand, say around an airport. It will recommend the best times to take a break.
“We know, for example, around the Bay Area, at 3 a.m., Uber is short on drivers,” Fevry said. “If a driver wants to work at night, it's better to work at 3 a.m. That's probably going to pay 25% more than working in the morning.”
The app also offers a heat map that gives an overview of gig-job activity in the area, again, to help the user make the best choices among gig jobs. There are also calendar and schedule views that help the users plan their day or week.
The Stoovo app is offered to all. Fevry expects people in the Black community and other minority communities to use it to boost their income.
Fevry seeks bank partnerships; the company is already talking to one large U.S. bank, he said.
One aspect of his pitch is that for people who are late with car payments, Stoovo could be an alternative to a collections agency.
“The collections agency will harass and call the person 20 times a day to try to get them to pay,” Fevry said.
But it can’t address the underlying problem that customers don't earn enough to pay their debt. Stoovo could help those borrowers earn the extra cash they need to make those payments.
In the pandemic and beyond, more people are taking short-term assignments, Fevry said.
“We need to rethink how we are going to push financial products to all those workers and more particularly to the Black community, because a majority of gig workers are either immigrants or from the Black community,” he said.
The Android Stoovo app is available for download. The iOS version will be available in late summer or early fall. More features, including banking, cash advance and employment agency partnerships, will be announced in early fall.
Fevry expects Stoovo’s services to become more important in the coming months.
“A lot of small businesses, mom and pop shops, don't need to able to hire someone full time,” he said. “And especially after COVID-19, they probably won't be able to hire someone full time.”