A Silicon Valley Road Map for Banking the Underbanked
Trying to keep up with developments in mobile financial services can be a dizzying prospect. Banks are fearful of being left in the dust, yet they are hesitant to make a big bet on mobile that could possibly distinguish them from the rest of the field but could just as easily fail.
Despite all of the new powers at their disposal, regulators continue to emphasize simplified and standardized disclosure as a critical tool to ensure consumers get a fair deal.
Every year, despite the risks and high costs, millions of Americans turn to payday loans for emergency funds. To date, a top-down, regulatory approach has been the primary means of addressing the downsides of the payday lending industry. To improve protection of consumers and encourage this industry to mature, such regulation should be joined by efforts that encourage market transparency.
The Kindle Fire isn't as capable as the iPad and it isn't as connected as a smartphone but its mix of price and features makes it extremely well suited to serve the underbanked.
What would happen if you took the creativity and user-focused design sensibility of Silicon Valley and applied it to one of the least consumer-friendly industries on the planet — financial services? What is the Apple of budgeting? The Facebook of lending? The Google of bill payment?
Could everyday financial needs ever be answered with the simplicity and ease of an iPhone, a status update, or a web search? We think yes.
Thanks to the mashup of emerging technologies and banking, a growing number of entrepreneurs are seizing on the opportunity to improve the financial services experience for everyday Americans. Taking a page from Silicon Valley, they are creating simple, intuitive products and providing a delightful user experience. Who knew that paying your gas bill, tracking spending and applying for a loan could be fun?
A cadre of financial technology start-ups will be on display at the upcoming 7th annual Underbanked Financial Services Forum in San Francisco, a hotbed of innovation just a stone's throw away from Silicon Valley. Organized by the Center for Financial Services Innovation and American Banker, the conference brings together the best ideas in the financial services industry for reaching the underserved.
Our partners at Core Innovation Capital put out a call for innovative financial services products aimed at the underserved, promising finalists a spot on the conference stage to demonstrate their products live.
The audience will vote for their favorite, and the winning company will receive $10,000.
The four finalists represent a range of products and company types, and their ideas are in varying stages of development. What they have in common is a focus on leveraging technology and good design to improve the customer experience.
Sociogramics wants to help banks bring character back into banking. Founded by serial tech entrepreneur Gary Kremen, most famous for starting Match.com, the company mines social media data to help banks authenticate, underwrite and stay engaged with customers – particularly those with thin or no credit file. Verifying employment through social media data, for instance, a standard practice for underwriting certain kinds of loans, can be cheaper and more effective than traditional methods. Another example is using social networks as forces of positive peer pressure by having friends and family encourage good financial behavior, like making a loan payment on time or making a deposit in a savings account.
If Sociogramics is a high-technology business, Juntos Finanzas is the polar opposite. It is a low-tech SMS-based service that helps cash-based Latinos track their spending and build up savings. Stanford grad Ben Knelman developed the idea after interviewing some janitors at the college for a class project and found money to be a source of constant anxiety.
The service is one step up from paper and pencil, making it far easier to use than the typical personal financial management tools found online. Users simply text the company every time they make a purchase with the item and amount. At the end of the month, Juntos sends users a visual display of how they spent their money.
Silicon Valley start-ups seem to get all the attention these days, but banks are still doing their share of innovating. Santander Consumer USA, an American arm of Spain's Banco Santander (STD), has developed an auto equity loan for subprime and near-prime consumers built off of its major auto lending platform.
HelpingLoans, as they are called, are structured as 1- to 5-year installment loans, with loan amounts based on the value of the car and the credit profile of the borrower. Consumers apply online, using simple toggles to see how monthly payments and interest rates vary depending on the amount borrowed and the duration. The average APR is 24% — high, but far lower than typical auto title loans, and on par with subprime credit card rates.
One of the greatest pain points for cash-strapped consumers is paying bills conveniently and on time. TIO Networks has built a major walk-up bill payment business over the last decade; now it is leveraging the power of mobile technology to put their service directly in consumers' hands. (Full disclosure: CFSI is an investor in TIO.)
Mobile wallets schemes are a dime a dozen these days, but few offer a real reason to use them other than novelty. TIO customers will be able to pay nearly any bill from their phone, real time, with the touch of a button.
No matter how cool and high tech (or low-tech) these innovations are, only time will tell whether or not these products and companies will ultimately succeed — for both theirs consumers and their investors. In the banking world, that kind of uncertainty is typically avoided at all costs. But in Silicon Valley, everyone knows that risk-taking, consumer-centric innovation is the best ingredient to creating scalable, profitable businesses that improve consumers' lives.
Perhaps it's time for the financial services industry to take a trip out West.
Jennifer Tescher is the president and chief executive of the Center for Financial Services Innovation. Rob Levy is an innovation manager at CFSI and the content coordinator for the Underbanked Financial Services Forum.