Digital technology can make financial struggles easier to manage

BETWEEN 2011 and 2014, according to the World Bank, the number of people in the world with a bank account, either directly or through a mobile-money provider, grew by no fewer than 700m. The global ranks of “unbanked” adults thinned from 2.5bn, 49% of the total, to 2bn, just 38%. Data being collected this year are likely to show further progress, with more people who used to rely on cash and informal, often expensive, means of saving, borrowing and paying for goods and services now connected to formal financial systems.

This rapid advance is far from complete: 2bn is still a big number. Plenty of transactions that could take place more safely and efficiently by electronic means are still conducted in cash. Nonetheless, progress has been remarkable. It is largely the product of a technological revolution—the harnessing of digital technology, in particular mobile phones, to provide financial services in developing countries. The most celebrated example is M-PESA, a mobile-money service used by 27m Kenyans. Although only 2% of people worldwide had amobile-money account in 2014, in sub-Saharan Africa 12% did, half of whom were not customers of conventional financial institutions.

In rich OECD countries, 90% of adults already had a bank account in 2011. An even bigger share do now. Clever technology is therefore unnecessary for financial inclusion, at least in this narrow sense. Yet an account only gets you so far. “Inclusion doesn’t denote engagement,” says David Brear of 11:FS, a bank-technology consultancy. “Just because you have a bank account, it doesn’t mean you know what an APR [annualised percentage rate] is.”

Financial services can still be forbiddingly expensive, complicated or hard to obtain, especially for people on low or variable incomes, those with patchy credit records, immigrants and refugees. Digital technology can help. Just as it has cut the cost of serving the unbanked in emerging markets, it has made marginalised groups in developed countries cheaper to serve. And just as telecom and internet giants, rather than banks, have led the way in the poor world, financial-technology (“fintech”) startups are in the vanguard in the rich one.

It is not only the poor who find money hard to manage or bureaucracy hard to crack. “In developed countries the challenge is not so much inclusion as financial health,” says Tilman Ehrbeck of Omidyar Network, a philanthropic group that invests in startups in both rich and emerging economies. According to the Centre for Financial Services Innovation (CFSI), a think-tank in Chicago, 35% of American households that struggle financially make more than $60,000 a year. Immigrants to Britain, for example, even if they have come from elsewhere in the European Union and have a job, complain that setting up a bank account can take months. Banks typically demand proofs of residence, such as utility or local-tax bills, which new arrivals do not have.

The CFSI estimates that 121m American adults have either credit scores below 600 on credit agencies’ standard scale or no score at all because agencies have little information about them. For such people loans are pricey or inaccessible. Fully 91m have incomes too low, and 54m have incomes too volatile, to use mainstream financial products effectively. The Federal Deposit Insurance Corporation, a bank regulator, reckons that 16m still have no bank account at all, although the number is declining fast, and another 51m are “underbanked”—meaning that they go outside the banking system to meet their financial needs, turning to services such as cheque-cashing or payday loans.

He that hath not

Americans in these overlapping categories spent $141bn on fees and interest in 2015, says the CFSI: $55bn or so went on loans lasting more than two years, including subprime car finance. Subprime credit cards are another big category, and growing fast. Poorer people are likelier than the better-off to use cash. They also spend $5bn a year on tax advisers, who prepare their returns early and advance them money in anticipation of a rebate.

Banks and fintech startups backed by venture capitalists are spending oodles on bringing finance into the digital age. Until a couple of years ago, says Mr Brear, banks concentrated on cutting costs and simplifying processes. Their digital services are getting slicker, but are aimed chiefly at the broad mass of existing customers rather than poorer new ones. “If you need a lot of help, digital is leaving you behind,” Mr Brear says. (He thinks rich clients, who want personalised help for different reasons, are also missing out.)

Yet digital technology is cutting the cost of serving just about everyone. Amir Hemmat of SABEResPODER (“knowledge is power”) in Los Angeles, which gives Hispanics in America information on education and health care as well as finance, says that a lack of data is a “classic excuse” for denying affordable finance to the less well-off. “I don’t buy that, in this day and age.”

SABEResPODER generates “an enormous amount of data around a hard-to-reach population”, which it uses to finance its operations. Its 930,000 members are paid to complete smartphone surveys. It sells the results (with their permission) to market researchers for companies hoping to sell more to Hispanics. Clients have included Ford, MoneyGram, Nielsen, Sprint and Wells Fargo.

Computer says yes

Plenty of companies are working away. The CFSI’s Financial Solutions Lab, backed by JPMorgan Chase, America’s biggest bank, incubates eight to ten startups a year. Jennifer Tescher, the CFSI’s chief executive, says it runs the rule over 350 hopefuls annually. One graduate, Propel, helps recipients of food stamps, which are received via government-issued debit cards, to manage their benefits. According to Propel, 70% of cardholders have smartphones, but most check their balances by calling a hotline or (more precariously) by saving grocery receipts. The company’s app shows their balance, lists their transactions and tells them which local shops accept stamps. It recently raised $4m from investors including Omidyar, the CFSI and Andreessen Horowitz, a Silicon Valley venture-capital firm.

Digital technology has made it easier to collect and sift data—and hence to find creditworthy people among those with “thin” conventional credit files, who might otherwise be denied loans. “There are a lot of 680s among those 540s,” says Arjan Schütte of Core Innovation Capital, a venture-capital fund, referring to credit scores. At the same time, algorithms, like human risk-officers, have to avoid lending to those who cannot afford to borrow. Reckless American mortgage lending not only fed the boom that preceded the financial crisis of 2007-08, but also left borrowers ruined.

Douglas Merrill, a former chief information officer of Google, was prompted to start his firm, ZestFinance, by a conviction that conventional credit scoring was denying loans to people whose only failing was to have thin credit records (his wife had been among them). Its machine-learning software draws on wider, messier sources of information—eg, whether people provide the same mobile-phone number in different credit applications, or whether they are licensed professionals. A credit-card issuer using it has cut annual losses by a nine-figure sum. RentBureau, a company acquired in 2010 by Experian, a credit-scoring agency, spotted that databases on tenants included only adverse information, such as late payments. Simply noting that rent was paid on time was a straightforward way of thickening a thin credit file.

Immigrants can find it hard to get a bank account at all, let alone credit. Monese, a startup in London, has built a business largely on the frustration of arrivals in Britain from other EU countries. It is not technically a bank but an “electronic money institution” which places its customers’ cash with licensed banks. In effect, however, it offers a standard online bank account, with a debit card, contactless payments and so forth, for a monthly fee, as well as remittances in ten currencies.

Whereas banks insist that new customers present documents physically, Monese asks them to install its app on their smartphones, video themselves and photograph their passport or identity card. It checks identities and issues account details within 90 seconds or so. According to Norris Koppel, the firm’s chief executive, Monese’s software-based verification procedures are more accurate than those of banks, which rely on visual checks of passports and utility bills by branch staff. The two-year-old company has nearly 100,000 active account-holders, mostly other Europeans in Britain. Recently it opened up across the euro area too.

If Europeans free to roam across the single market find banking systems hard to unlock, asylum-seekers and refugees face an even more daunting task. They have little money and may lack documents that banks, wary of know-your-customer and anti-money-laundering rules, will accept. At the same time, easier access to banking should help refugees and hosts alike. “Today’s refugee is tomorrow’s citizen,” says Balazs Nemethi of Taqanu, a startup.

One promising idea is to apply looser identity rules to refugees, in exchange for limited banking facilities—for example, with caps on the amount they can have in an account or on transfers of money. BaFin, Germany’s banking regulator, relaxed the terms in 2015, reasoning that it was easier to keep an eye on formal financial services than on informal ones. Taqanu is working on ways to establish identity using people’s digital footprints, such as the location of their mobile phones or their use of social media, to complement often-patchy formal documentation.

MONI, a Finnish startup, has already provided services to refugees. It offers blockchain-based accounts (launched across Europe this week) which, like those of Monese, can be set up in seconds. They can be topped up from a normal bank account or a credit card. Their facility for instant payments and transfers is handy for lending or giving money to friends and relatives on a tight budget, as well as for settling bills. In 2015 the Finnish government asked MONI to supply accounts and debit cards to refugees, to whom it gives a monthly allowance and a temporary identification card, in a pilot programme.

Antti Pennanen, MONI’s boss, says that around 4,000 refugees in Finland still have active accounts. Their usage has grown now that many more refugees have jobs, can pay bills and so forth. Relatives can send money without needing to entrust cash to the post. MONI is working on providing automated help in dozens of languages through artificial intelligence. The scheme is due to be extended to refugees elsewhere in Europe this month.

Much more could be done, and not just for new arrivals. Ms Tescher laments the slow pace of bank transfers within the United States. Real-time payments would speed up cash flows, encourage electronic payments and squeeze cheque-cashers and payday lenders. Mr Schütte says that American laws restricting the types of information used to assess creditworthiness are too tight for the digital age. He also thinks that the Community Reinvestment Act of 1977, intended to thwart discrimination against African-Americans, is out of date. It forces banks to maintain branch networks in an era when deposits and branches are increasingly poorly matched. Steven Mnuchin, the treasury secretary, is planning an overhaul. Shifting the focus from bricks and mortar to online services would be a good place to start.