Fintech: How COVID Affected Payments and the Underbanked

The COVID-19 pandemic was a disruptor in the purest startup sense. The immediate shift to remote work, school, and socially distanced ways of life accelerated innovation by an estimated five years. Inequalities were laid bare across countless aspects of daily life, exposing some difficult truths. Among them: financial technology (fintech) and how developments on this front left the underbanked behind, exposing critical gaps in our financial systems.

Certainly, there were great launches and the public offerings of some amazing infrastructure innovations during 2020. The pandemic forced all of us who participate in the space of developing tech that seeks to improve and automate the delivery and use of financial services — from startups to the biggest institutional finance companies — to think differently about how we deliver these services.

Dickens’ classic line, “It was the best of times, it was the worst of times,” holds true for the industry in 2020. If you were a Fintech entrepreneur, times were never better. On the other end of the scale, consumers — especially those on the socioeconomic margins — have faced unforeseen obstacles in making the payment transactions that were fundamental to daily life.

Over the past year alone, we’ve witnessed massive innovation in financial services infrastructure, tearing down the functional realm of traditional banking. Before Stripe, online payments were available as gateways through bank and non-bank resellers, but the integration and customer experiences were time-consuming and less than ideal. You may remember the days when you went to pay a bill online and had to jump through two or three web pages to end up someplace to actually make the payment.

By recognizing the need for a smooth, easy way to integrate payments into an online experience, Stripe opened the door. Rushing through it came a flurry of other payment processing and digital banking companies such as Marqeta, Moov, Finix, Fidel, Cherry and Fast. Each of these innovators are disintermediating services that have traditionally been provided by banks.

Some of these upstarts are branded, full-stack offerings. Others are white-labeled developer tools. No matter which way you look at it, these innovations in Fintech will make traditional banking look radically different in 2021.

For example, there are platforms emerging that issue virtual credit cards that can be used by cardholders in mobile wallets such as Apple Pay and Shop Pay. While this has been great for wealthy consumers with high credit scores, anyone living beneath such rarefied air has trouble accessing and benefiting from this type of innovation.

People who rely on cash; that is, those without a bank account or credit cards and who do not have sufficient access to mainstream financial services and products, tend to be at the lower end of the socioeconomic scale. The number of Americans who fit this description is eye-opening.

According to Pay Theory’s analysis of data from the National Education Association and the Federal Reserve Banking System, roughly one-third of US public school parents are under- or unbanked, making online and credit card-based payments extremely difficult. Banking products afford upward social mobility. But without ensuring broad access to these products, advances in Fintech have left cash payments in the dust, wielding a very real — very devastating, human toll.

“There is a significant correlation between the use of cash, prepaid, debit, high-end credit and wealth, and there’s a huge correlation between wealth and race,” says Aaron Klein, policy director at the Center of Regulations and Markets at the Brookings Institution in a recent CNBC interview. “Our payment system is geared toward helping the wealthy and charging the poor.”

The silver lining amidst the toll that Covid has taken is that it has forced Fintech to look for contactless ways to deliver services without discriminating against those who don’t have access to credit or don’t have the same digital footprint as you and me. Embedding financial services into products and services helps those products and services to do a better job servicing Fintech’s customers. Leaving behind 30 percent of a market isn’t good for any business, and especially not for those that are vital to the futures of those they serve.

Up until 2020, much about Fintech functioned with personal contact. It took a visit to a bank or a connection to a peer to get the really important things done or for a cash-based family, even to enable the most basic transactions — like cashing a paycheck or getting cash to pay a bill. The underbanked community has long relied on stopgap banking tools such as money orders; remittance cards, often purchased in bodegas and convenience stores; and check-cashing and usurious payday loans.

The COVID–19 pandemic has only accelerated the demand for digital payments and associated Fintech tools as more and more transactions move online. Consider the unprecedented volume of gifts purchased via e-commerce. The rise of online shopping has been painful for those outside of advantaged digital footprints. To partake in Cyber Monday deals, you can’t fork over cash.

Mundane payments have become much more difficult as well. Before COVID, paying my son’s soccer coach for his name to be put on the back of his jersey consisted of a hand-to-hand exchange of a fiver. The virus has made that type of payment unnecessarily burdensome.

All of this increased demand for digitized, reliable financial services has tested the robustness of the existing, often legacy, platforms. The cracks have been exposed. At the same time, pushing those digital services to reach those disadvantaged people has become more important than ever.

Now that we’re forced to address the foundational flaws inherent in Fintech, we also have a unique opportunity to widen its net. The most important development in the Fintech industry in 2021 will be increasing financial inclusion and access to financial services regardless of location, socioeconomic status, and/or banking status.

Investor funding will continue to primarily be focused on building new financial infrastructure globally. Increasingly, the consumer personalization of that infrastructure will come to the fore and the companies leading that will be richly rewarded. This means tailoring how that infrastructure is delivered to a consumer so that its impact is maximized for both the consumer and the product or service provider.

Point-of-sale financing is a great example of this. Credit cards are expensive if you need a payment plan. Klarna and Affirm saw an opportunity in this gap. Now a payment plan tool is an accessible form of payment at the point of sale for many online retailers. Combined annual revenues for these two Fintechs is estimated to be in excess of $1.2 billion. Digital wallets such as ApplePay are already active on more than 500 million iPhones, and on track to process some 1 in 10 of every electronic retail payment in the world.

The most important development in the Fintech industry in 2021 will be increasing financial inclusion and access to financial services regardless of location, socioeconomic status, and/or banking status.

A person, banked or unbanked, has access to cash stored somewhere, even if that spot is under a mattress. As illustrated In the below diagram, there are many new mechanisms to access that stored value. Once the cash has been called, it has to land somewhere such that a customer can make a purchase, exchanging that stored value, quickly, easily and efficiently with a service provider through some delivery mechanism. This can be done in person with a $10 bill or through a card stored in a digital wallet.

The difference is, for someone using cash stored under a mattress versus money in a bank account, they’re at a constant disadvantage. Carrying cash is a liability: You can lose it; it carries germs. It can be stolen or misplaced. At the same time, it’s not earning interest or building up your credit, and you miss out on bonuses such as credit card points and rewards. The next generation of Fintech will confer the same benefits realized through electronic payments to cash payments.

Financial services will become closely identified with individuals and the family units where spending decisions originate. These payment weapons will be most visible at the various points of sale where families are gaining access to some product or service.

The demand for Fintech services did not go away. Instead, it migrated to places that tested the fabric of the industry — like the youth soccer field. And the growth in demand for financial services in those places has been exponential. Consumers will benefit from a dramatic Fintech sea change through the personalization of digitized financial services that maximizes access to these services — simply and for all.

Also published on: https://paytheory.medium.com/why-fintech-needed-covid-c89968bfd3d9