Financial inclusion: How fintech expands access to all
Financial inclusion is about expanding access to financial services to those who have historically lacked it—fintech has made a significant contribution
October 03, 2022
Tom is a fintech industry writer who creates whitepapers and articles for Plaid. His work has been featured in publications like Forbes, Fortune, and Inc. He's passionate about the freedom that the union between financial services and technology can create.
Many in the US and around the world lack access to the basic financial services that others take for granted. Things like bank accounts and debit cards are out of reach to many due to their location, mobility, and financial situation.
According to the Federal Reserve, 13% of US adults are underbanked, meaning that they have a bank account but instead of using it, they rely on costly services like check cashing and payday loans. 6% are unbanked, meaning that they have no bank account at all and completely rely on those services. Income, education, and ethnicity are strongly correlated with access to banking (see below).
Unbanked and underbanked people face many financial difficulties, including lack of access to credit, inability to build savings, and risk of losing money to predatory financial service providers. However, fintech has the ability to make an impact in expanding financial services to these groups—which is what financial inclusion is all about.
What is financial inclusion?
Financial inclusion means that all individuals and businesses in a society can access the financial services they need for an affordable price. Services like checking accounts, credit cards, insurance, and other crucial financial tools are within reach of everyone—including low-income or marginalized communities.
With the high numbers of unbanked and underbanked people in the US (see above), we are clearly not living in a financially inclusive society. However, many fintechs are working to improve this situation. For example, Plaid has partnered with Green Dot’s GO2bank, which offers mobile-first banking with no fees and early access to paychecks.
These types of banking services are available to people for whom traditional financial services have been out of reach. Joining the Plaid network enables GO2bank’s customers to access over 6,000 fintech apps that give them even more power to achieve financial independence and well-being.
“Plaid is proud to work alongside Green Dot to extend the reach of our open finance solutions to even more people, including those who live paycheck to paycheck or have limited or no access to financial services due to lower income levels or credit-thin histories.”
Why is financial inclusion important?
Financial inclusion is important because it brings affordable and convenient access to the basic financial services that have historically been less accessible for low-income and marginalized groups. When access to financial services—which often comes through fintech—is expanded to these groups, financial empowerment increases.
Globally, the rise of fintech has coincided with increased financial inclusion. As of 2021, 76% of adults worldwide had a bank or mobile account, up from just 51% in 2011. That accounts for billions more people with bank accounts over the course of a decade, mostly in developing countries. This increase is tied to fintech’s contribution to financial access and is fostering a more financially inclusive world.
What are the benefits of financial inclusion?
The benefits aren’t just for the individuals who gain access to financial services they need, financial inclusion also contributes to economic growth. When more people can use financial services, they are better positioned to contribute to the economy and collectively rise all boats.
Four benefits of financial inclusion include:
1. Expanding access to traditional banking services
Providing previously unbanked and underbanked people with access to traditional banking services is one of the core tenets of financial inclusion. Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs) are at the forefront of expanding banking access to historically underserved communities.
CDFIs and MDIs provide similar services to traditional financial institutions but focus on serving specific populations and geographic areas that lack access to affordable financial services. They provide a safe haven away from predatory loans and check cashing services that typically take advantage of people in these areas and groups by providing access to traditional bank accounts, loans, and more.
2. Expanding access to credit
According to an Oliver Wyman report, 19% of Americans don’t have a credit score—which hurts their ability to qualify for loans. This included 28 million who don’t have a credit file and 21 million who don’t have enough information in their file to generate a score. These people are known as ‘credit invisibles’, and they likely include many who are unbanked and underbanked because they lack access to the financial services needed to qualify for a credit card.
Financial inclusion aims to extend credit and loan offerings to the credit invisible through the use of alternative data sources that go beyond the normal credit score. By using data such as pay stubs and rent payment history, lenders can evaluate those without traditional credit histories. They can use that data to decide whether or not to provide capital to small businesses, offer a credit card, or fund a personal loan.
Plaid offers products that can help lenders do just that. For example, Income enables borrowers to provide lenders with robust data on their employment and income history. By using income data rather than credit scores, lenders can make informed decisions about lending to those who have historically lacked access to credit.
3. Greater financial access through fintech apps
As stated earlier, the rise of fintech has coincided with greater financial inclusion. Billions worldwide gained access to bank or mobile accounts between 2011 and 2021. The rise of fintech—along with mobile phones and apps—is the main driver of this shift.
In the US, several neobanks (fintech companies offering digital banking services) have emerged in the last decade to offer financial services to the masses. Mobile-first banks such as Chime, Varo, and Dave have helped low-income consumers stay away from predatory lenders and check cashing services by offering no-fee banking, overdraft protection, early access to paychecks, interest-free cash advances, and even the ability to build credit without paying interest.
In Plaid’s 2021 consumer survey, 20% of Black respondents and 31% of Hispanic respondents say that financial fees concern them most. To resolve those concerns, 37% of Black respondents and 31% of Hispanic respondents report using online-only neobanks like Chime that offer no-fee or low-fee accounts.
Neobanks are greatly expanding financial access to low-income populations and radically transforming the financial services landscape at the same time. In fact, more traditional banks have started to offer low- and no-fee checking accounts, overdraft protection, and early access to paychecks in an effort to catch up to the services neobanks offer.
→ Watch the video below to learn how the fintech app Branch uses Plaid to help Americans who live paycheck-to-paycheck avoid overdraft fees and predatory lending.
4. Economic growth and social impact
When more people are included in the financial system, society benefits as a whole. One example of expanded access contributing to economic improvement is the advent of mobile money movement apps in Africa and South Asia.
A Gates Foundation study looked at the economic impact of mobile money on poverty across the region. It published some compelling results, including:
Mobile money helped reduce the extreme poverty index by 42% in Bangladesh by giving urban migrants the ability to send income back to their households in rural areas.
Self-employment in Northern Uganda increased by 3-6% for those that lived far away from a bank branch thanks to mobile money’s impact on labor.
Urban migrant households in Bangladesh that actively used mobile money apps saved 296% more than non-users.
Another MIT study found that mobile money services helped lift 194,000 Kenyans—or 2% of the population—out of poverty.
When examining the results of mobile money’s impact on Africa and South Asia, it makes a clear conclusion that financial inclusion contributes to economic growth. It also shows that fintech apps have been a large contributor to the economic freedom and power of those that were once excluded from affordable financial services.
→ New to financial technology? Read our guide, 'What is fintech”, to learn more about the most popular fintech use cases and the impact fintech is having on the world.
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What are financial inclusion strategies in the US and globally?
Governments and non-governmental organizations promote financial inclusion initiatives around the world.
From 2017-2021, the World Bank ran the Financial Inclusion Global Initiative (FIGI). Its aim was to create universal financial access in China, Egypt, and Mexico through electronic payments, digital financial ID, and security measures. In addition, the Innovations for Poverty Action’s Financial Inclusion Program which seeks to improve the financial health of vulnerable individuals through global research projects has completed studies in 44 countries.
In the US, the FDIC’s Economic Inclusion Strategic Plan aims to bring access to affordable and sustainable financial products and services from insured depository institutions to millions of unbanked and underbanked Americans. The FDIC advances this plan through work with collaborative networks, community promotion, education, innovation, research, and policy.
How fintech makes finance more inclusive
Fintech has been one of the largest drivers of expanding financial inclusion in both the US and worldwide. In 2021, Plaid’s consumer fintech survey showed how fintech drove financial inclusion in several ways:
Fintech helps underserved groups solve their biggest financial challenges
In 2021, fintech use among underserved populations either approached or surpassed traditional banking use. For example, while 87.8% of Hispanic respondents were banked, 95% reported using technology to manage their finances. The reason for this is that fintech has helped solve these groups’ most pressing financial challenges such as fees, budgeting, and staying on top of finances.
For example, 32% of Hispanic respondents use fintech to get early access to paychecks, which offers an alternative to high-interest payday loans. Additionally, 28% of Black respondents and 24% of Hispanic respondents didn’t track their credit scores until they started using fintech apps to do so.
Fintech helps break money taboos
Fintech has empowered people who've historically been excluded to take greater control of their financial lives. As a result, more are now engaging more with their own finances. One of the ways this is manifesting is through more people speaking openly about their finances.
According to Plaid’s 2021 survey, 7 in 10 people say that fintech has made them feel more comfortable talking about finances. Additionally, 54% say finance has become a dinner table topic, including 74% of Hispanic respondents and 61% of Black respondents.
From driving bank account adoption worldwide through mobile banking apps to helping Americans discuss their finances, fintech is making a significant impact on financial inclusion. Nothing else has been able to bring financial access to so many so fast and contributed so much to financial freedom worldwide.
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How Plaid supports financial inclusion
Plaid’s mission is to ‘unlock financial freedom for everyone,’ which is why financial inclusion is baked into our company’s DNA. We support 6,000+ fintech apps that expand financial access to consumers, and we also have internal initiatives and goals to support our mission of financial inclusion.
Our most recent initiative is Plaid Accelerate, a fintech accelerator program supporting early-stage founders who are Black, Indigenous, or People of Color. Because we believe it is vital that those building the future of financial services reflect the rich diversity of the consumers who can benefit from that innovation, this program serves to support founders who are underrepresented in fintech.
However, most of the founders sponsored by Plaid Accelerate create products that foster financial inclusion for their own customers. Examples from our previous cohorts include:
Dollarito: A digital lending platform that makes it possible for the low-income Hispanic population to gain access to fair credit, including those with little to no credit history.
Kaoshi: An API-based platform that helps immigrants with cross-border financial services and remittances to their home countries.
Fintech was built for financial inclusion
In the US and around the world, fintech has created services that enable more people to access the financial services they need at a price they can afford. Thanks to fintech, more people are sending money to relatives who need it, building their savings for the first time, or making their first investment in stocks or cryptocurrencies.
Fintech has brought a sea change to financial inclusion, putting crucial financial services into the palm of so many who need them. While fintech has increased financial freedom for millions, there are still millions more who need access to basic and affordable financial services. Until everyone is included in the financial system, there is more work for fintech companies, governments, and nonprofits to do.