New financial programs aim to tackle economic inequalities in underserved communities
Black and Latin households make up 32% of this country’s population, but they represent a breathtaking number 64% of unbanked in the United States and 47 percent of underbanked.
The banking system’s discrimination against communities of color and low-income communities is a reality that goes back over a century and materialized in various ways, including fewer banks in non-white neighborhoods (majority white counties are home to an average of 41 financial institutions per 100,000 population, compared to 27 in predominantly non-white neighborhoods), fewer mortgage approvals, and higher fees when members of these demographic groups use service providers financial.
More often than not, however, this difficult and inequitable landscape often pushes low-income community members, often black and brown, toward the more expensive and less desirable alternatives in the financial space – payday loans, securities lending. automobiles, check cashing services, etc.
“The system is down in the United States,” says Snigdha Kumar, who spent two years at Harvard studying how the traditional bank has disproportionately neglected underserved communities and is now responsible for product operations for the application of savings and investment. Figure. â€œThere is a dearth of banks in the American counties that are not white and because of the shortage of banks in these communities, individuals do not have access to any financial services. At the same time, products like traditional bank accounts are not suited to unserved communities. . “
The continued rise of fintech looks set to change all of that. A Harvard Study has shown that banking apps, credit apps, and even investment apps have slowly democratized the financial services industry and provided new levels of access and fairness to historically underserved people and locations. These developments even allow these communities to create wealth in ways that were not possible before.
Start-ups like Tender, Nova Credit, Carillon, To improve, and others like Robin Hood help disenfranchised populations do everything from building and repairing credit to obtaining loans to make fractional investments. Here’s a closer look.
Help with building up credit
A lack of credit history can be a serious challenge in communities of color, low income communities, and even among new immigrants to this country. And without access to traditional bank accounts, these people are not able to generate the data to establish creditworthiness, according to the Boston Consulting Group.
One of the new platforms that hope to meet this particular challenge is Tender, a banking collective launched a few months ago. The bank’s CEO said its mission is to empower communities of color and low-income communities and that it will do so in a variety of ways, including not excluding customers who may not have a history of credit or have a lower than average credit rating. of its customers.
â€œWhether you have credit problems or no credit, you won’t be blocked by this,â€ said Tend CEO James Dunavant. â€œWhat we want to do is provide tools to help people build their credit profile and also help to improve credit for this population.
Tend will help clients do this by providing them with access to up to 75% of their personal savings in the form of a secured line of credit, which clients can use to help. build a positive credit history.
Members build or improve their credit profile simply by making consistent monthly payments on their Trend secured line of credit, and the payments will be reported to the credit bureaus.
Tend will also provide Members with access to their credit score, credit report, and other credit monitoring tools that can actively keep them informed of any changes in their rating.
There will also be a credit score simulator on the Tend platform to help members discover the different ways their credit score can be affected. Access to the credit score is already available through Tend, and additional improved tools will be released soon.
Reducing the costs of using FinTech lowers barriers to entry
In communities of color, where national banks, lenders, or investment firms lack a meaningful presence, many consumers turn to check tellers, payday lenders, and other types of alternative financial institutions that generally charge high transaction fees. Traditional banks also typically charge higher account fees to those who can least afford it, experts say.
However, the emergence of financial technology applications, including virtual banks and neobanks, creates an environment in which vendors can, through automation and other measures, reduce the cost of doing business and these savings. can be passed on to customers, experts say.
Chime bank follows such a model and lowers the barriers to entry, says Kumar. There are never any minimum, monthly or overdraft fees for Chime customers.
The Chime website makes it clear that it doesn’t believe a bank account should cost you money. It also provides other services that are particularly useful for low-income communities, such as allowing customers to be paid up to two days in advance when they sign up for direct deposit. It also offers a free network of ATMs.
And finally, just like Tend, the Chime Platform seeks to help clients build their credit and does so by allowing them to apply for a secure Chime Credit Builder visa.
Low-cost and fractional investment applications provide access to construction
Investing apps such as Robinhood (whose slogan is â€œInvest for Allâ€) have made stock market investing more accessible to low-income and underserved communities. Users can start investing commission-free through Robinhood and accounts can be opened with a minimum deposit of $ 0.
â€œRobinhood allows people to invest at no cost, which wasn’t a thing three or four years ago,â€ says Kumar.
Robinhood also introduced a revolutionary new program called IPO Access. Although IPO stocks are generally limited, Robinhood’s IPO access offers platform users, regardless of order size or account value size, the same opportunity to invest in. an IPO than anyone else.
The emergence of fractional investing through financial technology applications such as Hideout (which allows you to start with as little as $ 5) and Webull (no minimum deposit, zero commission, fractional investment) have also opened the doors to building wealth through the stock market.
â€œIf I’m a worker in the odd-job economy and earn $ 100, I can now invest $ 10, which could not have been done three years ago,â€ Kumar adds. “Financial technology has also forced incumbents to lower fees so that you can now trade at Schwab or Fidelity and expect trading to be free.”
Loan apps level the playing field too
Nova Credit targets one of the biggest challenges new immigrants face in this country – a lack of financial history in the United States. The fintech firm, which describes itself as a cross-border office, says it was created to help immigrants get “a head start on [their] journey to financial integration in the United States.
“The lack of national credit history is preventing millions of immigrants to the United States from achieving their dreams,” says the Nova website, which aims to help newcomers and other citizens of the world apply for financial services by using their international credit history.
The platform translates international credit data into a US equivalent score and report in a format familiar to US underwriters, who then use it to assess claims.
Nova Credit connects users to both auto loans and credit cards. The company is also opening the doors to other financial products for immigrant communities.
â€œNewcomers can also apply for a student loan through MPOWER financing and rent an apartment through landlords who use tenant selection platforms like Yardi, Intellirent or First Advantage through our platform,â€ says the Nova Credit website. “We are also currently piloting a partnership with a large US mobile phone company in some cities in the United States.”
Digital access leads to global democratization
The common thread running through all of these services is that they are digital. They don’t require a physical bank or investment firm to be around every corner. This fact has been a game-changer in many ways, from reducing entry costs to eliminating systemic biases.
â€œDigital is democratizing underserved communities,â€ says Kumar. â€œThis is especially true due to the emergence of neobanks, which are all digital, meaning that every user is saw the same thing, which makes them very accessible to historically underserved communities. “
Neobanks, says Kumar, have helped underserved populations gain access to bank accounts, while credit fin-techs provide these populations with access to credit cards as well as credit-building services. And now there are even platforms offering loans to traditionally disenfranchised people.
â€œYou can open a bank account, save money, take out loans and invest,â€ says Kumar. All of this leaves one last very important service gap for these communities, as Kumar sees it: holistic financial advisory services. By this Kumar means the type of advisory services that help these same communities and individuals develop a comprehensive financial plan for their life and future, including developing a comprehensive family budget and planning for milestones such as buying a house and retiring.
â€œThe point is, in underserved communities a lot of people probably have multiple jobs, and let’s face it, they don’t have the time to do it,â€ says Kumar. â€œAnd a lot of people are also afraid of finances. So where is this holistic financial advice to help users start the journey and become strong in investing, home buying, credit, and all of that together? “
This, it seems, remains the next frontier for the fintech world.