Why isn’t the FinTech market a fin4all?
The Chancellor of the Exchequer, Phillip Hammond, launched the UK’s latest FinTech Strategy with a speech that celebrated the remarkable growth of the sector, which is essentially about combining financial services with innovative technology.
He talked in terms of billions of pounds, millions of customers, thousands of jobs, hundreds of firms and investment in several new FinTech hubs across the country.
With each year that passes, each new FinTech report, or speech to launch a new FinTech policy initiative, repeats similar numbers, getting bigger each time.
This is all very impressive and something the UK Government is right to celebrate.
However, what was more interesting was the story about one man and the FinTech firm he founded, that the Chancellor used to open his speech.
Ismail Ahmed, a refugee from Somalia with a degree in economics from UCL, was tired of being overcharged to send money to friends and family back home.
So he started a tech company to solve a financial problem faced by low-income people, which no one had cared about before. Once people realised his business could make money, all of a sudden the issue of helping struggling refugees send remittances to Africa was worth $220 million of investment and his company was held up as leading example of FinTech success in the UK.
It is interesting that the Chancellor used this example, as he could have highlighted the success of numerous other similar FinTech firms, which have collectively slashed the costs paid by consumers to transfer money abroad. He also could have chosen to illustrate the point that London is recognised as an important global financial hub, as many FinTech firms have originally developed in the EU, but chosen to relocate to London in order to grow and succeed.
The difference between this type of FinTech firm, is that only one was founded by a refugee from Africa and helped solve a unique problem faced by people who are typically at the bottom end of the income distribution. The rest simply made it cheaper and easier for ordinary people to do something they would have otherwise had to do with their bank.
Both types of firm are highly successful, yet for every 100 or 1000 FinTech startups that focus on making traditional banking services faster, cheaper and easier, there are just a few FinTech firms that are providing services to lower-income customers. These are people who banks offer basic banking services to because they are legally required to, not because it is profitable for them to do so.
The lack of FinTech firms serving low-income customers is not because there is not a business case to do so. In fact, quite the reverse is true, as the example of Ismail Ahmed’s firm to help provide remittances shows. Yet there are still just a handful of FinTech firms that set out to provide financial services tailored specifically to the preferences and needs of those on low-incomes.
One FinTech firm, for instance, provides a modern mobile-only banking service, targeted primarily at EU nationals working in the UK. The firm is every bit as innovative as other new mobile-only banks that target middle-income customers, yet it typically receives far less media attention than its competitors. All of the new ‘mobile-only’ banks essentially do the same thing: allow people to make payments, receive payments and keep track of their money, without keeping a shoebox full of cash under the bed.
Arguably, they also all do these things better than the mainstream banks.
Opening an account takes just minutes and requires only your mobile phone; payments show up in ‘real time’ rather than on monthly statements, and customers can cancel their card, or change their PIN with a few taps on their phone, rather than a 10 minute phone call to their bank or a visit to a decreasing number of branches.
The question is why is so much media hype and investment money directed towards FinTech firms that provide services traditional banks already provide to millions of people, under a relatively proven and profitable business model? Why is there not more effort to direct the innovations and possibilities of FinTech towards addressing widely recognised problems in the consumer finance sector?
For example, the cost of borrowing for low-income people is much higher than for middle class borrowers, who can easily borrow money for up to 30 days using a credit card without paying a penny in interest charges. In comparison, millions of customers can only access loans where they pay up to £1 for every £1 they borrow, meaning a small loan of £200 would cost an extra £200 in interest and fees.
Government has typically turned to regulation, or subsidised social programmes, to solve the ‘problems’ of the consumer financial markets and try to ‘protect’ people sometimes described as ’vulnerable’ or ‘excluded’, despite typically being in part or full-time employment.
In 2015 the FCA capped the cost of payday loans, as a result of public campaigns and political pressure, which has indeed reduced the volume of these loans.
But has it solved the problem of the high cost of credit for people on low incomes?
Similarly, the government has used a variety of regulations, legal obligations and political pressure to force every high street bank to provide a basic account to any person that wants it, regardless of their financial circumstances, for ‘free’.
They have also taken steps to cap overdraft charges and penalty fees for failed direct debit payments, which banks had used to cover the costs of providing these ‘free’ bank accounts to people that they had no other way to make money from, such as with mortgages, loans or insurance products.
But has it really solved the problem of providing high quality banking services to low-income people?
Ahmed identified a similar problem and actually solved it. He saw low-income people wanting to send money abroad as customers, who were getting a bad deal from banks, or more typically, tertiary financial firms that service low-income customers. He then used innovative technology to do it better and cheaper.
The business model of a traditional bank does not work for many low-income customers. Banks simply have no way to generate revenue from these customers. There is limited incentive therefore to maximise the provision of services, or focus on this group of customer, which often leads to ‘non-standard’ providers serving this group – as was the case within the payday loans sector.
FinTech makes alternative business models possible in each of the areas mentioned above, in the same way that Ahmed’s firm approached the issue of remittances made by migrant workers.
While the Chancellor rightly celebrated the success of the FinTech sector, he should perhaps consider leading a wider debate on how FinTech can improve financial services for everybody.
A good starting point would be to attempt to understand how to improve financial services for low-income customers. Because they are indeed customers, not vulnerable people, and should be treated as such by FinTech firms that value their business.