For decades, banks have achieved distribution through physical locations. The historical business model of banks was to be a checking account and then up-sell products like insurance and wealth management products.
Bank traffic is in decline 30% year over year. The underlying platform for financial services is changing towards mobile and millennials. 60% of millennials want startups firms to change how banks work. As a result, new startups are leveraging mobile ubiquity, data, and new consumer behaviors to disrupt and unbundle U.S. Banking.
Big banks are constrained by legacy infrastructure. New players are targeting potential customers at their inflection points for efficient and effective customer acquisition.
With all the “democratization” and innovation in Fintech, half of Americans live in an alternate financial services world: check cashing, pre-paid debit cards, and payday loans. There are $320B+ transactions per year with alternative financial services.
It’s unclear why there’s been less activity than there should be in this market. The technological and demographic trends to enable new entrants are here. It’s likely the best entrepreneurial talent starting companies come from more privileged backgrounds and are unfamiliar the pain-point. The talent pool for Fintech is already thinner considering that financial services market often have unique frictions to scale compared to other markets. The traditional startup design methodology is harder to deploy in Fintech.
However, the reality is that “it’s expensive to be poor.” 15.6 million U.S. adults are unbanked, and an additional 51.1 million adults are underbanked. Unbanked Americans spend 15 times what someone who is banked pays in fees. Payday loans offer quick cash but similarly offer predatory fees, averaging 319% APR. Low-income families of color, disabled adults, individuals plagued by decades-old debt, and other subjugated groups are disproportionately affected.
This creates an inescapable, oppressive cycle of poverty. Borrowers often need to take out a loan every two weeks because they spend a significant chunk of their low-income repaying the interest on the previous loan. Forty-five percent of Americans cannot pay a $500 emergency expense bill. Government assistant programs are inadequate while still being costly to taxpayers. Most unbanked are increasingly debt burdened. Expectedly, they lack access to credit too. 26M are credit-invisible and 19M Americans with a thin credit on file.
Interestingly, 55 percent of unbanked individuals have access to mobile. There’s ample opportunity to leverage some of the technology that has unbundled banking here.
I’m excited for a startup called Propel. The government spends $70B mark on food stamps through SNAP Supplemental Assistance Nutritional Program, which also reaches 45 million Americans. Checking the balance on EBT food stamp hotline is hard. Propel is solving an acute pain point that’s overlooked by traditional tech innovation. They will eventually expand to adjacent markets by winning customer trust through their initial product.
I’m also excited for startups like Earnin, Payjoy, and Branch. I hope there are more and I can’t wait to back them. The opportunity for predictable and flexible income, budgeting and savings applications, and access to reasonably priced credit is massive. While there are risks, I see many opportunities for risk-agnostic products.
Non-profits have traditionally dominated the alternative financial services space. However, there are for-profit companies that can play a unique role in this space to help better financial wellness for all Americans.