In the first of a three-part series, we assess how digital transformation can help rather than hinder attempts to make financial services more inclusive.
“This bank is just what the freedmen need,” said President Abraham Lincoln in 1865, as he signed the Freedman’s Bank Act. In doing so, he authorized the organization of a national bank for recently emancipated Black Americans.
Yet, more than 150 years later, one in six African-Americans still have no bank account. The figures across the Latino community paint a similarly dismal picture.
Digging below the surface of these troublesome statistics, there appears to be a deep-rooted mistrust of the banking system within these communities.
Some point their finger back to The Great Recession, when many people of color had their money mishandled and never fully returned. But the roots of distrust go back decades. Only by understanding these factors can financial services start to overcome the puzzle of low access rates.
The incentive? According to a McKinsey & Company report, closing the gap between black and white wealth in the United States could increase GDP by 6% before 2028 through increased investments and consumption.
Therefore, as stalwarts of the financial service world aim to accelerate their transformation initiatives to keep up with digital disruptors, an opportunity emerges. By reaching out to a new audience and building trust, banks can achieve greater business results.
Understanding Mistrust of Financial Services
Statistics from the McKinsey study reveal there are an average of 41 financial institutions for every 100,000 people across the United States. Yet, in non-white majority areas, this figure drops sharply to 27. The same study also uncovered that more expensive services, like payday lending, are more readily available in Black neighborhoods.
Such disparities also appear elsewhere within the banking industry. A survey from Bankrate, the consumer financial services company, found that Black and Hispanic Americans pay twice as much in bank fees as white Americans.
Of course, macroeconomic factors play their part here. But financial institutions must attempt to overcome some of the alarming practices conducted within their organizations. A minimum account requirement is a classic example, which restricts access to traditional banking services.
Updating regularity procedures can force the hand of many providers. Yet, this is just one of three recommendations that Attorney Joseph Pileri puts forward to rebuild trust and increase accessibility in financial services:
- Modernize regulatory schemes
- Appreciate the role of financial literacy
- Turn to technology
Unfortunately, as per this final suggestion, digital technologies also have the power to reduce trust with those from poorer communities. It depends on how financial institutions adopt them.
Digital financial services can harm poorer communities by making them more susceptible to scams – particularly individuals that struggle with financial literacy.
That’s not all. With digital, companies have access to more customer data. Harnessing this, predatory vendors may use AI tools to learn when a loan is difficult to refuse. Offering a high-interest rate, they can increase profit margins. What’s more, they can also – by design or accident – introduce bias to pinpoint particular segments of society.
If such techniques become mainstream, notions of unfair banking will spread further into poorer communities and deepen mistrust. To combat this, The Economist shares three recommendations from the CGAP – a global partnership of 30 organizations dedicated to empowering the poor through financial services. These are to:
- Accept that the “consumer-consent” model is irretrievably broken and put the onus for looking after the data on the service provider.
- Give consumers full legal rights over their data, allowing them to view, correct, and move them without charge.
- Appoint “privacy representative,” who, among other tasks, would check algorithms for signs of bias.
When developing digital transformation initiatives, following such advice and spreading the message may help to establish trust and encourage more people to access online financial services.
The Promise of Digital Services
Digital innovations give everyone with a smartphone and a good internet connection immediate access to financial services. As such, potential customers gain financial clarity, understanding everything that goes in and out of their bank. Such transparency builds trust.
Further, technology-driven initiatives – such as digitized payments and formalized savings – help to keep people connected to their finances, offering security and efficiency. Digitized payments also benefit the banking sector, as people move their salaries away from cash payments.
Pileri spots another promising opportunity for the “unbanked.”
“Once people are using digital bank accounts person-to-person payments can be made via mobile phone, which has the potential to be more secure and cheaper than cash payments or using wire transfer services,” he writes.
In addition, consider how a formal savings account will protect the investment interests of customers. While this is perhaps irrelevant to the needs of many, some will invest through more informal methods, which do not offer the same security.
By understanding and promoting these benefits, financial services providers can forge trust with members of minority communities. They may also use AI algorithms to build fairness into financial systems, removing the possibility of human bias — if harnessed ethically.
Of course, building an ethical, profitable digital transformation strategy within the financial services space is a big challenge. However, as agile digital disruptors nip at the heels of banking stalwarts, taking on big challenges becomes critical.
Come Back and Learn More
Itching to investigate the issue of accessibility in banking further? Then, check back with us soon as we dig deeper into the positive potential of digital innovation.
Our next blog will explore how a start-up fintech company is closing the gap for marginalized communities. In doing so, we uncover a series of key takeaways.
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Charlie Mitchell is an award-winning writer on customer experience.