Wednesday 15 January 2020 7:10 am

Fintech can be the silver bullet to banking the UK’s unbanked

Benjamin Barnard is Policy Exchange’s head of technology policy.

Can new technology help the 1.23m people in the UK who don’t have a bank account? And could it improve the lives of the 10–12m who still struggle to access affordable loans? 

New research suggests that the answer to both those questions is yes.

It is all thanks to London’s booming fintech sector — one of the great success stories to emerge from the wreckage of the 2008 financial crisis.  

A positive regulatory and investment environment has helped new firms such as Monzo, Revolut and Starling create 76,500 new jobs, a number set to grow to 105,500 by 2030. It’s the fastest growing sector of the London economy, and over a third of European venture capital funding for fintech now goes to London firms — almost double that of any other European city.

Yet the promise of this sector doesn’t end there. As a new report entitled Fintech For All, which I have co-authored for the think tank Policy Exchange, shows, there are still over a million people without a bank account in the UK, and about 10 times that number who struggle to access affordable credit.

This can have a devastating effect. If you don’t have a bank account, you will find it almost impossible to receive a pension or benefit payment. You will also have to pay an estimated £485 more each year on essential bills or purchases, and are more likely to find yourself vulnerable to economic or financial abuse. 

Those excluded from mainstream credit can get trapped in a vicious cycle of debt and poverty. For Britain’s lowest income households, a broken washing machine can quickly spiral into out-of-control borrowing.

So what can we do to help them? Our research explores how to harness the power of fintech to improve access to banking, credit, insurance and debt advice services, particularly for those on Universal Credit. 

Endorsed by former Labour chancellor Alistair Darling and three Conservative MPs elected in December — one from the south, one from the Midlands, and one from the north — it has both cross-party and cross-country support.

The key to addressing financial exclusion, the report explains, is to provide customers with products they both want and can understand. Fintech companies can provide low-income customers with better banking services, bespoke budgeting, and smart savings tools.

Thanks to their pioneering business models and the cost-efficiencies that emerge from the use of new technology, fintech companies are also able to provide their services at a fraction of the cost of traditional banks. This means that they have a commercial incentive to serve customers from whom banks have traditionally struggled to generate revenue.

By using advanced algorithms and new data sources, fintech firms can provide alternative credit scores for the poorest, potentially bringing down the cost of lending to millions. Innovations around payroll systems can also allow customers to access their wages before payday, preventing those in need of short-term credit from resorting to high-cost loans.

But if we are to build a truly inclusive banking system, these companies will need the support of the government. How can it help?

First, the government should open up the “Help to Save” scheme to multiple providers. 

This is a government-backed savings scheme that gives low-income savers a bonus payment of up to 50 per cent on their savings. Opening it up to fintech firms would ensure that customers seeking to save through the scheme could benefit from innovative saving tools, such as “rounding up” transactions and saving the remainder (say 10p saved when you purchase an item worth £1.90), or automatically “sweeping” money left over at the end of the month into a savings account.

Second, the government should create a fund to help the approximately 1.1m people who have Post Office Card Accounts (which will not be available after November 2021) transition to more advanced accounts. This fund could also be used to help the mostly elderly users to develop their digital banking skills.

Third, it should provide those on Universal Credit with a banking voucher which they could redeem at a provider of their choice. The vouchers should be funded by a levy on the largest banking providers — who could recoup their contributions if customers eligible for the voucher choose to bank with them. 

Such vouchers could also be used to open new accounts with fintech providers, and would kickstart the challenger banking market for those on low incomes. It would give those in receipt of Universal Credit the capacity to choose high-tech banking services.

As Alistair Darling says about this report, we need “an effective, efficient and inclusive banking system”. Let’s use fintech to make that a reality.

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.