Four Tech Trends Bringing Payments To The Underbanked

While more than 68 million U.S. consumers don’t have access to traditional financial services – eschewing bank accounts and borrowing for a variety of reasons – the emerging technology startups that can entice this demographic to utilize potentially beneficial innovations have much to gain, a new report suggests.

The study, published by the Center for Financial Services Innovation (CFSI) and Core Innovation Capital, with research sponsored by Morgan Stanley, cited past findings that showed the market for underbanked customers rose by 7 percent over the course of 2011, climbing to $85 billion from $78 billion the year before.

“Emerging companies are capitalizing on increasingly robust and inexpensive computing power, ubiquitous consumer Internet and mobile access and growing demand for comprehensive digital networks,” the report stated. “These companies are improving access to effective, high-quality products for underserved consumers while developing technology with broad applications beyond the market.”

Further, the report took a closer look at companies that are working to improve consumer financial health while colonizing this potentially lucrative market space, and compiled the common threads that it suggests are helping these organizations find success.

We take a look at the four key technology trends the report says will continue to drive the industry in this PYMNTS.com Data Point.

Harnessing Social Networks

Nearly 66 percent of all Internet users frequent social media sites, and as such, companies that can tailor their offerings to this consumer behavior may be the most competitive, the study says.

Perhaps most importantly, many avid social media users are members of the underbanked community. The researchers indicated that “social media in particular is disproportionately popular among demographic groups who are likely to be underserved.” This included 83 percent of young adult consumers, 72 percent of low-income individuals, 72 percent of Hispanic users and 68 percent of Black Americans.

Solving The Cash In/Out Problem

Despite the rise of alternatives, the majority of retail transactions are conducted with cash, according to the report. With this in mind, the researchers say that companies that can expand consumer access by “facilitating near-frictionless conversions to and from cash” may best be able to capture the market.

This section of the report cited Square for its inclusion of a receipt printer in its merchant kits, an offering that helps its customers solves this issue.

Leveraging Big Data For Better Risk Management

Since many members of the underbanked community don’t have a financial history, traditional metrics don’t currently allow major lenders to identify which of these individuals might represent a lower borrowing risk. This problem could soon be solved however by increases in data collection.

The report suggests that “the volume of the digital universe is projected to multiply 50 times between 2010 and 2020.” With records of digital and online activity improving, these Americans may be more confidently served by emerging tech companies who can rely on new statistics to support business decisions.

Scaling Up By Going B2B2C

Though new companies may be able to better serve this once-elusive customer base, the report suggests that those who partner with existing financial providers – whose use is already entrenched in the habits of this community – could have the easiest time breaking into the market.

Likewise, the report notes that “leading financial institutions… have addressed the need for this new competency by incorporating the products of agile startup companies.” It says this approach increases the quality and variety of their offerings without the upfront costs.

To read more, view the full report here.