To kick off a panel “The Next Billion” at CB Insights’ Future of Fintech Conference, moderator Jon Marino of CNBC asked the speakers for a working definition of being underbanked or unbanked.
One panelist’s definition of the underbanked was somewhat radical.
“I’m increasingly convinced that we’re all underbanked,” said Arjan Schütte of Core Innovation Capital, only partly in jest. “There is a huge … population that is poorly served by the mainstream financial services industry … [and] there is a tremendous amount of [optimization] that can happen in the financial services industry.”
A main reason that the underbanked and unbanked are an opportunity is certainly sheer volume: a recent US Census showed that 10 million households are unbanked and that about 20% of American households are underbanked.
The panel went on to loosely define the unbanked as people without bank accounts or relationships with banks of any kind. They live more or less paycheck-to-paycheck. Both the unbanked and underbanked may turn to non-standard financial services like check cashing, payday loans, and title loans. These services often come with fees and interest rates that can chip away at their earnings.
“It’s expensive to be poor,” Schütte said.
And it’s not just fees and charges that drain the underbanked. People without credit cards, bank accounts, and electronic payment options can find themselves increasingly cut off from commerce in a world that’s daily becoming more shaped by online and mobile tech.
Regulations are a challenge for fintech companies targeting this market.
“Everything we invest in is regulated,” said Dr. Alex Lin of Infocomm Investments. “I think that makes it much harder to get entrepreneurial talent into the industry because it’s harder to do.”
Matt Harris of Bain Capital was clear about the risks he sees in the online lending category as a whole.
“Show me a software company with $100M in revenue and a lending company with $100M in revenue, I’ll take the software company all day long. No liquidity risk. No credit risk. Stable margins, recurring transactions.”
Harris said that investors, entrepreneurs, and pundits alike needed to account for the added weight that regulation brings when evaluating and valuing certain fintech startups.
Moderator Jon Marino added: “No one’s going to invest in a sector where they don’t feel that there’s going to be attractive returns or … that they’re going to be regulated out of a profit.”
There is a silver lining to the regulatory burden, Dr. Lin explained.
“… the flip side … is [regulation] also creates a competitive moat … Once you figure out how to work your way around the regulatory system, you have something that is more defensible than if you were just making an app.”
In Asia, Dr. Lin continued, regulators have taken a proactive role in approaching fintech startups in accelerators and incubators to answer questions and help entrepreneurs create solutions that account for regulations.
This way, startups can avoid investing in apps or business models that are incompatible with the existing regulatory framework. The ability to tell an investor that a solution they are developing is compliant, and even defended by a regulatory moat, may even help these companies raise funds from investors.
Additionally, changes in the regulatory landscape could also help create opportunities, as recent moves against payday loans in the US may cause a drop in the number of customers able to use these services.
Coupled with technological solutions — mobile banking, personal finance apps, etc. — this may lead to more people accessing tech-enabled financial services of some kind, whether they open bank accounts or not.
“Generally, everybody needs banking services. Somehow, you need to buy things and do the transaction. You need an organization that’s trusted for you to facilitate all this movement.”
Which organizations will deliver those services and how they’ll do it is still evolving.