Context

A long-standing policy concern in both the UK and US is that low-income families and small businesses have found it difficult to access and use affordable and appropriate financial products. In a world in which individuals and businesses have increasing contact with financial services in managing their finances and ensuring their financial wellbeing, financial technology (‘FinTech’) offers significant opportunities to help them improve their financial health and promote full financial inclusion. These include both back-office (e.g. customer segmentation) and customer-facing (e.g. smart phone applications) technologies. However, FinTech is not without its barriers, and FinTech companies face a number of challenges in achieving better financial outcomes for consumers.

The study

The Centre for Responsible Credit conducted this study, which was funded by the JP Morgan Foundation. The study involved a series of telephone interviews and meetings, and an interim virtual workshop, with individuals and organisations involved in the FinTech sector in the UK and US. Its aim was to identify the barriers the FinTech sector faces in scaling up their innovations and to investigate how it can overcome them.

The focus of the study is on the role of FinTech for low-to-middle income households and small businesses. This consultative research (which also draws on previous research and other literature) aims to serve as a starting point for further discussions and the development of global FinTech networks.

Key findings

This study, identified several positive developments of FinTech innovation that have the potential to improve the financial health of low-to-middle income households and small businesses. These are divided into back-office and customer-facing innovations:

• Information sharing and the integration of insights using ‘big data’, including for credit scoring and large-scale impact assessment of products on financial health;
• Building common infrastructure such as open standard Application Programming Interfaces (e.g. for credit referencing systems) and pooling of liquidity;
• Expanding peer-to-peer lending platforms, including through partnership with community finance organisations, to reach a broader spectrum of borrowers (including lower income groups).

• The development of smart phone technology and applications, to capitalise on the widespread use of such technology among low to middle income groups. These include financial health tools which utilise back-office features.
• Utilising gaming techniques and principles in non-game applications to better engage users (‘gamification’) and linking these to real-life actions. For example, in the US, D2D developed and launched six financial entertainment titles between 2008 and 2011, which were found to engage users and improve financial outcomes for them.
• The development of sophisticated pre-paid card technology which, for example, enables users to use them as fully functioning transactional accounts, linked in turn with smart phone technology and gamification.
• Online financial education, mentoring and financial support services.

• Tougher regulatory rules for financial service providers risk stifling innovation. For example, for new consumer credit lenders the authorisation process is difficult and costly.
• Fragmented funding landscape.
• The capability of different organisations to deliver technical innovation varies enormously. For example, differences in organisations’ structures, remits and ethos, including risk appetite, capacity to attract funding, understanding of the needs of target user groups, and access to distribution channels.

The report makes several recommendations for the sector including:

• The need for the effective measurement of financial health.
• Collaboration and greater efforts to foster this.
• Better coordination for the attraction of funding.
• A pro-active role for regulators in stimulating innovation.

Points to consider

The study findings are based largely on interviews with a relatively small number of experts from commercial new-start and non-profit organisations. It is difficult to assess the likely representativeness of their views and experiences.

This is a preliminary study and learning from – as well as the development of – FinTech is likely to change rapidly over time, given the past pace of technological innovation.

The study’s findings are likely to be of relevance to a wide range of more economically developed countries, especially those with expansive or aggressive high-cost credit markets.

Full report

How financial technology can benefit low income households