An opportunity at the intersection between Fintech and Proptech

By Brandon Best

Underbanked consumers represent a massive and misunderstood segment of the US consumer market. These individuals tend to be disproportionately younger, poorer, and people of color. They have distinct attitudes and motivations that have not been catered for by the traditional banking system. Reduced trust in financial institutions, tighter lending standards and rising interest rates will push this segment further away from the traditional banking environment. Building trust and ultimately adoption of banking services in this population is a huge opportunity for all stakeholders.

These consumers are digitally savvy and increasingly comfortable with banking services outside of a physical network of ATMs and retail locations. The rise of De-Fi and Cryptocurrency underlines the increased digital knowledge and the lack of trust in financial institutions. However, these technologies are too nascent and do not offer a large enough scope of coverage to meet the needs of this consumer. Promotion of big data, analytics and neo-banking in addition to corporate and government focus on DEI will allow technology-enabled alternative data and finance startups to remove biased gatekeepers from the traditional financial system. This shift will usher in the underbanked as well as the next generation of young bank customers.

According to a 2019 report by the Federal Reserve, approximately 63 million American adults are either unbanked or underbanked. This makes up 22% of the US population. Outside US borders, the World Bank reports 1.7 billion individuals without bank accounts. In the United States, these individuals tend to be disproportionately poor, young, and people of color. Lack of financial inclusion forces these consumers to rely on alternative financing products to meet their day-to-day financial needs (eg money orders, check cashing, payday loans, auto loans, pawn shops, etc.). This addiction creates perverse incentives for these individuals to frequent predatory alternative financial services with APRs that reach as high as 600%.

Underbanked consumers in the United States spend approximately $3,000 annually in fees and interest on alternative financial services totaling $189 billion annually. This spending can represent more than 10% of pre-tax income for lower-income unbanked consumers. For context, it is often recommended that households should spend 10% of their income on budget categories such as transport, food and insurance. Despite the exorbitant costs of these alternative financial services, these consumers are trapped by necessity and lack trust and loyalty in providers in this area.

It’s important to note that the same barriers that prevent those with lower incomes from entering the banking system also prevent young Millennial and Gen-Z customers from accessing them. According to Morning Consult, Gen-Z and Millennial consumers make up 61% of the underbanked and 60% of the unbanked. Put differently, approximately 30% of Millennials in the US are underbanked. This percentage is even higher for Gen-Zers who are just starting their credit journey.

Millennials and Gen-Z differ from their parents in many ways, including their attitudes toward ownership. These young consumers are less likely to buy homes and cars. In addition, they are more likely to participate in the gig economy and have less traditional employment patterns. These two variables (assets and income) are important inputs into their credit profiles and can prevent them from obtaining financing for future life events (e.g. getting a business loan, securing favorable financing [or refinancing] for college tuition, or get approved for coveted high-status credit cards).

Access to financing options is important for these consumers, especially considering that Millennials control less than 5% of all US wealth; compared to Baby Boomers who controlled 21% at the same age in 1989. If Millennials are to take the next step in their financial journeys and begin making large purchases such as vehicles, houses or business loans, they will require financing.

At the same time, there is a huge opportunity on the horizon as Baby Boomers, who own approximately 57% ($68T) of all wealth in the US as of 2020, are expected to pass this wealth on to their millennial children over the next two decades. With traditional banks falling out of favor within this consumer segment, there is a significant opportunity for new entrants. The trade-off for this opportunity will be a large moat-protected market, extended customer lifetime value, and winner-take-all dynamics. Data-driven, consumer-first fintechs that authentically develop trust will beat out legacy players that fail to adapt.

Brandon Best ’24 is a Columbia Business School EMBA graduate and principal at a family investment office in Hartford, CT. In addition to his role in the family investment office, Brandon is a Venture Associate at Republic and a Venture Fellow at HBCUvc. He is passionate about creating opportunities for individuals with thin networks and also supporting entrepreneurs in all categories, especially FinTech and PropTech. Contact Brandon at Twitter or LinkedIn.

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