How Can Embedded Finance Improve Financial Inclusion

Over 14 million Americans don’t have a bank account. Here’s how embedded finance can change that
Headshot of Patrick Lee
Patrick Wong
September 13, 2022
Embedded finance financial inclusion

Embedded finance has made it easier for millions of Americans to access targeted financial services like buy-now-pay-later, account opening, and card issuing. However, there is still a large disparity between the dozens of financial services millennials and Gen Z use, to the millions of people who remain underbanked. 

What role do embedded finance fintechs play in achieving true financial inclusion and what should these fintechs be thinking about when developing services that consumers not only want and need, but are equitable in access?

Fintechs’ progress towards financial inclusion

Let’s start with some bad news first. While fintechs — and banking as a service — have certainly led the charge on changing the way consumers interact with their finances in this country, they haven’t necessarily delivered on their wider missions of financial inclusion and wellbeing.

Venture capitalists believe in these fintech’s commitment to positive social impact, putting their money where their mouth is, investing $250 billion — or a quarter of impact-related funds — in the industry. A closer look reveals that these companies that tout a mission-driven product aren’t actually following through. For instance, the likes of Visa and Shopify have promoted their commitment to connecting the underserved and underbanked to their digital financial services have either underreported their efforts or not revealed any data at all. 

Of course it’s not all bleak. Fintechs have still made a lot of valuable progress, making it easier than ever for many Americans to access and control their money. As fintechs offer hyper-targeted and vertically integrated services, strategic fintechs have carved out a space in the consumer journey that has been shaped by a digital-first mindset that some also attribute to the pandemic.

Neobanks are a great example. With no physical branches, lower fees, and the ability to access the same financial services as a traditional chartered bank, neobanks have ballooned in popularity. Neobanks have afforded many who had previously lacked the resources or bandwidth to visit physical bank branches the chance to have a viable banking option directly through their phone and internet.

Who is being left out?

85% of Americans own a smartphone. Shouldn’t that solve the issue of why 22% of US adults today are underbanked or don’t have a bank account? Just a few years ago congress even forecasted that technological innovation would help reach the underbanked via new digital means. So what are embedded finance fintechs missing?

Distribution of services

While fintechs have solved for making access to and the use of financial services easier, it hasn’t necessarily made it more compelling, despite there being a major opportunity to better serve the underbanked.

The underbanked are more likely to use digital banking. Our recent study on digital banks in collaboration with data and news organization PYMNTS revealed that 78% of those who live paycheck to paycheck with difficulties have used a digital bank, compared to 57% of those not living paycheck-to-paycheck. In addition, 15% of respondents living paycheck to paycheck with issues paying bills have their primary account at a digital bank, compared to 6% of respondents who do not live paycheck to paycheck.

Our data suggests that those who are struggling financially are looking for other inroads to financial stability through the use of digital banking and the convenience, lower fees, and ancillary services that come with it. 

Fintechs need to consider how their products and services can reach and serve the underbanked, many of whom may  also be undereducated and financially insecure. Underbanked consumers aren’t necessarily going to have the means and may not know what they need to achieve financial independence. Fintechs that have the resources can not only provide these services, but the educational tools to better equip the underbanked as well.

Where we’re seeing success

Fintechs in other countries have already started to create services aimed at the underbanked. 

Grab, a Singaporean “everything-in-one” app bundles an array of services from meal delivery to ridesharing to digital payments to investing to insurance. As Grab explains on their site, six out of every 10 adults in Singapore are underbanked and providing nimble financial services packaged all-in-one is their way of fixing that issue.

Colombian fintech Aflore addresses lack of financial fluency by training women to educate their personal networks on the best ways to invest and protect their assets while also offering access to a variety of different financial services. 

The Right Banking Partner

Building the right platform also has its dependencies. Fintechs need to have the right banking partner(s) to offer the services they want their target consumers to have. Even with the emergence of banking as a service, banking in the U.S. is still fragmented, underscoring the importance of fintechs finding the right fit when seeking out a financial institution.

BaaS provider Treasury Prime has the largest (and growing) bank network in the space with nearly a dozen banking partners, giving fintechs the opportunity to leverage one to several banks to truly offer a holistic bundled financial services product. for the end-user. And with regulatory scrutiny getting stronger, fintechs will need a partner like Treasury Prime who will empower them to own their compliance framework.

Why should fintechs care about financial inclusion?

Fintechs aren’t obligated to improve financial inclusion, but with the tools and the resources, why can’t they? Financial wellbeing and fluency is a global issue that many fintechs have the power to improve.

Especially with the help of a BaaS provider, fintechs can create a complementary and sticky product that not only benefits the underbanked but benefits the company as well. Embedded finance has made it easier than ever for fintechs to at least make financial inclusivity a smaller issue in this country and greatly improve their revenue.

Understandably, it can be easy for any company from startup to corporations like Visa to remain focused on their core product offering. However, one can also argue that a deep commitment to social impact and responsibility is a selling point worth focusing all on its own.

A recent study from AAZZUR cites that consumers want to bank with socially conscious banks that support important social issues like sustainability and environmentalism. 

Solving for financial inclusion doesn’t have to be an ancillary company goal; it can be positioned as simply activating a new channel reaching a new — and deserving — customer demographic. 

← Back to blog