How Emerging Financial Technology Can Combat Poverty
Although the United States is a wealthy nation, the gap between rich and poor Americans is ever-widening. Resources that are available to the wealthiest citizens are often woefully out-of-reach of the United States' poorest. Financial technology--commonly known as "Fintech"--has the potential to transform the lives of these lower-income Americans.
The current financial alternatives for lower-income Americans
Many Americans have relatively little access to traditional banking alternatives. As CB Insights noted at a recent event, the United States Census has revealed that about 10 million American households lack any bank account, with approximately 20 percent of households being "underbanked".
What does this mean for these Americans? They must currently rely upon mediocre alternatives outside the traditional banking system, such as payday loans or check-cashing services, which charge exorbitant fees. Furthermore, CBS News has noted that the poor in America face further costs that their wealthier counterparts don't even see. For example, the fees associated with a returned check are a record-setting $33.07; lower-income Americans are approximately two times as likely to face overdraft fees than middle- and upper-income Americans. For a family living paycheck-to-paycheck, this fee is potentially devastating--and often extremely difficult to avoid in the traditional banking system.
For many who have not experienced paycheck-to-paycheck living, an overdraft fee may seem easy to avoid. The fee could be paid with a credit card, or money could be borrowed from family. Often, however, these options are not available to lower-income Americans. The cost of credit might exceed the overdraft fee itself, if credit is even available. Moreover, family members and family friends are commonly in the same financial situation; because of this, the safety net that many wealthier Americans can rely on is not available for their poorer counterparts.
How can emerging Fintech help lower-income Americans?
Lower-income Americans commonly incur abnormal expenses that must be paid in order to continue earning an income: for example, an unexpected car repair or a one-time medical expense. While traditional banks do not offer credit options for poorer Americans facing these types of unusual expenses, emerging Fintech companies might. Microcredit, which was pioneered in Africa, has recently taken off in the United States. These small loans which are often offered with no required collateral can help bridge the gap to the next paycheck for a lower-income American facing an abnormal expense.
However, Fintech has the potential to offer more than only short-term loans to cover unexpected expenses. This emerging marketplace can allow new entrepreneurs with little access to traditional credit markets the opportunity to obtain financing for small business opportunities. Forbes has noted that, following the 2008 financial crisis, traditional FDIC-insured banks have reduced their number of small-business loans to 21 percent of all commercial lending (down from 34 percent before the crisis). The new Fintech model requires small business to make more information regarding their operations available both upfront and on a continuing basis, allowing potential investors to gain more familiarity with the operations before making an investment. In this manner, both the investor and the company invested in are able to profit.
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