Financial inclusion requires understanding cultural shifts
Deloitte Digital has published a study on digital banking, financial inclusion and the role banks should play in addressing inequality. The report concludes that “the evolution of digital banking is pushing financial services to catch up with the demand for representation of society.”
Deloitte bases its projections on the rise of digital banks, particularly affinity banks “founded by and for the underrepresented” and concludes “they are closing this gap and putting pressure on incumbent banks to transform their mode of operation”.
The evidence is thin, light on data, and ambitious to the point of wishful thinking. But it may be due to the nature of the project that they are trying to describe changes which may not have much data.
Tapper said the affinity banking organizations they spoke with had a strong case for attracting niche communities.
“I would expect to see more success from affinity banks than you have seen in a more generic neobanking space. I suspect the affinity angle will provide regulatory tailwinds, we’ll see what happens.
The changes he and Deloitte are considering may be hard to define, but at least some of their client companies, including several Fortune 500 companies, are paying Deloitte’s Ethos for its ideas and advice, Tapper said.
“We are not a non-profit offering from Deloitte.”
The report says that today, with more options and lower satisfaction than ever before, US consumers are now 2.6 times more likely to transact with banks associated with high humanity. Black and Hispanic customers are 44% more likely to choose a bank based on their personal values compared to the average customer, he added.
Deloitte says, “There are now more than 30 Affinity Banks on the market, specifically designed to serve underrepresented groups who share common values and identity factors such as race, ethnicity, gender, sexual orientation, vocation and socio-political beliefs, among others.
Sixty-six percent of Americans believe banks have a responsibility to support diverse and underserved communities, and 31% of Americans want to switch to a bank that supports diverse and underserved communities, he found. Black and Hispanic customers are 44% more likely to choose a bank based on their personal values compared to the average customer.
But how many actually switch banks, activate those accounts, and transfer their direct deposits and automated payments, like rent or mortgages, to the new bank?
Deloitte does not say so.
One problem with Deloitte’s analysis is that while many people complain about their bank, very few change.
“The average American adult has used the same primary checking account for about 16 years, according to a survey conducted for Bankrate and MONEY. More than a quarter (26%) have had a checking account for more than 20 years. marriage in the United States is 8.2 years.)
“The evolution of digital banking is pushing financial services to catch up with the demand for representation of society,” says Deloitte. “The rapidly growing number of affinity banks – challenger banks founded by and for underrepresented people – are closing this gap and putting pressure on incumbent banks to transform the way they operate.”
The FDIC expresses similar concerns about minority communities’ access to banking services, although in its case it focuses strictly on racial minorities and minority depository institutions (MDIs) – and the community development financial institution (CDFI) – specialist organizations that provide financial services to low-income communities and to people who do not have access to finance.
In 2020, the FDIC published “Investing in the Future of Mission-Driven Banks: A Guide to Facilitating New Partnerships,” which outlines the important role that FDIC-insured MDIs and CDFIs play in the financial system, outlines the business needs of these banks, and outlines strategies that private companies and philanthropic organizations should consider to support MDIs and CDFI banks through equity.
Deloitte says “31% of Americans surveyed want to transition to a bank that supports diverse and underserved communities… The shift from incumbent banks to digital challengers is expected to continue as underrepresented groups seek new places to place their silver”.
Incumbent banks need to realign brand purpose and profits to create new inclusive offerings that benefit their customers and communities and improve equity issues, if they are to retain market share, Tapper said. , again without supporting data.
What is so conspicuously lacking in the Deloitte study is a sense of agency – who or what will make this push for inclusion happen. Banks serving the underrepresented struggle to achieve profitability and survive.
The FDIC states that “the proportion of profitable businesses remained relatively stable during the year at approximately 85% of all MDIs. The percentage of unprofitable IMDs is above 14% and remains significantly higher than the percentage of unprofitable community banks and all banks, at 4.41 and 4.58%, respectively.
The financial performance of MDIs has improved significantly over the past five years, the FDIC added, although “from 2008 to 2018, the number of MDIs declined by 31%, but more gradually than community banks, which decreased by 33%. From 2001 to 2018, the number of Asian, Hispanic, and Native American MDIs increased and the number of African American MDIs decreased by more than half and now accounted for 15% of all MDIs at the end of the year. year 2018. »
For successful outreach to the unbanked, see my story on Bank On. which has enrolled more than 3 million banking newcomers
The Simon-Kucher report suggests that finding underserved communities is just the first step for a new digital bank ready to target one of those niches. To make a business successful, a bank must identify community pain points and the willingness and ability to pay for solutions. The goal should be to reach profitability within three to five years, according to its study.
Digital banks, with their lower costs and lack of expensive branch networks, are almost a necessity to reach a niche community with banking services, but it is not enough, according to the Simon-Kucher report. He showed that very few of the hundreds of neobanks around the world are profitable.
Tapper believes partnerships and community support for specialty banks will make a significant difference. And why do companies want to work with a goal-oriented innovation group?
“I think this time is, for those who pay attention, a time when culture shifts and shifts and issues of identity, community representation, equity, power – these great social foundations, these great tectonic plates – they are all changing now. What does this mean for what culture will look like in the future? »
Banks need to go beyond KYC by ticking boxes; to reach some of these communities, they need to understand culturally different financial needs such as surrogacy or genetic transition.
“How come I need to know my customer, if I’m going to do things like personalization, and if I’m going to do things like micro-segmentation. I have to know a lot more about my clients than in the past. There’s a lot more fluidity in those aspects of culture that evolve and change as demographics, identity, and society change.
“So we have a lot of clients acknowledging that and saying that the elements of DEI (diversity, equity and inclusion) are not just pro-social normative good things to do, but essential to understanding people. This is the key to creating differentiated, sticky, resonant and relevant experiences. And if I want to stay relevant, I have to stay culturally aware, I need to understand the world through that lens.