If you're drowning in unread paperwork, such as checking account statements and 401(k) updates, consider that roughly a quarter of all Americans are unbanked or underbanked. Rising costs and penalties for holding small sums of money in formal accounts keep many off the financial grid. They're instead using prepaid cards and check-cashing services, which also can mean fees and create a vicious cycle, with little hope of savings or prosperity.
But reaching those on the financial fringe isn't just a developed-world problem. In emerging economies, including those in Africa and Asia, reaching the un- and underbanked remains a challenge for governments and policymakers. Access to the mainstream financial marketplace can help encourage savings, public safety, disaster preparedness and asset building for underserved groups, according to a 2012 bulletin from the Federal Reserve System's Board of Governors on the underbanked.
Now several mobile technology trends quickly are colliding and maturing. The end result could be more affordable financial services for more people around the world—including those in the U.S.
A key trend is plunging prices for prepaid phones (smartphones still are rare in the developing world). Indian phones, for example, are available for $50—with pricier and cheaper versions for sale, depending on the model. Unlike the U.S., where hefty contracts and monthly payments are the norm, roughly 90 percent of phones purchased in developing economies are prepaid versions.
Mobile service is becoming nearly ubiquitous globally. So even if you're a farmer in the middle of rural Tanzania or India, for example, a phone can be an affordable gateway onto the financial grid.
As cheaper phones proliferate, so, too, is the data on mobile phone usage and those users. Low-income people and those under the financial radar traditionally have what's known as thin files. This group lacks paperwork and other transaction records, which normally are precursors to credit scores and loans.
Then, in 2008, the terrorist attacks in Mumbai, India, created a data ripple effect. After the attacks, individuals in many countries were required to register SIM cards—basically, the chips inside phones. The registration change linked individuals to phone numbers. Unlike America, where we can't seem to register and document enough, the SIM card registration created a data treasure trove of millions of people—the un- and underbanked with phones—who previously were off the information grid.
The lightbulb went off for savvy start-ups.
Upstarts see potential profit in helping deliver financial services to underserved populations—using mobile data and platforms. The start-ups are focusing on people with thin files and using new metrics for creditworthiness—such as time spent on smartphones and number of calls made. The point is to crunch available mobile data to assess individuals' engagement in communities and ultimately their ability to repay loans.
"If you put all of this together, what this is leading to is change in mobile financial services," said Ranu Dayal, senior partner at The Boston Consulting Group in New Delhi.
It's about opening economic development to new populations. "It's a massive pool of people who've never been on the information grid," said Nicole Stubbs, chief executive of First Access, based in New York City. The 3-year-old start-up combines financial and mobile data to gauge the credit risk of potential customers for lending institutions.