In 2020, a new generation of fintechs emerged who specialize in serving black consumers, other color communities, and immigrants.
Many of these services mirror more typical challenger banks, with fee-free deposit accounts, early access to paychecks, and compatibility with mobile wallets. But they also promise to return money to color communities and develop features that are tailored to their specific needs.
The youngest founders of the Challenger Bank include (clockwise from left) Wole Coaxum of Mobility Capital Finance; Michael Render, Andrew J. Young, and Ryan Glover of Greenwood; Magnus Larsson the majority; and Rohit Mittal from Stilt.
Black and Hispanic consumers will be able to open deposit accounts with Greenwood Financial when it launches in 2021 and convert the change from daily expenses into charity. A VIP, a product from media company Urban One, increases the cashback of its prepaid debit card when users shop at selected black-owned companies.
A variety of challenger banks cater to immigrants with features like low-cost wire transfers, access to credit, and the ability to open an account without a social security number. Simba and Rayo are not yet open to the public, but participants such as Majority, OnJuno, Sable and Stilt are up and running.
While many of these fintechs are barely up and running, reviewing their designs and intentions can provide clues for traditional banks looking to better reach an underserved audience. For example, these services invest in local communities and draw on the life experiences of founders who face the same problems as their customers.
There is evidence of fintech demand centered in these communities that tend to be short of financial services and assets: data from consulting firm McKinsey shows that 47% of black Americans are under- or unbanked, compared with 20% of white Americans .
Additionally, McKinsey surveys show that black families are more likely than others to turn to a fintech platform and open active fintech accounts since the beginning of the COVID-19 crisis – a phenomenon associated with a stronger focus on racial justice in 2020 and 2020 a renewed interest in black-owned banks.
The novelty of fintechs can also be beneficial.
"In some ways, this is a benefit to challenger banks that don't have the history that many big institutions have," said JP Julien, associate partner at McKinsey's Philadelphia office. "In the beginning, our financial system was not suitable for everyone."
Why is there a wave?
Several factors make these niche fintechs possible. For one, newcomers can easily integrate financial services into their offerings with the help of sponsor banks or banking-as-a-service technology.
"Now a nonprofit or community service organization can say that I can provide financial services and not have to become a bank," said Mary Dent, financial services advisor and former CEO of Green Dot Bank. “They will trust my brand, they will be attracted to me, and I will be able to put together all of the infrastructure behind me that is required to provide a checking account, credit products and investment accounts. You don't have to change how the loan exchange works to allow people to use some of their rewards for charity. "
At the same time, entrepreneurs are re-examining traditional products and are more willing to deviate from, for example, longstanding underwriting methods that prevent new immigrants from taking out loans.
"They have had a fresher consumer focus on financial services in the past 10 years than they have been in the last 20 years when it was more about getting on the scale as a really big commercial bank," said Dent.
The audience can also be larger than it appears at first glance. Ran Harnevo, the CEO of Homeis, a New York and Tel Aviv-based immigrant social network, is Israeli but lives in New York. He recalls struggling to get a mortgage even after selling his previous startup to AOL for $ 65 million in 2010.
"I worked in the tech industry and did well, but it didn't matter," said Harnevo. “In the system I was new to, my past was irrelevant. Many new fintechs understand the opportunity here. "
Two fintechs that serve immigrants, Rayo and Sable, say newcomers can apply for credit cards with them right away. Other fintechs like TomoCredit and Petal are saying the same thing as American Express by partnering with fintech Novo Credit.
The Black Lives Matter movement has also sparked interest in banks and fintechs that serve people with color.
"There is an urge to move away from the traditional banking structure that has held back wealth creation among underserved populations," said Anne O’Leary, research analyst at FBX, part of London-based consultancy Informa.
The #BankBlack movement is encouraging consumers to deposit their funds with black-owned banks to convert dollars in the community. But fintechs generally have an edge over traditional banks when it comes to intuitive interfaces and tools for personal finance management.
Digital channels are also beneficial during the pandemic when consumers are reluctant to enter stores. "Your traditional minority depositaries and community development financial institutions don't have the capital to invest in much digitization," said Tawanda Sibanda, a McKinsey partner based in San Francisco.
It envisages partnerships between fintechs and black-owned banks, rather than one replacing the other.
Branding Gimmicks or Key Benefits?
The founders of Greenwood will offer five free meals to a needy family through the Goodr nonprofit for every account opened and give a Black or Latino company $ 10,000 a month. With a VIP, users can donate the points they earn from prepaid debit card spending to charities. Simba, a black and immigrant owned company, says it will use part of its profits to fund financial education programs.
These efforts to invest in marginalized communities could resonate with potential customers.
"We're seeing more morality put on money. People aren't that passive about where they keep their money," said O'Leary. "It's more than a marketing tool."
This tactic can also instill a sense of confidence.
"We found that 30% of black households with no bank account do not trust banks, and this is one of the reasons why they do not have an account," said Sibanda. "Telling the story of what you do with the deposits you raise, where you loan out, and whether you support small businesses in the community are all useful indicators for building trust."
Fintechs can also excel through financial literacy and education, for example by teaching users how to improve their credit score or get a small business loan.
"These apps can get the message across in a concise way," said O’Leary.
Wole Coaxum was inspired to create the digital banking platform Mobility Capital Finance (MoCaFi) after the city of Ferguson, Missouri, erupted in protests in 2014 following the police shooting of Michael Brown. The company's goal is to close economic mobility gaps by focusing on customers with and without bank details.
Users can choose to report their rental payments to the Equifax and TransUnion credit bureaus, track their credit scores with a VantageScore tracking tool, and unlock access to personal financial coaching and more by showing positive financial behavior. Account holders get discounts on purchases from small minority businesses that partner with MoCaFi.
Some of the fintechs mentioned are not yet available to the public; others were introduced earlier this year, so their sustainability is untested.
Ultimately, "the basics have to be in place," said Dent. "It's hard to make enough money for the company to stay close."
To be successful, founders who care for their communities also need to understand what makes a viable financial product.
"I hope we see some of the companies hit the middle ground in truly serving the needs of the community and knowing enough about banking to do so in a way that works in the long run," said Dent.