How Does Mobile Banking Affect the Unbanked?
Posted by Bill Bynum on September 7, 2016
A representative of a network of convenience stores across the Mississippi Delta once told me that more than 70 percent of purchases in their stores were done with cash, a stark contrast to convenience stores nationwide, where 80 percent of transactions are conducted with debit and credit cards. He went on to explain that it was not unusual for someone to come in with a $400 paycheck, keep $100 in cash, buy a money order for the balance, then return a week or so later to use that money order to get more cash and a smaller money order. Not only is this quite expensive, it is a very risky way to bank.
These all-too-common realities are why the first time I used my iPhone to deposit a check into my credit union account, I knew that mobile banking could be a game changer in bank deserts across the Mid-South.
Arkansas, Louisiana, and Mississippi are home to the nation's highest concentration of unbanked and underbanked residents. For many, traveling distance to the nearest financial institution has only gotten farther after years of branch closures. The absence of bank branches and the proliferation of high-priced alternative lenders in the region only underscore the importance of access to affordable financial services.
More than a third of Hope Credit Union’s 30,000 members use our mobile app. We hear that they love the convenience of mobile banking and use it for much more than remote deposit. They pay bills, transfer money between accounts, and track their budgets with a personal finance feature we recently added. Their ATM/debit cards provide safe and inexpensive access to cash. And being able to instantly check one’s account balance has meant many fewer instances of members’ accounts being overdrawn or having checks returned for insufficient funds.
It is, however, important to not oversell the benefits of mobile and online banking—they will not fully erase the deficits people in economically challenged communities face when they try to access financial services. (In fact, though smartphone use is significant among the underserved, a 2015 Federal Reserve study noted that rural residents and African- Americans are still less likely than other groups to own smartphones or have access to high speed internet).
Financial technologies provide quicker access to financial products and services, good or bad, so whether a provider uses the latest technology or relies on traditional strategies, the most important determinant of whether services improve conditions for an underserved population is the nature of the underlying products and services being offered. After all, a predatory lender that draws in customers via the internet is still perpetuating harm.
Concern about the rise in abuse has led the Consumer Finance Protection Bureau to increase its scrutiny of online lending. Fin tech’s exponential potential, for both harm and good, drives home the importance of community development financial institutions (CDFIs) that are more likely to deploy technological options in a constructive manner.
Despite all of its benefits, technology is less adept at providing more complex banking services, such as responsible lending, which requires decision-making by a real human being. Rather than relying on a formula with limited inputs such as a credit score and take home pay to determine one’s creditworthiness, CDFI loan officers engage low-income individuals to understand how they manage limited incomes and complex cash flows, and work with them to craft appropriate solutions.
Branches May be Fewer, But Service Cannot Be
Research shows that when branches close, people in the community face a much tighter credit market for mortgage and business loans. Many traditional financial institutions are using mobile and online banking to reduce costs, which means employing fewer people and closing branches. But the branch itself, and what it represents in terms of connection to a community, should not go away.
HOPE is using technology-driven efficiencies to create more opportunities for our staff to work directly with members to help them meet their financial goals. In essence, our staff becomes private bankers for the underserved.
For our CDFI, this technology has brought new challenges and opportunities on the ground. Developing and managing mobile and online banking capability is time-consuming and complicated. Our software must work on new and old phones, and be robust enough to be operational 99.9 percent of the time. If these systems go down, the problems are immediate and widespread. And the growth of mobile and online banking has required greater capacity in our call center. Increasingly, calls to the center are about unlocking online accounts or other questions about the mobile app.
We’ve also learned the importance of increasing people’s awareness of, and comfort with, mobile banking. It is not unusual to find HOPE staff speaking to church congregations in the Mississippi Delta, or conducting training on using HOPE’s mobile app while they wait in line at government offices.
But the opportunities the financial technology tools afford our members far exceed the challenges they present. And while fin tech alone will not magically transform economically challenged places, with regard to affordable financial services that enable them to better support their families and strengthen their communities, it is expanding one basic thing: Access.
(Photo credit: Intel Free Press via flickr, CC BY-SA 2.0)
About the author more »
Bill Bynum is chief executive officer of HOPE, a credit union (Hope Credit Union), loan fund (Hope Enterprise Corporation) and policy center (Hope Policy Institute) dedicated to improving lives in one of the nation’s most persistently impoverished regions. Since 1994, HOPE has provided financial services, leveraged private and public resources, and shaped policies that have benefited more than 650,000 residents in the Delta and other distressed parts of Arkansas, Louisiana, Mississippi and Tennessee. For more than three decades, Bynum has worked to advance economic opportunity for disenfranchised populations. He helped to establish Self-Help, a pioneer in the development finance industry, and later built nationally recognized programs at the North Carolina Rural Economic Development Center. A recipient of the Aspen Global Leadership Network John P. McNulty Prize and University of North Carolina Distinguished Alumnus Award, Bill has advised several U.S. presidents on financial service matters, and served ten years as chairman of the Treasury’s Community Development Advisory Board. He currently chairs the Consumer Financial Protection Bureau’s Consumer Advisory Board and is a member of the U.S. Partnership for Mobility from Poverty, funded by the Bill & Melinda Gates Foundation.