An Opportunity At The Intersection Of Fintech And Proptech

By Brandon Best

Underbanked consumers represent a massive and misunderstood segment of the US consumer market. These individuals tend to be disproportionately younger, poorer, and persons of color. They have distinct attitudes and motivations that have not been catered to by the traditional banking system. Decreased trust in financial institutions, tightening lending standards, and rising interest rates will push this segment further away from the traditional banking environment. Building trust and ultimately adoption of banking services within this population is a big opportunity for all stakeholders.

These consumers are digitally savvy and increasingly comfortable banking beyond the confines of a physical network of ATM and retail locations. The emergence of De-Fi and Cryptocurrency underscores the increased digital savviness and lack of trust in financial institutions. These technologies however are too nascent and do not offer a large enough scope of coverage to meet the needs of this consumer. The advancement of big data, analytics, and neo-banks in addition to corporate and government focus on DEI will allow tech-enabled alternative data and finance startups to remove biased gatekeepers from the traditional financial system. This shift will usher in the underbanked as well as the next generation of young banking consumers.

According to a 2019 report by the Federal Reserve, approximately 63M US adults are either unbanked or underbanked. This represents 22% of the US population. Beyond US borders, the World Bank reports 1.7 billion individuals without bank accounts. In the US, these individuals tend to be disproportionately poor, young, and persons of color. Lack of financial inclusion forces these consumers to rely on alternative finance products to meet their everyday financial needs (e.g. Money Orders, Check Cashing, Payday Loans, Auto Title Loans, Pawn Shops, etc…). This reliance creates perverse incentives for these individuals to frequent often predatory alternative financial services with APRs reaching as high as 600%.

Underbanked consumers in the US spend approximately $3,000 annually in fees and interest on alternative financial services totaling $189B annually. This spend can represent more than 10% of pre-tax income for lower-income unbanked consumers. For context, it is commonly recommended that households should spend 10% of their income on budget categories like transportation, food, and insurance. Despite the usurious cost of these alternative financial services, these consumers are captive by necessity and lack trust and loyalty to providers in this space.

It is important to note that the same guardrails that prevent those who are lower income from entering the banking system also prevent young Millennial and Gen-Z customers from accessing them. According to Morning Consult, Gen-Z & Millennial consumers make up 61% of the underbanked and 60% of the unbanked. Said differently, roughly 30% of Millennials in the US are underbanked. That percentage is even higher for Gen-Z’s who are just beginning their credit journey.

Millennials and Gen-Z differ from their parents in many ways including their attitudes toward ownership. These young consumers are less likely to purchase homes and cars. Additionally, they’re more likely to participate in the gig economy and have less traditional employment patterns. These two variables (assets and income) are significant inputs in their credit profiles and can prevent them from obtaining financing for future life events (e.g. obtaining a business loan, securing favorable financing [or refinancing] for college tuition, or being approved for coveted high-status credit cards).

Access to financing opportunities is important in the context of these consumers especially considering that Millennials control less than 5% of all US wealth; compared to Baby Boomers who controlled 21% at the same age in 1989. If Millennials are to take the next step in their financial journeys and begin making major purchases such as vehicles, houses or business loans, they will require financing.

At the same time, there is a huge opportunity on the horizon as Baby Boomers, who hold roughly 57% ($68T) of all of the wealth in the US as of 2020, are expected to transfer that wealth to their Millennial children over the next two decades. With traditional banks falling out of favor within this consumer segment, there is a significant opportunity for new entrants. The spoils of this opportunity will be a large market protected by moat, extended customer lifetime value, and a winner takes all dynamic. Data-driven, consumer-first fintechs who authentically develop trust will beat out legacy players who are unable to adapt.

Brandon Best ’24 is a Columbia Business School EMBA candidate and a Director at a family investment office located in Hartford, CT. In addition to his role at the family investment office, Brandon is a Venture Associate at Republic and a Venture Fellow at HBCUvc. He is passionate about creating opportunities for individuals with thin networks and also supporting founders in all categories, especially FinTech and PropTech. Connect with Brandon on Twitter or LinkedIn.