Could partnering with fintechs help social and community lenders tackle financial exclusion, and what are the key challenges facing effective collaboration?
With more and more fintechs disrupting modern banking and finance, it’s now easier than ever for people to open bank accounts, manage their finances and even take out loans. However, these new innovations are still serving the same people, with over 8 million people in the UK using credit to pay for everyday items, and 31 per cent of the population reporting one or more signs of financial distress.
For example, people like Harry* who is in part-time employment as a delivery driver after a spell of unemployment and depression. He earns around £15,000 but with two young children to look after, and his partner only having a part-time cleaning job, he has to take out various payday loans and high interest loans to consolidate his debt. He found this easiest to do on his mobile phone, as it was less embarrassing than talking to a person about his money situation. Unfortunately, he subsequently defaulted on his payments when he became unemployed and his claim for Universal Credit took a month to come through. Due to his past performance, his credit rating was poor and meant that the only loan he could get was from an online provider with an unreasonable rate.
Credit unions (CUs) and community development financial institutions (CDFIs) work to help under-served communities with people like Harry, providing finance on fair and equitable terms, without profiting from getting people into debt. However, with a relatively low market share, community and social lenders have been struggling to break into the mainstream market in recent years.
At Nesta, we believe that partnerships between community and social lenders, and the technology sector can unlock further, much needed, support for people in our community who are struggling to get by.
We launched a new report, produced in partnership with MyPocketSkill, that looks at the opportunities and challenges facing community and social lenders; how partnering with fintechs could help expand their impact and reach; and what barriers need to be overcome to enable effective collaborations.
We spoke to 20 leaders of CUs/CDFIs and fintechs, as well as studying the existing landscape and evidence. We found that while pockets of collaboration already exist, the fintech sector has not yet engaged with CUs/CDFIs at scale; and, as expected, applying disruptive technologies in this sector presents both opportunities and challenges.
While a number of CUs/CDFIs are already providing a streamlined digital experience, the uptake of digital technology in this sector is not yet widespread. One repeated concern cited by leaders of community and social lenders was that their organisations are struggling to compete with the instant decision-making offered by many high-cost, short-term lenders, where digital technology is automating parts of the process.
A recurrent theme from all that we spoke to was that members/customers are managing their money on a week-by-week basis, and an immediate resolution is more important to them than longer-term implications.
With this in mind, we’ve highlighted six specific areas where technology could help social and community lenders to grow and have a greater impact:
Of course, there are challenges in applying innovative technologies in ways that improve opportunities for those most at risk of exclusion; and bringing these two sectors together successfully requires overcoming cultural and strategic differences.
For CUs/CDFIs, we found the three main blocks to effective partnerships were around organisation capability, effective partner selection and perceptions of past failures:
Organisational capacity – Being unable to engage effectively due to lack of resources or client-side tech expertise. Here, potential partnerships could focus initially on larger organisations as examples (with a cohort of fast followers) or enable joint ventures/consortia of smaller CUs to engage in upskilling programmes alongside implementation.
Partner selection – Because resource and expertise are scarce commodities, CUs/CDFIs can find it difficult to evaluate which fintech to work with; there may be concerns, for example, about the organisational stability or long-term future of a potential partner (as many fintechs are also startups). One area of potential assistance is therefore due diligence, for example to help establish criteria or a framework of capable suppliers.
Culture and perceptions of past failures – Many CUs are culturally risk averse and unwilling to jeopardise current operational processes. There is nervousness about wasting time on initiatives that have not worked in the past. In any new technology initiative, project coordinators will need to be clear about how it is going to be different this time. Success factors based on learning from previous attempts include delivering initiatives that are more user-designed, less top-down, modular rather than big bang, and delivering quick wins through an agile approach.
Readiness – Fintechs currently struggle with CU/CDFI customers who are not ready or willing to embrace change, which may involve changes to business processes not just new technology. One way to address this is through case studies of current good practice and generating buy-in for a vision/roadmap for the sector.
Sector knowledge – The technical capabilities exist in the fintech community but the CU/CDFI landscape is alien to all but a few sector specialists. Briefing sessions and matchmaking within the fintech community to stimulate those with relevant transferable technologies could help address this.
Need for a CU/CDFI partner – Some fintechs we spoke with already have a proposition for financially excluded customers and do not see value in partnership. Here, there may be a need to better articulation of the win-win aspects of the challenge. For example, in the context of the global opportunity or in opening up to a broader customer base (such as local government/NHS employees), and access to CUs/CDFIs data and experience.
Finally, it’s essential to keep in mind the drivers of financial exclusion (for more on this, see the full report), and ensure community and social lenders’ offerings are accessible to those who are excluded on the basis of geography or digital literacy, or those who have always relied on face-to-face interaction. It’s crucial that new web-based options don’t serve to deepen existing divides.
Right now, Nesta is supporting innovation in the financial inclusion sector through ourAffordable Credit Challenge fund which, with support from Treasury, is working to partner fintechs and affordable credit providers .We have also been working to support innovation in financial inclusion through a variety of other projects and programmes.