New wave of fintechs make communities of color top priority
A new generation of fintechs emerged in 2020 that specialize in serving Black consumers, other communities of color and immigrants.
Many of these services mirror more typical challenger banks, with no-fee deposit accounts, early access to paychecks and mobile wallet compatibility. But they also promise to return money to communities of color and carve out features that address their particular needs.
Black and Hispanic consumers will be able to open deposit accounts with Greenwood Financial when it launches in 2021 and direct spare change from everyday spending to charity. One VIP, a product of the media company Urban One, boosts cash back on its prepaid debit card when users shop at select Black-owned businesses.
A slew of challenger banks are targeting immigrants with features such as low-cost remittances, access to credit and the ability to sign up for an account without a Social Security number. Simba and Rayo are not available to the public yet, but entrants such as Majority, OnJuno, Sable and Stilt are up and running.
While many of these fintechs are barely off the ground, examining their designs and intentions can offer clues to traditional banks that want to better reach underserved audiences. For example, these services invest in local communities and draw on the life experiences of founders who share the same struggles as their customers.
There is evidence of demand for fintechs that focus on these communities, which tend to lack financial services and assets: Data from the consulting firm McKinsey shows that 47% of Black Americans are underbanked or unbanked, compared with 20% of white Americans.
Moreover, McKinsey surveys show that Black families are more likely than others to turn to a fintech platform and have been more active in opening fintech accounts since the beginning of the COVID-19 crisis — a phenomenon that dovetails with a sharper focus on racial justice in 2020 and a renewed interest in Black-owned banks.
The novelty of fintechs may also be an advantage.
“In some ways it’s a benefit for challenger banks that don’t have the history that a lot of large institutions have,” said JP Julien, an associate partner in McKinsey's Philadelphia office. “Our financial system wasn’t built for everyone at the start.”
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.
“Nonprofits or for-profit entities committed to a particular community can now say, I can provide financial services and I don’t have to become a bank to do that,” said Mary Dent, a financial services consultant and the former CEO of Green Dot Bank. “They will trust my brand, they will be drawn to me and I can assemble behind me all the infrastructure that it takes to provide a checking account, loan products and investment accounts. You don’t have to change how credit interchange works to let people use a portion of their rewards to go to charity.”
At the same time, entrepreneurs are reexamining traditional products and are more willing to diverge from, say, longtime underwriting methods that exclude new immigrants from taking out credit.
“You have a fresher consumer orientation to financial services over the last 10 years than you’ve had in the last 20 years, when it was more about reaching scale as a really large commercial bank,” Dent said.
The audience may also be bigger than it appears at first blush. Ran Harnevo, the CEO of Homeis, a New York- and Tel Aviv-based social network for immigrants, is Israeli but lives in New York. He recalls struggling to get a mortgage, even after he sold his previous startup to AOL in 2010 for $65 million.
“I was working in the tech industry and doing well, but it didn’t matter,” Harnevo said. “In the system I was new, my past was irrelevant. A lot of new fintechs understand the opportunity here.”
Two fintechs that serve immigrants, Rayo and Sable, say new arrivals can apply for credit cards with them immediately. Other fintechs like TomoCredit and Petal say the same, as does American Express, through its partnership with the fintech Novo Credit.
The Black Lives Matter movement has also sparked interest in banks and fintechs that serve people of color.
“There is a push to move away from the traditional banking structure which has held back wealth generation among underserved populations,” said Anne O’Leary, research analyst at FBX, a part of the London-based consultancy Informa.
The #BankBlack movement encourages consumers to deposit their funds in Black-owned banks as one way to recirculate dollars in the community. But fintechs generally have a leg up on traditional banks when it comes to intuitive interfaces and personal finance management tools.
Digital channels are also a plus during the pandemic, when consumers are reluctant to enter branches. “Your traditional minority depository institutions 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.
He foresees partnerships between fintechs and Black-owned banks rather than one supplanting the other.
Branding gimmicks or substantial benefits?
The founders of Greenwood will provide five free meals to a family in need through the nonprofit Goodr for each account opening and give $10,000 to a Black or Latino business every month. One VIP lets users donate the points they accrue through prepaid debit card spending to charities. Simba, a Black- and immigrant-owned business, says it will contribute a portion of its profits to fund financial education programs.
These efforts to reinvest in marginalized communities could resonate among potential customers.
“We’re seeing more morality placed on money. People aren’t being so passive about where they store their money,” O’Leary said. “It’s more than a marketing tool.”
These tactics can also instill a sense of trust.
“We found that 30% of unbanked Black households don’t trust banks and that’s one reason they don’t have an account,” said Sibanda. “Telling the story about what you are doing with the deposits you're collecting, where you're lending and whether you are supporting small businesses in the community are all useful markers to build trust.”
Fintechs can also set themselves apart with financial literacy and education, for instance by teaching users how to improve their credit scores or get a small-business loan.
“These apps can deliver the message in a succinct way,” O’Leary said.
Wole Coaxum was inspired to create the digital banking platform Mobility Capital Finance, or MoCaFi, after the city of Ferguson, Mo., erupted in protests in 2014 following the police shooting of Michael Brown. The company’s goal is to bridge economic mobility gaps by focusing on unbanked and underbanked customers of color.
Users can opt in to reporting their rent payments to the credit bureaus Equifax and TransUnion, follow their credit history with a VantageScore tracking tool and unlock access to personal financial coaching and more by exhibiting positive financial behaviors. Account holders get discounts for shopping at small minority-owned businesses that partner with MoCaFi.
Several of the fintechs mentioned are not yet available to the public; others launched this year, so their sustainability is untested.
Ultimately, “the basics have to be there,” Dent said. “Making enough money so the company can stay around is hard.”
To succeed, founders who care about their communities must also understand what makes a viable financial product.
“I hope we are seeing some of the companies in the middle ground, to truly serve the needs of the community and know enough about banking to do in a way that will work for the long haul,” Dent said.