Digital Bank Accounts for the Unbanked

The challenge to be overcome

One third of adults across the globe don’t have bank accounts – a vast majority of them living in low-income households. But how, in all the centuries of modern banking, has the industry not managed to ‘mop up’ these populations up to enjoy the benefits of participating in the financial system? Benefits that would make them more resilient and help them to grow their income. Because after all, mopping them up only means more growth for banking.

But you’ll start to understand all the limitations of a traditional bank when you examine their financial statements – their operating costs are massive, so justifying adding more costs for the sake of low-income earners usually doesn’t make sense. Banks are typically plagued with expensive and clunky legacy systems and processes that makes them move slowly. This in no way appeals to the needs of the current unbanked, to whom speed is critical given that many live on daily paychecks.

Expanding physically to meet the current un/underbanked, most of whom are in rural and hard to reach areas, is usually too costly for the bank. The cost of this expansion to reach low earners, seen as less profitable, is hard to justify.

Instead, banks recoup all these costs (e.g., high cost of upkeeping current bank branches, systems and processes) by offering low-interest savings accounts, account maintenance fees, fees on transactions, etc. Needless to say, the typical unbanked population who do wish to have bank accounts cannot afford these services.

But technology is changing all that and leading to a crop of new digital banks, primarily aimed at the unbanked and underserved populations. First popularized in Europe, these banks are working on technology, process and product innovations that help reduce the barriers mentioned above. They are able to do this by keeping their operating costs low - typically through having no physical branches of their own, and through partnerships. The unique banking services they provide has proven successful over the past decade.

Below are some of the features they offer which have appealed to this ‘new’ clientele.

Low or no fees

Banking services have always been perceived as costly, with hidden fees that crop up unexpectedly. This doesn’t work for a low-earner because every cent counts. As such, low fees on banking products has been an obvious offering to attract new customers. And it has worked.

South Africa’s TymeBank has no fees charged on its savings accounts. Even debit and online transactions (local) are not charged; charges only come in during certain transactions, which the bank is transparent about. The link to their fee schedule (a simple table) is one of the first things you see when you get on their website. Compare this to Nedbank, one of the biggest banks in South Africa, with a R2.20 – R5 transaction fee, a monthly account maintenance fee of R50, and a fee schedule that, even though is accessible, is complicated to read.

Brazilian digital bank, Banco Original, has an interesting take on this. Customers need to pay R$19.90 every month and they get access to unlimited services, with no other additional fees. Nubank, one of South America’s most popular digital banks, also offers a no-fee account and credit card to its customers (compared to traditional banks that charge at least a $20 credit card annual fee).

American neobank, Chime, not only doesn’t have monthly maintenance fees on its checking account, but it also doesn’t require a minimum balance. Compare this to traditional American bank, Chase, which charges a $12 monthly fee, waived only if you have a certain amount of deposit in your account. Similarly, Canadian digital bank, Simplii, also offers a checking account with no minimal balance and no monthly fees. Compare this to a traditional bank such as RBC with monthly fees starting from $4.

In addition, Chime gives eligible customers free overdraft on their debit card transactions – up to $200. It also offers no fees on its debit cards. South African bank TymeBank does the same. Plus, it has MoreTyme, a feature allowing customers to make purchases spread across three instalments, interest-free.

Meanwhile, India’s digital bank, Kotak 811, offers one of the highest interest rates on savings accounts around – about 4%.

Assistance with savings and budgeting

Everyone wants to save more money. But this is doubly important for a low earner whose every cent is important and accounted for. Banks aiming to attract this clientele must show that not only will they not take much in fees, but they will help their customers make their dollars go that much further. Therefore, many digital banks (and even some traditional banks now) are offering add-on services that help customers budget better and save more efficiently.

For example, Chime rounds up debit card transactions to the nearest dollar and automatically deposits that round up from the customer’s checking (daily transactional) account to their savings account. Meanwhile, German digital bank, N26, provides its customers with a budgeting tool where they can set daily spending limits on their card directly from the bank app. The bank also uses AI to automatically categorize payments (e.g., shopping, groceries, etc.) in real-time and give a clear picture of how spending compares to budgets at any given time in the month. Customers can also set up sub-accounts so that they can move money easily to facilitate their budgeting. What’s more, customers can actually create or join a ‘Shared Space’ so they can save and budget with other people. Other digital banks like American fintech, Spruce Money, provide cash back to customers when they shop at partner retailers.

Cheap distribution network

Digital banks are able to compete using low fees because they have minimal (and in some cases, no) physical presence. But several services, e.g., depositing and withdrawing cash, still require a physical touchpoint. These are being provided mainly through arrangements with partners that already have vast and last-mile physical infrastructure.

South African digital bank, TymeBank has managed to reach their customers without increasing costs associated with expanding a physical presence through branches. They’ve done this by partnering with Pick ‘n’ Pay, the South African grocery chain that is already literally everywhere…including where traditional banks aren’t. American digital bank, Chime, has also used this method to distribute its ATMs – placing them at popular chain stores such as Walgreens and 7-Eleven.

Similarly, American fintech, Spruce Money, allows its customers to visit popular retailers to deposit cash into their accounts (rather than having to transfer from another bank or wallet). The notable Kenyan mobile wallet, M-Pesa, relies on a network of agents who are already established micro businesses to help customers cash-in (deposit) and cash-out (withdraw) their funds.

Fully digital onboarding

Given the lack of branches, these new banks must have efficient, remote, fully digital processes through which to register and onboard new customers.

For example, South Africa’s TymeBank onboards about 93,000 customers monthly through its kiosk channels at retail chains – much cheaper than it would have if it had to set up a branch. Similarly, it onboards about 17,000 customers via its web channels at only about $0.6 per customer. Brazilian digital bank, NuBank, onboards new customers completely through its app – a feature that appealed greatly to the public when they launched, and which also helped accelerate their customer acquisition during the pandemic.

Such mobile-first onboarding approaches has defined digital banking in general – from UK’s Monzo and Revolut to Nigeria’s Alat. In the face of growing competition from digital banks, many traditional banks are now on their way (albeit slowly) to offering 100% digital onboarding through web portals and apps.

More competition going forward

In conclusion, competition in the general digital banking space has undoubtedly become fierce, many of them aimed at banking the unbanked and underserved, or even those who are simply dissatisfied with their current traditional banking situation. Competition has also emerged from traditional banks themselves who are launching (or acquiring) their own digital banks.

Because the growth in the sector (also fueled by the COVID-19 the pandemic), we are likely to see these digital banks continue to innovate in terms of the features they are releasing. No or low fees is already a basic feature to even be competitive, but to differentiate, innovations for better products or new products within the digital banking app are needed. E.g., providing better insights for personal finance management, or including products such as micro-insurance and micro-investments. Products such as virtual cards are also taking hold – here, customers can request for a card with only the PAN and details for use during online shopping and bill payments.

It’s worth noting though, that the impact of these banks on actually closing the financial inclusion gap is yet to be understood…are they really reaching these new unbanked customers at scale, or are they simply providing alternatives to already banked customers. This is certainly a topic for new and definitive research.