Can Tech Help Us Include the Financially Excluded?

By Chris Gorst, Head of Better Markets at Nesta Challenges

Some may think that ‘financial exclusion’ is a term used to refer to people who are struggling and living in geographically remote areas of the world, or in less developed countries. But actually we all know that there are millions of people in the UK who find it difficult to access the financial products that many of us take for granted, and therefore aren’t able to manage their money.

In fact, that there are 1.23 million adults in the UK without a bank account. This is deeply concerning as a bank account is the starting point to accessing financial services that we all need, such as gaining access to credit or simply being able to pay bills and services via an account. In fact, the issue is not just around access but also around the differentiated cost of products. The ‘financially excluded’ pay a ‘poverty premium’ of £1,300 every year  because people in poverty or on low incomes often pay more for the same products or services than people who are better off financially.

Tackling this problem has been much debated among politicians, community leaders and the media for decades. However, with advances in technology, it is now widely acknowledged that fintech can play a key role in helping people to better access financial services. Indeed, 48% of the population would be happy to use apps and tools to help manage their finances according to a recent Nesta Challenges report. New innovative ways of accessing financial services through smart phones, apps, and online are starting to deliver benefits to low income households through lower-priced financial products, an increase in choices, and by providing better service to all. In fact, we are at a pivotal point in the history of personal financial management in the UK with the impact of open banking just starting to be felt. While it might be a small impact so far, it’s just the tip of the iceberg. 

Leading the way in financial innovation

Open banking came into force in January 2018 designed to stimulate innovation and competitiveness in banking in the UK and ultimately make life easier for individuals and small businesses by giving them control over their financial data. It’s no exaggeration to say that open banking has been a revolutionary move by the regulator, the Competition and Markets Authority (CMA). As a result of the CMA’s regulatory intervention, we are starting to see new generation products that allow us to do things that we could only imagine before such as integrating all of our financial products in one place. For the financially excluded this could include more affordable lending solutions, as well as products to help consumers to manage their money and make payments.

The UK is leading the way in open banking enabled innovation, with over 1,600 fintech firms in the UK disrupting the market – a number that is estimated to more than double by 2030. However, in the excitement of the fintech revolution and the bright lights of open banking opportunities, we need to ensure that the financially excluded are baked into these new innovations. For those who have already used an open banking supported product, 86% think it would be helpful for people who are less well off or struggle with their money, and 76% say that it has already helped to improve their money management. 

Accelerating the next generation of banking products

Open Up 2020 launched to address some of these concerns. It’s a ground-breaking £1.5m challenge prize from Nesta Challenges in partnership with Open Banking Ltd designed to stimulate the development of Open Banking-enabled new products and solutions to help individuals across the UK better manage their finances – especially the more financially vulnerable. 

It is a follow-up to the Open Up Challenge which ran in 2017 and 2018, also operated by Nesta Challenges but with a focus on supporting small businesses. The original Open Up Challenge was designed to unlock and accelerate the next generation of financial products and services for small businesses, and it worked. The winners of the Open Up Challenge have gone on to become some of the important trailblazers in the small business open banking sector including Fluidly, OpenWrks, Swoop, Funding Circle, Coconut and Funding Options. These organisations are genuinely changing the way that small businesses manage their money. 

Supporting better money management

Now Open Up 2020 is looking for products and apps that use open banking to help individuals instead of small businesses better manage their money. Social impact is an important part of the criteria, so there will be a special focus on ground-breaking apps and products that serve those who are financially excluded. This includes areas such as widening access to affordable credit including alternative lending options and innovations in credit scoring, automated financial management to help build savings buffers and manage debt, and micro-payments towards savings.

The next five years will see a flurry of activity in the fintech sector in response to open banking and as consumers adopt innovative products that transform their day-to-day financial management. We believe that Open Up 2020 will be an important stepping stone in this journey and, as a result, we hope the number of financially excluded adults in the UK will significantly reduce as tech and innovation help the nation towards better money management.