The Underbanked: How Your Fraud Management Might Make or Break This Customer Segment
Despite the advancements in financial technology and the global reach of banking institutions, a significant portion of the world’s population remains unbanked or underbanked, lacking access to basic financial services such as savings accounts, credit cards, and other traditional financial products.
The reality today is that the dynamics of our world are constantly evolving. With the younger generation becoming more active in the economy and people moving from small towns to larger cities for work opportunities, we are witnessing a growing trend of the underbanked and underserved. This trend is particularly pronounced in developing countries, where financial exclusion is more prevalent due to factors such as low income, limited infrastructure, and lack of access to information.
Case in point: Half of the total population in Southeast Asia was unbanked as of 2020, while about 18% were underbanked according to a Fitch Ratings report. Given the region’s 290 million or so population, the Fitch Ratings findings mean that about 53 million Southeast Asians are underbanked or are getting limited access to the best the modern financial sector can offer. That number can be even higher given National Geographic’s estimate that 70% of the region is either unbanked or underbanked, with Vietnam, the Philippines and Indonesia having the highest combined rates at 79%, 78% and 77%, respectively.
Click HERE to read about Remitly, a mobile payments service provider helping enable the same, seamless financial inclusion.
One major problem is that traditional financial institutions, like banks, are not as ready yet for this young, dynamic population, who are routinely subjected to outdated verification processes that are time-consuming, expensive, and not designed to serve the unique needs of this customer segment.
Bridging the gap, in this case, are FinTechs, which are offering alternative financial products but are, in most cases, less stringent as compared to traditional financial institutions in terms of documentary requirements – leveraging technology to streamline their operations, offer more accessible and convenient financial services, and use alternative data sources to assess creditworthiness.
In other words, FinTechs are offering customers alternative identity verification—a boon for thin-file customers who have little or even nothing to show forth in terms of traditional identity verification documentation, like adequate valid IDs, account histories, credit files, and utility bills. This reliance on age-old means of verifying someone as an actual individual has worked for the longest time, but is not necessarily appealing to today’s generation of people, who are either largely on the move or too young to have accumulated the kind of documentary evidence banks and other financial institutions usually require.
Alternative identity verification as offered by FinTech solves that problem by expanding data authentication to include a range of data sources. It checks an individual’s identity history, credentials, available documents and even digital footprint to make sure that they are who they claim to be—thus solving the age-old problem of knowing your customer.
This new way of identity verification brings FinTech more in line with the digital-first preference of today’s younger generation—digital native Gen Zs and digital savvy Millennials—who prefer to do most of their transactions online. In other words, FinTechs are meeting the needs and wants of today’s consumers, and that can help in reducing the underbanked and unbanked populations in the long term.
Even so, FinTechs face the same challenges as traditional financial institutions, like delivering a unified and exceptional customer experience and complying with regulatory requirements. Neither are they immune to the issue of fraud—something greatly magnified when juxtaposed with consumers’ high expectations of frictionless transactions with FinTechs.
To that end, four in five consumers in APAC believe financial institutions and businesses are responsible for protecting their customers from fraud. This is the reason more consumers are becoming more open to surrendering personal data—the trade-off being an expected increase in online security. To justify the trust customers have placed in them, financial institutions, whether traditional or FinTech, need to not only put Know-Your-Customer and anti-money laundering mechanisms in place but also enhance them with new advancements in identity verification technology as an added layer of protection.
However, there is a misconception that infusing new technologies into existing fraud management systems can add complexity to the process and prolong the onboarding process, which in effect, increases friction—something consumers do not want. According to a report by Tink, as much as 88% of customers are prepared to abandon a transaction if they experience needless friction, like difficulties with identity verification. Likewise, a study by ProofID revealed 56% will give up on the actual registration process in case they encounter too much friction.
Needless to say, both traditional financial institutions and FinTechs play a vital role in reducing the underbanked and the unbanked, particularly, the younger, more dynamic segment of both. And among the ways to do that is by making it easier for consumers to partake in the financial space and make transactions smoother, faster and more seamless. And that all starts with actually getting customers into the system by making it easier for them to be a part of the financial ecosystem. However, that does not mean sacrificing fraud management in favour of eliminating friction at any stage.
The good news is that financial institutions and FinTech can do all that—provide exceptional customer experience and an easier identity verification mechanism with as little friction as possible while preventing fraud. This can be accomplished by implementing a robust multi-layered fraud management system that leverages innovative technologies, like dynamic identity insights, behavioural analytics and machine-learning.
Combating the fast-evolving fraud landscape effectively while delivering an exceptional, low-friction customer experience requires the implementation of holistic fraud prevention strategies. Click on the link below to find out how Remitly, a mobile payments service provider managed to achieve that very balance with Ekata, a global leader in digital identity verification.
