The Point: In the world of finance, the terms ‘unbanked’ and ‘underbanked’ are often referred to in the context of individuals with limited access to conventional banking services. However, while working on a consulting project we’ve come to recognize that these terms have extended their reach into the world of business too. A considerable portion of small to medium enterprises (SMEs) fall into these categories, facing a profound impact on their growth and scalability. In this article, we explore (1) The Impact of the Underbanked and Unbanked Issue and (2) The Role of Technology and Policy in Addressing Underbanked and Unbanked… Enjoy!
The Underbanked and Unbanked Businesses
Defined by the Federal Deposit Insurance Corporation (FDIC), unbanked businesses are those that have no access to basic financial services such as checking or savings accounts. A step up the ladder, underbanked businesses do have access to some banking services, but they also lean heavily on alternative financial systems. These might include anything from check cashing services to payday lenders or pawn shops.
The issue of underbanked and unbanked businesses is particularly profound when it comes to small to medium-sized enterprises (SMEs). For these businesses, traditional banking systems often prove to be inadequate, largely due to inherent systemic challenges. SMEs commonly lack the requisite credit history, sufficient collateral, or formal business structures, making them less attractive prospects for conventional banking institutions. This effectively excludes them from many of the benefits afforded by traditional financial services.
As a consequence, these businesses resort to the use of non-traditional, often costly, alternative financial services. The 2019 FDIC survey painted a stark picture of this reality, revealing that 5.4% of U.S. households were unbanked and 18.7% were underbanked. Extrapolating these figures onto businesses, particularly SMEs, one can infer a considerably amplified predicament.
The Impact of Underbanked and Unbanked Businesses
The implications of being underbanked or unbanked extend beyond the individual business entity. When a substantial portion of the economy is denied access to essential financial services, the ripple effects permeate all corners of society. Stifled business growth, suppressed innovation, and the perpetuation of economic inequality are among the immediate, most visible effects.
However, it’s not just about the businesses themselves; it’s also about their potential contribution to the economy. According to the World Bank, SMEs play an integral role in most economies, particularly in developing countries where they account for about 90% of businesses and contribute to more than 50% of employment. When these businesses are unable to access the resources they need to grow and thrive, it’s not just the business owners that suffer; the broader economy feels the pinch too.
Exclusion from the financial system also impacts a country’s GDP growth. In their role as catalysts for economic development, SMEs contribute significantly to GDP. When their growth is hampered due to lack of access to financial services, they are unable to realize their full potential, thus pulling down the overall GDP.
Moreover, economic inequality becomes an inevitable consequence when access to financial services is not democratized. Businesses unable to access affordable credit are left to grapple with high-cost loans or, in some cases, no loans at all. This lack of access to financial services creates a vicious cycle that hampers business growth and innovation, while at the same time exacerbating income and wealth disparities.
The underbanked and unbanked problem among businesses, while a complex issue, presents significant opportunities for inclusive growth. Addressing it requires concerted efforts from policymakers, financial institutions, and technology innovators. As we move toward a more inclusive financial ecosystem, we not only pave the way for businesses to grow and innovate but also contribute to greater economic equality and robust GDP growth. Ignoring this issue isn’t an option if we aspire to foster sustainable and inclusive economic development. The time to act is now!
Sam Palazzolo, Managing Director @ Tip of the Spear Ventures
- Klapper, Leora, and Dorothe Singer. “The opportunities of digitizing payments.” World Bank, August 2014.
- FDIC. “2017 FDIC National Survey of Unbanked and Underbanked Households.” Federal Deposit Insurance Corporation, October 2018.
- FDIC. “How America Banks: Household Use of Banking and Financial Services.” Federal Deposit Insurance Corporation, October 2020.
- Cambridge Centre for Alternative Finance. “Weathering the Storm: COVID-19 and the Economic Impact on SMEs in 13 African Countries.” University of Cambridge, July 2020.
- World Bank. “Small and Medium Enterprises (SMEs) Finance.” World Bank, September 2020.
- GSMA. “State of the Industry Report on Mobile Money.” GSMA, March 2020.