The Burgeoning Opportunities in Financial Inclusion

The Burgeoning Opportunities in Financial Inclusion

By: Thomas Dee

September 18, 2022 – The financial challenges that lower-income Americans face have been well-documented. Thirty-six percent of Americans would not be able to cover a $400 unexpected expense using cash or its equivalent, according to the latest survey by the Federal Reserve. Nearly one-fifth of Americans are underbanked or fully unbanked. Many are underprepared for retirement. Inflation and rising interest rates also present new challenges. The National Association of Realtors® housing affordability index recently hit its lowest level since 1989, highlighting the challenges many Americans deal with when seeking homeownership.

Nearly one-fifth of Americans are underbanked or fully unbanked. Many are underprepared for retirement.

The good news is across the financial services sector, an increasing number of business models are centered on a mission of financial inclusion. We see opportunities for both corporations, which can offer new financial products to better support employees and customers, and investors partnering with early-stage and mature companies.

Most well-known are the scores of fintechs that aim to bring mainstream financial services such as checking accounts, debit cards, and personal loans to near-prime and subprime consumers. Fintechs continue to expand the scope of their services, with many now offering secured cards (a successful credit-building tool), investment products, and traditional credit cards. In a world where US regulators crack down on what they call “junk fees,” we believe consumer groups and regulators have generally embraced these models.

We see opportunities for both corporations, which can offer new financial products to better support employees and customers, and investors partnering with early-stage and mature companies.

The mortgage market also has seen a push toward inclusion. Rent-to-own housing, which occasionally has been criticized as predatory, is evolving into a new generation of businesses that offer credit-building tools and embedded consumer protections, only modestly sacrificing investor returns. And both Fannie Mae and Freddie Mac, which together represent about half of mortgage originations, are experimenting with models that encourage the inclusion of rental payments in underwriting. These are just some of the models that aim to expand access to mortgages and credit history.

Companies in the retirement services market also have made 401(k)s more accessible for more Americans—especially those employed by small businesses, a segment that historically has been ignored by many of the largest retirement services firms. Data suggest that less than half of small businesses offer retirement plans compared to most large employers. A new suite of tech-based recordkeepers, some integrating with payroll firms, serve this niche, benefiting from overwhelming policymaker support for small plan creation.

Financial services that cater to low-and-moderate income consumers can be compelling investment and business opportunities, as traditional financial services firms continue to neglect this consumer base. But newer models also face risks, from not fitting neatly into an existing regulatory regime or monetizing products in a way that consumer groups or regulators criticize.

Utilizing our research-driven framework, we help impact funds identify themes and opportunities that match an impact mandate, and our other sector teams do the same for the energy, technology, and healthcare sectors.

At Capstone, we specialize in helping corporations and investors navigate policy and regulatory issues around the world. For investors, our team specializes in evaluating businesses for hedge funds, private equity firms, and others, leveraging our sector expertise and expansive networks with key decision-makers. For companies, we advise on market entry, M&A, and strategy, understanding the risks and opportunities that financial inclusion strategies could present. Utilizing our research-driven framework, we help impact funds identify themes and opportunities that match an impact mandate, and our other sector teams do the same for the energy, technology, and healthcare sectors.

We noted that 36% of Americans could not cover a $400 emergency expense. But this number has actually fallen significantly in recent years: Just seven years ago, a whopping 50% of Americans could not afford an emergency expense. While these gains cannot be attributed to financial innovations alone (the past decade also saw strong economic growth and, generally, rising credit scores), perhaps the push toward financial inclusion is playing a role. And we at Capstone look forward to continuing to work with clients on these efforts.

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