Financial Inclusion Requires Understanding Cultural Shifts

Deloitte Digital has released a study of digital banking, financial inclusion, and the role banks should play in addressing inequities. The report concludes “The evolution of digital banking is pushing financial services to catch up with society’s demand for representation.”

Deloitte bases its projections on the rise of digital banks, specifically affinity banks “founded by and for the underrepresented” and concludes “they are closing this gap and putting pressure on incumbent banks to transform how they operate.”

The evidence is slim, light on data and aspirational to the point of wishful thinking. But that may be due to the nature of the project they are trying to describe changes that may not have a lot of data.

Julius Tapper, head of inclusive innovation & equity-centered design at Deloitte, said the affinity banking organizations they talked to made a good case for appealing to niche communities.

“I would expect to see more success from affinity banks than you have seen in more generic neobanking space. I would suspect the affinity angle will provide some regulatory tailwinds, we will see what happens.”

[In response to this article, Tapper sent some further information: ““The important thing to remember with the current data around customers moving banks is that they had fewer options to move to. Before affinity banking, those who felt that their values were underrepresented, still didn’t have anywhere else to turn. That context is important. Fewer reported banking moves didn’t necessarily mean a low desire to move, but rather a lack of places to go. Our data bears that out, with customers now being 2.6 more likely to transact with banks associated with high humanity.”]

The changes he and Deloitte are addressing may be hard to define, but at least some of their corporate clients, including several Fortune 500 companies, pay Deloitte’s Ethos for its insights and advice, Tapper said.

“We are not a non-profit offering from Deloitte.”

The report says that today, with more options and lower satisfaction than ever, U.S. consumers are now 2.6x more likely to transact with banks associated with high humanity. Black and Hispanic customers are 44% more likely to select a bank based on personal values compared to the average customer, it added.

Deloitte says: “There are now over 30 affinity banks in the market, specifically designed to serve underrepresented groups who share common values and identity drivers such as race, ethnicity, gender, sexual orientation, vocation and sociopolitical beliefs, among others.

Sixty-six percent of Americans believe banks have a responsibility to support diverse and underserved communities, and 31% of Americans are interested in switching to a bank that supports diverse and underserved communities, it found. Black and Hispanic customers are 44% more likely to select a bank based on personal values compared to the average customer.

But how many actually switch banks, activate those accounts and move their direct deposits and automated payments, like rent or mortgages, to the new bank?

Deloitte doesn’t say.

A problem with Deloitte’s analysis, is that while a lot of people complain about their bank, very few switch.

“The average U.S. adult has used the same primary checking account for about 16 years, according to a survey conducted for Bankrate and MONEY. More than a quarter (26 percent) have held onto a checking account for more than 20 years. (The average duration of a marriage in the U.S. is 8.2 years.)

“The evolution of digital banking is pushing financial services to catch up with society’s demand for representation,” says Deloitte. “The rapidly increasing numbers of affinity banks — challenger banks founded by and for the underrepresented — are closing this gap and putting pressure on incumbent banks to transform how they operate.”

The FDIC is showing similar concerns about minority communities’ access to banking, although in its case it is strictly focused on racial minorities and Minority Depository Institutions (MDI) — and Community Development Financial Institution (CDFI) — specialized organizations that provide financial services in low-income communities and to people who lack access to financing.

In 2020 the FDIC published “, Investing in the Future of Mission-Driven Banks: A Guide to Facilitating New Partnerships,” which outlines the important role FDIC-insured MDIs and CDFIs play in the financial system, describes the business needs of these banks, and outlines strategies for private companies and philanthropic organizations to consider in supporting MDIs and CDFI banks through equity.

Deloitte says that “31% Of Americans surveyed are interested in switching to a bank supporting diverse and underserved communities…The shift from incumbent banks to digital challengers is expected to continue as underrepresented groups look for new places to put their money.”

Incumbent banks must realign brand purpose and profit to create newly inclusive offerings that benefit their customers and communities and improve equity issues, if they want to maintain market share, said Tapper, again with no supporting data.

What is so obviously missing in Deloitte’s study is any sense of agency — who or what will make this push for inclusion happen. Banks serving the underrepresented face challenges in achieving profitability, and surviving.

FDIC states that while “The proportion of profitable firms remained relatively stable over the year at about 85 percent of all MDIs. The percentage of unprofitable MDIs is over 14 percent and remains significantly higher than the percentage of both community banks and all banks that are unprofitable, at 4.41 and 4.58 percent, respectively.”

MDI financial performance has improved significantly over the past five years, the FDIC added, although “from 2008 to 2018, the number of MDIs declined 31 percent, but more gradually than community banks, which declined by 33 percent. From 2001 to 2018, the number of Asian American, Hispanic American and Native American MDIs increased and the number of African American MDIs declined by more than half and now represents 15 percent of all MDIs at year-end 2018.”

For successful outreach to the unbanked, see my story on Bank On. which has enrolled more than 3 million banking newcomers

The Simon-Kucher report suggests that finding underserved communities is just the first step for a new digital bank ready to target one of these niches. To make a successful business, a bank must identify community pain points plus the willingness and ability to pay for solutions. The goal should be to achieve profitability in three to five years, its study says.

Digital banks with their lower costs and absence of expensive branch networks, are almost a necessity for reaching a niche community with banking services, but that is not enough, said the Simon-Kucher report. It showed that very few of the several hundred neobanks around the world are profitable.

Tapper thinks partnerships and community support for specialized banks will made a significant difference. And why do corporations want to work with a purpose-driven innovation group?

“I think this moment is, for those who are paying attention, a time when culture is shifting and changing and issues of identity, community representation, equity, power — these big social bedrocks, these big tectonic plates — they are all kind of shifting at the moment. What does that mean for what culture is going to look like in the future?”

Banks have to go beyond KYC as box-ticking; to reach some of these communities they need to understand culturally different financial needs such as surrogacy or gener transitioning.

“How is it that I need to know my customer, if I’m going to do things like personalization, and if I’m going to do things like micro-segmentation. I have to know a lot more about my customers than I had to in the past. There is a lot more fluency in these aspects of culture that are shifting and changing as demographics, identity, and society changes.

“So we have a lot of customers who recognize that and say the elements of DEI (diversity, equity and inclusion) are not just pro-social normative good-to-do things, but that this is key to understanding people. It’s key to creating differentiated, sticky, resonant, relevant experiences. And if I want to stay relevant I have to stay abreast of culture I need to understand the world through this lens.”