The continued path for banks and partner fintechs in expanding access to financial services

Traditional banks have long prioritized products and services toward their ideal customer—one with good credit and reliable income, likely to maintain a large balance in their accounts. It’s not surprising: Those customer segments are generally the most profitable.

By contrast, underserved segments typically have unique financial situations— thin/no file credit, irregular income, lower balances. Given their risk profiles and lifetime value, these characteristics historically left them difficult to profitably serve and unattractive to banks as growth segments.

Over the last 10 to 15 years, that has started to change, as the growth of fintech startups opened the doors to rethinking financial inclusion.

Breaking through the cost barrier

Fintechs, generally speaking, are able to profitably market to these customers because their digital operating model means lower overhead costs. Traditional banks historically have been built on infrastructure that is capital-intensive and expensive to maintain, so the cost to serve each customer is relatively high.

Newer market entrants tend to rely on a cloud-based model that reduces startup costs and also enables them to rapidly and economically scale digital-only services. These leaner systems allow fintech firms to use business models that directly address the needs of underserved people and companies that traditional banks deemed too risky or not sufficiently profitable.

Fintech innovators can pursue opportunities in segments not served by incumbents, then design offerings around those needs. Innovations such as free credit monitoring, credit builder accounts, early access to wages, BNPL, prepaid cash accounts, low-cost foreign exchange remittances and P2P lending came out of emerging fintech companies. And larger banks often followed: Many of these features eventually were adopted and scaled by traditional banks.

There are some key examples of customers who might benefit from such nontraditional approaches. For one, people who don’t receive their income on a regular cadence. (Think gig workers or independent contractors.) Standard risk assessment models don’t work well with irregular income, pricing the risk of those customers as too high to serve; therefore, conventional banks may not offer flexible financial products tailored to these customers. Fintech solutions have stepped in by offering early access to wages, allowing gig workers a more predictable cash flow.

Other prospective customers, including immigrants or those who haven’t had access to traditional financial services for a variety of reasons, may lack the comprehensive credit history banks look for. Reliance on standardized credit scores has, generally speaking, hasn’t produced the data banks historically require for loan decisioning. Fintechs have introduced alternatives like cashflow underwriting, small-dollar lending, and no-fee deposit accounts.

The gen AI effect

As in any industry, the emerging impact of AI, particularly generative AI, looms large. This technology is poised to have a massive impact on expanding accessible finance. In the near term, gen AI can enable financial institutions to simply do more. That includes driving down operating costs and freeing up capital for investments either in new technology or in reaching those underserved market segments.

Looking further out, agentic systems may become reliable enough to provide banking-type services to anyone with a bank account, which would level the financial services playing field and drive further innovation. AI capabilities could drive rapid growth in fintech without large investment; a small team might build an application or service at a fraction of what it would have cost to do so a decade ago.

That said, the AI use in financial services is a work in progress. Realizing its full potential will require advancements in the underlying models and the technology to accompany it. AI adoption in financial services has been haltingly slow, and such a highly regulated industry may yet take years to start seeing more widespread adoption.

Will traditional banks change their approach?

Fintechs will likely always be innovators; it’s in their DNA. The founders of finserv startups, almost by definition, are people who have spotted inefficiencies or gaps in the industry and are willing to push the envelope to address them.

However, it’s been a harder road in recent years for many growth-stage fintechs looking to achieve profitability. Financial services is about scale. Fintechs need capital to fuel their growth, but higher interest rates have made that capital more expensive. That means some moonshot ideas have been forced to show a profit earlier than planned.

Meanwhile, traditional banks, which have long adopted innovations that were first introduced by fintechs, are feeling the need to find new sources of revenue. Prospective customers who may have been deemed an unacceptable risk in past years may now present a welcome opportunity. And banks have said they expect to expand the use of fintech in their core services. Fintechs may never lead the market in well-established services, but they can move the industry forward.

Stephen Greer is a banking industry consultant with SAS.