About Nesta

Nesta is an innovation foundation. For us, innovation means turning bold ideas into reality and changing lives for the better.

We use our expertise, skills and funding in areas where there are big challenges facing society.

Nesta is based in the UK and supported by a financial endowment. We work with partners around the globe to bring bold ideas to life to change the world for good.

www.nesta.org.uk

About MyPocketSkill

MyPocketSkill is a technology and research company. We provide independent advice, consulting and research expertise across sectors which address inclusion, participation, capability-building and employability.

Our team has a wealth of specialist knowledge and skills across the public and private sector and we provide services and advice to researchers, funders and policymakers.

www.mypocketskill.com

Acknowledgements

We are extremely grateful to the sector specialists who contributed to our research through phone and face-to-face interviews.

James Berry, CEO, Bristol CU, Matt Bland, Head of Policy & Communications, ABCUL, Lakshman Chandrasekera, Chief Executive, London Mutual CU, Archie Chappel, Strategic Affairs Director, Wagestream, Karen Davies, CEO, Purple Shoots, Andrew Duncan, Founder & CEO, Soar, Nicola Garrett, Director of Corporate Services, Five Lamps, Leanne Herberg, Chief Executive, Cardiff & Vale CU, Monica Kalia, Cofounder & Chief Strategy Officer, Neyber, Freddy Kelly, Founder & CEO at Credit Kudos, Teresa Manning, CEO, Clockwise CU, Valentine Mulholland, Senior Policy Manager, Money and Pensions Service, Maureen Paterson, Deputy CEO & Head of Finance, NHS CU, Andrew Rabbitt, CEO, incuto, Faisel Rahman, CEO & Founder, Fair Finance, James Salmon, Fund Manager, Big Issue Invest, Chris Smyth, Chief Executive, Leeds City CU, Emma Steele, Investment Manager, Ascension Ventures (Fair by Design), Joe Surtees, Policy Manager, Money and Pensions Service, Nzube Ufodike, Investment Manager, Telefónica Open Future (UK) & Wayra UK

If you'd like this publication in an alternative format such as Braille or large print, please contact us at: [email protected]

Design: Green Doe Graphic Design Ltd

Foreword

Innovation takes many forms. Often when we think of innovation we think of new technologies and certainly innovation in fintech (financial technology) has changed the face of the finance industry over the last decade. There is now a plethora of new products and solutions that are supporting better financial life for British consumers, from challenger banks to income smoothing products. From budgeting tools to new credit scoring mechanisms fintech has brought a sea change as to how we manage our money and financial transactions, but like many technological transformations those who need them the most often get left behind.

We at Nesta see a different type of innovation is possible. We believe that innovation in the sector won't only include the technology that is being developed but also the innovative partnerships that can emerge.

This rapid research report was commissioned by Nesta to help us understand better the possibilities and challenges that collaboration between fintech companies and affordable credit providers could bring. Is it possible to harness the skills and expertise of the community lending sector and those of the fintech sector to make better and more ethical products and services for more consumers?

The team at MyPocketSkill worked to develop this report and we are grateful to Matthew Harker and Zara Ransley for their hard work and to the interviewees for giving their time so generously.

We hope this report can be used by others thinking about and trying to harness the skills and resources of fintechs, and those of the community lending sector, and we hope others will build on this research.

At Nesta we run a variety of practical programmes and challenges that partner across sectors and we will continue to share our learning about partnership and how to successfully make it happen.

We expect that, for a true transformation of the sector and to deliver better services for those excluded from the financial system, there will need to be a variety of changes including: new and better legislation and regulation; more support for the current community lending sector; new ethical challenger solutions; encouraging current fintech providers to offer financial inclusion products and services, and of course we will need to support charities, communities and other 'people powered' solutions to ensure all are included.

Kate Sutton September 2019

Executive summary

Introduction and context

How can fintechs form effective partnerships with social and community lenders to support financial inclusion and what are the key issues and opportunities facing potential collaboration?

This rapid report introduces a set of primary and secondary research and insight, to better understand and categorise the landscape, and explore opportunities for better cross-sectoral collaboration between social/community lenders and fintechs to support financial inclusion.

Although there are pockets of good practice, the fintech sector has not yet engaged with credit unions (CUs) and community development financial institutions (CDFIs) at scale and, overall, challenges exist in applying disruptive technologies in ways that improve the lives of those who are excluded from the current system.

This work researches and documents the issues and potential solutions underpinning the narrative of financial inclusion. The focus here is to bridge the gap between digital providers of financial services (fintechs) and social and community organisations working with financially excluded groups.

An assessment of readiness – CUs/CDFIs and fintechs

Our research highlights many strengths of these organisations. Beyond their badge of being fair, flexible and ethical, these organisations have a rich knowledge of their customer base and often a wealth of historic data, mapping out members' preferences and behaviours. These organisations tend to offer a personalised, customer-centric approach and their offer itself often represents good value, particularly where the default option is the doorstep lender or the top company on the search engine results.

However, there are also issues in CUs/CDFIs' ability to grow and engage effectively with technology:

• Despite sector consolidation, many organisations are subscale, which can lead to issues around capabilities, promotional reach and unit economics.
• Legacy system and business processes often constrain their ability to respond to customer needs, particularly in respect to time to respond (e.g. time taken from initial click to loan acceptance).
• Structural constraints (e.g. where credit unions have specific capital and interest rate constraints, which potentially have unintended consequences for their competitiveness).
• Lingering public perception issues ('credit unions are just for poor people').

Fintech companies, using technologies to widen the access of consumers and businesses to new financial products and services, are already playing a part in this sector. For example, we are already seeing novel approaches to assessment and credit scoring, payment profiling to suit unpredictable earnings, and open banking integration. We identified six areas where technology can potentially have a significant impact on CUs/CDFIs' ability to grow:

1. Frictionless workflow: The creation of products with more streamlined workflow (e.g. to allow faster decision-making).
2. Customer/member acquisition and management: Digital marketing, segmentation, brand building, search optimisation and CRM functions.
3. Scalable solutions: Approaches which will lower the unit cost of execution (e.g. shared platform or blockchain/distributed-ledger-technology-based systems).
4. Digital experience (UI/UX): Overall customer experience (UI/UX). Offering greater immediacy, personalisation and customer experience.
5. Integration: Ability to integrate better into customers' own finances or to other third-party systems.
6. Analytics/AI/data science: Data analytics and decision support, machine learning, chatbots/interfaces and online verification/security.

Overcoming potential blocks to partnership

For CUs/CDFIs three principal blocks to effective partnerships are around organisation capability, effective partner selection and perceptions of past failures:

Organisational capacity - Unable to engage effectively because of lack of resource or client-side tech expertise. Here, potential partnerships could focus initially on larger organisations as exemplars (with a cohort of fast followers) or enable consortia of smaller CUs or engage in upskilling/development programmes alongside implementation. Joint ventures might be one way of achieving this.

Partner selection - Because resource and expertise are scarce commodities, CUs/CDFIs can find it difficult to evaluate which fintech to work with; there may be concerns, for example, about the organisational stability of a potential partner. An area of potential assistance is therefore due diligence, for example to help establish criteria or a framework of capable suppliers.

Culture and perceptions of past failures – Many CUs are culturally risk averse and unwilling to jeopardise current operational processes. There is nervousness about wasting time on initiatives that have not worked in the past. In any new technology initiative, project coordinators will need to be clear about how it is going to be different this time. Success factors based on learning from previous attempts include delivering initiatives that are more user-designed, less top-down, modular rather than big bang and delivering quick wins through an agile approach.

There are also potential blocks from fintechs' perspective. For fintechs, these blocks involve customer capability, sector knowledge and strategic importance:

Readiness: Fintechs currently struggle with CU/CDFI customers who are not ready or willing to embrace change, which may involve changes to business processes not just new technology. One way of addressing this is through case studies of current good practice and generating buy-in for a vision/roadmap for the sector.

Sector knowledge: The technical capabilities exist in the fintech community but the CU/CDFI landscape is alien to all but a few sector specialists. Briefing sessions and matchmaking within the fintech community to stimulate those with relevant transferable technologies could be a way to address this.

Need for a CU/CDFI partner?: Some fintechs that we spoke with already have a proposition for financially excluded customers and do not see value in partnership. Here, there may be a need to better articulate the win-win aspects of the challenge, for example in the context of the global opportunity or in opening to a broader customer base (e.g. local government/NHS employees) and access to data and experience.

1. Introduction and objectives

With eight million people struggling to keep up with bill payments and credit commitments,[^1] and more than 5.4 million loans made in the 12 months to June 2018 in the high-cost, short-term loans sector,[^2] it is clear that a significant proportion of the UK population is locked-out of mainstream lending and turning to high-cost credit.

This is a mainstream problem looking for a mainstream solution.

Social and community lenders, principally credit unions (CUs) and community development financial institutions (CDFIs), represent a valuable resource in the battle against financial exclusion. But, with a relatively low market share, they can struggle to break into mainstream recognition and currently many of these organisations remain underpromoted and underpowered.

Conversely, with unprecedented growth and investment, for example benefitting from £2.6 billion of investment since early 2018,[^3] the UK fintech sector potentially offers new perspectives on this problem, and from this pool of digital innovation expertise, there may be opportunities to leverage the technologies and toolsets of this sector to good effect. However, while there are a few fintechs which are actively working to target these customers and work collaboratively with social and community lenders, it is currently not clear whether there is enough common ground between these two types of organisations in terms of understanding, aims and interests, to work collaboratively.

This report looks at a set of primary and secondary research and insight, to better understand and categorise the landscape and explore opportunities for better cross-sectoral collaboration between social and community lenders and fintechs to support financial inclusion.

1.1 Context

The roots of financial exclusion are complex, with many often-overlapping risk factors involved. These factors relate to who you are, your financial circumstances and where you live; with age, ethnicity, gender, personal and household income, employment, health status and geographic location all playing a major part. For example, those on low income with less education, part of a BAME community or with a migrant background and either very old or very young are more likely to be financially excluded than others. Also, women are more likely to be excluded from financial services than men, and households with no wage earner are more likely to be completely financially excluded. Other groups with a higher propensity to financial exclusion include people who are single parents/single people with no children, students and unemployed individuals, those with disabilities and those living in rural areas.

The impact of financial exclusion also plays out in different ways across these different segments. The most prevalent issue for consumers is dealing with debt. An estimated nine million adults borrow money to buy food or pay their bills, equating to 17 per cent of the adult population, and this is correlated with overall wellness; the more people rely on credit for everyday spending, the less satisfied they are with life in general.[^4]

From an end-customer perspective, expectations are increasingly fuelled by their overall experience of digital services. Mobile apps have simple, slick, intuitive interfaces with immediate responses and compelling design. These expectations spill over into customers' expectations of digital financial services; users want access to immediate and intuitive solutions to solve credit issues. It is therefore no surprise that some of the most profitable commercial lenders then, are also the ones offering newer digital technologies to achieve a wide customer reach, an immediacy of response and industry-disrupting innovation.

The landscape is mixed. Social and community lenders, principally credit unions (CUs) and community development financial institutions (CDFIs), exist to provide fair and equitable financial services to the communities they serve (typically a geographic, faith or employment base of individual and business members):

• Credit unions: 420+ organisations which have more than 1.8 million adult members, a loan book of some £1.6 billion[^5] and lending c. £700 million a year.
• Community development financial institutions (CDFIs): Social enterprises whose mission is to deliver responsible, affordable lending to help individuals, businesses, social entrepreneurs and communities who struggle to access finance from mainstream banks. In 2018, around 50 CDFIs lent c. £250 million.[^6]

However, this is still modest within a sector which, for example, currently lends more than £5 billion a year in high-cost loans. Although there are pockets of good practice, the fintech sector has not yet engaged with this sector at scale and overall, there appears to be a challenge in bridging the gulf between these two types of organisations and in applying disruptive technologies in ways which improve the opportunities for those most at risk of exclusion.

1.2 Overview and objectives

This work researches and documents the issues and potential solutions underpinning the narrative of financial inclusion. The focus here is to bridge the gap between new digital providers of financial services ('fintechs') and social and community organisations working with financially excluded groups, and focuses on questions around:

• What are the categories of individual who are at risk of financial exclusion?
• What are the trigger events for each of these categories in terms of the risk being realised?
• What are the support gaps in enhancing financial inclusion for those at risk?
• And considering respective capabilities, what are the opportunities for sector providers to partner more effectively in widening inclusion?

In compiling this report, we have undertaken a combination of desk research, from previous studies, research and related literature, combined with stakeholder engagement, across a cross-section of the sector. The findings of this work then provide a snapshot of the current dynamics, issues and challenges of financial inclusion, relevant to creating improved partnerships in this sector.

2. Financial inclusion: Where are the gaps?

Effective partnerships are dependent on shared understandings and appropriately aligned objectives; we therefore wanted to understand how providers would respond to various gaps in financial inclusion and whether there was a common understanding of the characteristics of those individuals who are at higher risk of being financially excluded and the trigger events which then often lead to that exclusion.

2.1 A persona-based approach

Our starting point was a set of personas that describe some of these common types of exclusion. We have developed these from secondary research, with many of the sources used directly drawing on the experiences of those at risk of financial exclusion. The personas do not attempt to provide a comprehensive picture of all types of exclusion, but rather, highlight some typical examples, using a relatable, narrative approach, describing the core characteristics of the persona, their lifestyle and vulnerabilities, as well as the specific trigger points in relation to risk.

Based on these personas, we have highlighted some of the current issues and gaps for those individuals overleaf, in Figure 1, and a fuller description is included in Appendix 1.