As part of a continuing series, Finextra is reaching out to some innovative thinkers and organisations on the forefront of serving the unbanked, the underbanked, and others who have either been consciously excluded or have experienced barriers to entering the traditional banking system. It’s estimated that more than 150 million people are underbanked or unbanked out of 230 million adults in the US. This means that as many as 65% of the eligible population have roadblocks of some kind that prevent from using or fully benefiting from standard-offer financial services products and services in the country.

Like any other area of business, there are many ways to attack both the problems and opportunities involved with converting the unbanked or underbanked into solid customers and active, fulfilled, and profitable participants in the banking system. Approaches and products will vary by the application and marketplace of course, and though they seem related, the solutions for the unbanked and the underbanked are actually quite different in nature from the ground up.

Answers to these societal problems, including opening up opportunities for all involved – both customers and financial services purveyors - might involve developing and highlighting new, more sensible and affordable services and options than they’re getting from their current banking providers. For others, those consumers truly 'on the outside looking in' when it comes to financial services, there’s a real need to (in many cases) be educated on the realities of money management and budgeting. And they’re fighting against strong headwinds indeed - as there are deep-set societal, demographic, and economic hurdles for the unbanked - those who are left behind entirely, or even worse, completely ignored by the core of the banking industry.

In the world of commerce and capitalism of today, not too many companies offer sensible, affordable solutions to lower-qualified customers seeking the elusive targets of financial growth and independence. Longer term goals, out of reach or even completely out of mind for many of the unbanked, might be building generational wealth. Or buying a home they can afford, which seems to be a growing problem for many more Americans, who might also be considered underbanked as well.

High payday loan costs just part of larger problem

It’s a dark and expensive fact of life that without a higher-level credit score and solid credit history, individuals and families are often shut out of the financial marketplace and forced to pay higher costs, assume higher risks, and potentially not even qualify for anything but the most usurious and highest cost credit, if at all. And traditional financial services credit scoring and risk management models are not well positioned, yet at least, to solve this problem.

Payday loans or similar products may fill the bill for many who miss out on regular banking services. And while such products are very profitable for operators in this space, they’re often financially devastating for their customers, many of them repeat users of such services. And that’s a major problem, because by providing clients without any other banking arrangements or financial lifelines with options that tend to suppress or permanently lower income, rather than raise it through interest on savings or investments, bad habits are built instead, often continuing for generations.

Payday loans are typically fairly limited in value (often to $500 or less at a time, sometimes per statutory limits). However, they commonly carry extraordinarily high interest expense - ranging into the double-digits in monthly interest percentages (that’s monthly alone…annual percentage rates go as high as 600% in some U.S. states.) But for many, they have been the only option, with few avenues to escape to more equitable and flexible financial services providers.

Solutions are out there – but a change in focus is needed

In the coming weeks, we’ll be sharing details on some thoughts from industry leaders on how to approach these challenges. And we’ll be profiling organisations that are right on the front lines of solving them. One company tackling the obstacles of the underbanked is Stellar Fi. The fast-growing Austin, Texas-based firm provides a platform for members to have their bills registered and paid automatically every month for a very small fee. With the service, they also get those on-time payments reported to the three national credit bureaus, thus opening doors to building better credit in a sensible, affordable way.

Connie Davis, Founder and CEO of Kairos Digital Commerce Consulting, is concerned about what the ‘shadow financial system’ of payday loans and other services like them really means to the mostly unbanked (or heavily under-banked) members of society, over both the short and long terms. She points out that research from many authorities has shown a direct link between emotional health and financial health. As a former financial services executive, she espouses a concept called 'Digital Humanitarianism' and is working to change hearts and minds of the industry to understand and incorporate it in their products and marketing outreach. We’ll share an interview with Davis that explored some of her insights and suggested answers to start solving problems like these from a slightly different perspective.