--- title: Money: FinTech's Potential Dangers for Low- and Middle-Class Americans description: FinTech offers users an array of financial services that were once almost exclusively the business of banks canonical: https://time.com/3949469/financial-technology-boom/ author: New America article:opinion: true article:content_tier: free article:published_time: 2015-07-08T16:52:32.000Z article:modified_time: 2023-12-13T05:09:10.000Z article:section: Ideas og:title: Banks Are Right To Be Afraid of the FinTech Boom og:description: FinTech offers users an array of financial services that were once almost exclusively the business of banks og:url: https://time.com/3949469/financial-technology-boom/ og:site_name: TIME og:image: https://static.time.com/v3/assets/bltea6093859af6183b/bltde093bcdab65f2d0/6988d9b9bc6cfc69913e2a3c/time-logo.jpg?branch=production og:image:width: 1200 og:image:height: 675 og:image:alt: TIME og:type: article twitter:card: summary_large_image twitter:title: Banks Are Right To Be Afraid of the FinTech Boom twitter:description: FinTech offers users an array of financial services that were once almost exclusively the business of banks twitter:image: https://static.time.com/v3/assets/bltea6093859af6183b/bltde093bcdab65f2d0/6988d9b9bc6cfc69913e2a3c/time-logo.jpg?branch=production --- # Banks Are Right To Be Afraid of the FinTech Boom > Sponsored content. 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Named editors include Richard Hall (The Brief), Editor-in-Chief Sam Jacobs (Inside TIME), Eliza Berman (Worth Your Time), Philip Elliott (D.C. Brief), Justin Worland (Future Proof) and Harry Booth (In the Loop). Health Matters is written by TIME's health desk. #### How do I sign up for a TIME newsletter? Go to time.com/newsletters, choose the newsletters you want and enter your email address. There is no cost and no subscription requirement. ### Sources * TIME Newsletters: [time.com/newsletters](/c/time-nl-network-2026q3/newsletters?i=9aa0e8e8-bea6-40cf-bf38-539ff037ebc9&cr=time-nl-network-2026q3-v1) ## Video: Millennial Money Myths: Saving [Watch (HLS stream): Millennial Money Myths: Saving](https://cdn.jwplayer.com/manifests/BU0wOBwc.m3u8) (2:16)  _Published 2015-05-08. Millennial Money Myths: Saving_ by [Patricia Hart / New America](https://time.com/author/new-america-foundation/) ## Patricia Hart / New America Updated: Dec 13, 2023 5:09 AM UTCPublished: Jul 8, 2015 4:52 PM UTC by [Patricia Hart / New America](https://time.com/author/new-america-foundation/) ## Patricia Hart / New America Updated: Dec 13, 2023 5:09 AM UTCPublished: Jul 8, 2015 4:52 PM UTC **Correction appended Dec. 12, 2016.** Americans across the economic spectrum struggle to manage their money. We spend too much, save too little, and wait too long to invest. While we could all be more responsible, access to services that facilitate sound financial decision-making is often concentrated at the top of the economic ladder. Each rung down, those resources get a little harder to come by, with those at the very bottom are often locked out of the financial mainstream. Poor and minority families historically have gotten caught between the rock of discriminatory practices like [redlining](http://www.washingtonpost.com/blogs/wonkblog/wp/2015/05/28/evidence-that-banks-still-deny-black-borrowers-just-as-they-did-50-years-ago/) and [high-risk lending](http://www.nationaljournal.com/thenextamerica/economy/big-banks-racial-discrimination-linked-in-housing-crisis-20121016) and the hard place of [debt traps](http://www.responsiblelending.org/payday-lending/). Without access to banks, they find themselves subjected to the to the exorbitant fees and charges by providers of alternative financial services, such as check cashers and payday lenders. Policymakers should take steps to ensure that all Americans have access to secure, functional, and affordable financial services, as these commodities are crucial to financial wellbeing. But in absence of policy action, the market has moved to fill the need. Financial technology companies (known collectively as FinTech) are broadening access to a range of services that they claim can help us manage our spending, save more money, and make investments in our long-term financial security. FinTech offers users an array of financial services—from transactions to underwriting—that were once almost exclusively the business of banks. Personal finance apps like [Acorns](https://www.acorns.com/), [Digit](https://digit.co/), and [Mint](https://www.mint.com/) help users track their spending and stay on budget without the assistance of a financial advisor. Personal lending innovators like [Lending Club](https://www.lendingclub.com/) and [Prosper](https://www.prosper.com/) enable users to bypass traditional intermediaries with a peer-to-peer lending platform. Companies like [Betterment ](https://www.betterment.com/?utm%5Fcontent=2875&gclid=CIKilL7Dl8YCFVaQHwodbhAAeA)and [Wealthfront](https://www.wealthfront.com/) that facilitate investments, financial planning, and portfolio management have emerged as popular alternatives to traditional wealth managers. Investors have responded favorably to FinTech companies. Just six months into 2015, FinTech startups have raised nearly [$12.4 billion](http://www.forbes.com/sites/samanthasharf/2015/06/15/the-biggest-fintech-funding-rounds-so-far-this-year-26-over-50-million/) from venture investments and are on track to double their backing over the previous year. While FinTech is booming, it’s unlikely to replace banks altogether, and many FinTech companies actually rely on existing bank accounts. But it is [sapping away the banking sector’s profitability](http://www.economist.com/blogs/economist-explains/2015/06/economist-explains-12), which has raised concerns among traditional banks about their capacity to maintain low-margin services and in a rapidly changing marketplace. Generally, banks follow a loss leader pricing strategy: They provide certain products (checking accounts) at a cost below their market value to stimulate the sales of more profitable products (loans) and to attract new customers. Now FinTech companies are extracting the most profitable portions of the banking model, leaving banks stuck with high overhead and less profitable products. To recoup their resulting market losses and mitigate the threat of FinTech insurgents, traditional banks and other legacy players in the financial sector are discussing a range of strategies, including charging more for low-margin services, closing bank branches to cut costs, and acquiring FinTech companies. Unfortunately, the impact of some of these strategies has the potential to disrupt the financial lives of low-income households. The worst-case scenario for low-income families is FinTech’s drain on their profitability prompts banks to abandon their loss leader strategies. For people at the margins of the financial mainstream, the loss leader strategy is a financial lifeline that enables them to maintain checking and savings accounts. If banks compensate for lost revenue by raising fees and charges on current accounts, account ownership is likely to decline. Currently, over a quarter of American households are un- or underbanked. According to the [Federal Deposit Insurance Corporation](https://www.fdic.gov/householdsurvey/2013execsumm.pdf), one in three unbanked households reported high or unpredictable account fees as a reason for not owning an account and approximately 13 percent reported this to be the main reason. Raising the cost of owning a bank account could drive even more people away from the banking system entirely. While life with banks can be rough, life without banks can be brutal. Without access to a transaction account, households often turn to alternative financial products that charge exorbitant fees. The average underbanked household spends a staggering[ $2,412 each year on interest and fees ](https://www.uspsoig.gov/sites/default/files/document-library-files/2014/rarc-wp-14-007.pdf)alone. For [many households](https://www.fdic.gov/bank/analytical/quarterly/2015%5Fvol9%5F1/FDIC%5F4Q2014%5Fv9n1%5FBrickAndMortar.pd), access comes down to proximity to a brick-and-mortar branch. But as banks look to slash costs, branches are closing in droves ([nearly 2,599 in 2014](http://www.cnbc.com/id/102182556)). Low-income and minority neighborhoods are often the first areas targeted. Since late 2008, an astounding [93 percent](http://www.bloomberg.com/news/articles/2013-05-02/post-crash-branch-closings-hit-hardest-in-poor-u-s-areas) of the bank branch closings have been in ZIP Codes with below-national median household income levels. And the rise of digital banking may [contribute further](http://qz.com/393429/mobile-banking-underbanked/) to this trend as regulators consider a new proposal that would give banks more latitude to decide where they have physical branches. If the threat to their business grows, banks could opt to use their superior resources to buy up FinTech companies. With the five biggest banks controlling nearly half of the industry’s [$15 trillion](http://www.forbes.com/sites/steveschaefer/2014/12/03/five-biggest-banks-trillion-jpmorgan-citi-bankamerica/) in assets, FinTech’s $12.4 billion in venture investments this year look like peanuts. Acquisition was the approach [Capital One](http://www.theverge.com/2015/1/12/7523071/capital-one-buys-level-money-an-excellent-spending-tracker) took earlier this year when it bought Level Money, an app that helps users track their spending. If proven profitable, it’s likely that other banks will start buying up the competition. While usurping the threat of FinTech by co-opting it may relieve immediate pressure on the banks, it won’t necessarily stop them from trying to cut costs in other ways that disproportionately impact those at the bottom rung on the income ladder. With the last 50 years of history at our backs (or even just the last 10), do we really want banks annexing every potential rival? Competition is good, as is innovation, especially if they create inroads for new and currently underserved consumers to access and use traditional financial services. And for all their insurgent disruption, some FinTech startups have vision that traditional banks have lacked. They see underserved consumers as an emerging market, especially in developing countries where technological advances like [mobile banking](http://www.theguardian.com/sustainable-business/2015/jun/04/world-remit-do-pay-financial-services-western-union-world-bank) have been a key driver of financial inclusion. The rise of FinTech gives policymakers a good opportunity to take stock of where we have been and where we should be going when it comes to providing the means for low and medium-income Americans to save for the future. As these market forces unfold, policymakers should be designing and supporting ideas that promote more financial inclusion, whether that means more community credit unions, subsidies and tax credits for financial services, or a government-run option like postal banking. Regardless of the provider, legislators need to make access to secure, functional, and affordable financial services for all Americans a bigger priority—and FinTech’s impact on the banking industry is bringing that need into sharper relief by the day. _Patricia Hart is a program associate with the Asset Building Program at New America. This piece was originally published in New America’s digital magazine,_ [_The Weekly Wonk_](http://www.newamerica.org/the-weekly-wonk/)_._ _Sign up to get it delivered to your inbox each Thursday_ [_here_](http://www.newamerica.org/the-weekly-wonk/)_, and_ [_follow @New America_](https://twitter.com/NewAmerica) _on Twitter._ **Correction:** A previous version of this article misstated the amount in assets the five biggest banks control. It is nearly half the industry’s $15 trillion. ## Transcript [00:08] [ MUSIC ] Millennials are actually a lot more financially [00:10] conservative than their parents because they really came [00:13] of age during the financial crisis. So they're less likely [00:17] to invest in the stock market. They're kind of afraid of [00:20] stocks. I get really annoyed with a lot of the comments [00:24] about retirement and the stock market. Cuz again, we [00:29] did have a little bit of a later start. We're leaving school with [00:32] $ 30, 000 in debt. Our priorities are different, and just cuz [00:35] it's different does not mean that we don't care about some [00:38] of the same end goals as the generation. Generations [00:40] ahead of us. Millennials are the youngest generation that [00:44] also doubles as professionals, you know. So they're gonna [00:47] save less. I save more now than I did when I was 24, when [00:51] I was 25. I wasn't saving a whole lot then. It makes a lot of [00:54] sense, I wasn't making a whole lot of money. It wasn't a [00:56] priority. Even if it was It was basically impossible. You [01:00] know, Money Magazine would tell people to try to max out [01:02] their 401k when they can. Maxing out is $ 18, 000 a year. [01:06] [ LAUGH ] You know, find me a millennial who has [01:08] $ 18, 000 a year left over after housing, and food, and [01:12] student loans, and, there's just not that much left. I think [01:14] that no generation is particularly good at [01:19] the savings and budgeting, but to say that boomers were [01:21] great and millennials are awful in comparison really, really [01:21] untrue. I think boomers are patting themselves on the [01:27] back a little bit too much there. They have more savings, [01:32] more saving in 401Ks than baby boomers when they were [01:36] our age. But, there's just not always that much money left [01:39] over. Actually, in terms of retirement savings, Millenials [01:43] start saving younger. 70 percent of Millenials started saving [01:45] at the age of 22, which is a lot younger than Gen X [01:49] or Boomers have. Part of that, of course, could be because, [01:53] you know, 401K's automatically enroll you know and they [01:55] will up your contributions a little bit. Bu the fact is, they're [01:58] taking part. They're saving. They're squirreling away about [02:01] eight percent. So that kinda disproves the myth. 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