While the term “debanking” has become a staple since last summer, the issue of financial inclusion has been a priority for Pockit co-founder and chief executive Virraj Jatania for years.
He launched the business in early 2015 as a fintech geared towards people who struggle to open accounts with mainstream banks.
It traces its origins to Jatania’s family business selling consumer goods. “Spending time in emerging markets, one of the things we often saw happening was how outside of the financial system a lot of people were,” he told City A.M.
“That stuck with me and led me to looking at how big a problem this was, and the numbers are pretty high.”
He noted that between three and four billion people worldwide are financially underserved, including nearly 100m in the US and up to 130m in Europe.
“I spent time talking to banks trying to understand their view on this problem, and what was very clear was that it was not really a priority for the mainstream banks,” he said.
These firms often prefer customers with steady incomes and higher deposits, and are increasingly closing people’s accounts with little or no explanation
Jatania said banks were “sticking to their knitting” to protect themselves from tight regulation. “They just want to stay in a box that they’re very comfortable in.”
Serving the underserved
Jatania said Pockit focuses on the “bottom half” of UK adults – some 20m to 22m people – who are often poorly served by mainstream financial services.
Meanwhile, the Financial Conduct Authority (FCA) has estimated that around 2.1 per cent of UK adults – some 1.1m people – people do not have a bank account at all.
Pockit initially offered a digital wallet and prepaid card, since expanding to enable payments to 55 countries, cashback on purchases with partnered retailers, and mobile and broadband savings.
Jatania said most of Pockit’s 900,000 users are those experiencing “cashflow volatility” – mainly blue collar workers, those in the gig economy and freelancers with sporadic incomes.
Others include people new to the country, such as international students, as well as homeless people, those leaving prison and asylum seekers.
Former UKIP leader Nigel Farage
Jatania does not see his business model as inherently riskier by serving the kinds of customers legacy banks tend to turn down.
“With the right technology, controls and processes, you can manage the risk quite safely,” he said. “As fintechs have grown, so has regtech. So there’s great tools out there.”
Pockit made headlines last summer for offering to provide its services to former Ukip leader Nigel Farage after the closure of his Coutts account, which he claimed was due to his political views.
The Coutts scandal has weighed heavily on not just Natwest’s public image, but the wider reputation of Britain’s big banks, with an explosion in reports of account closures.
“There’s probably more debanking going on than there should be,” Jatania said, acknowledging that tight regulation means accounts are often closed for legitimate reasons.
“But I know so many people who are completely legitimate who just have their account closed down because a bank decides it doesn’t want to serve that type of customer.”
Subprime lending
Pockit has grand plans to enter the subprime lending market – a term Jatania avoids – and fill the gap left by firms like Amigo, Wonga, Quickquid, Morses Club, Non-Standard Finance and Provident.
The fintech is taking its first steps with an income advance product allowing customers who receive a salary into their Pockit account to take out up to £50 before payday. It plans to increase this limit to £250 for eligible customers.
Eligible users can also access a small loan after three months of using Pockit’s credit-building tool.
Pockit currently only lends to customers with a stable salary of at least £600 per month. Jatania said he was seeing “very low default rates” across the several thousand loans made so far.
The UK’s biggest subprime lenders have been hit by a spike in customer complaints, regulatory action and compensation payouts in recent years, causing many to collapse.
Amigo Loans expects to finalise its liquidation in the coming months, having been in wind-down since the FCA suspended it from lending in 2020 for failing to perform adequate checks on consumers.
Amigo
It has faced more than 200,000 compensation claims under a court-approved scheme.
“The subprime lending market has been decimated over the last two or three years,” Jatania said. “Yet you haven’t seen a change in the 15m to 20m people who need access to those types of products.
“The last thing you want to do is drive high indebtedness in a group of consumers who don’t have the best financial wellbeing and funds, but at the same time having no providers causes its own problems.”
He added that more people were turning to unregulated “informal forms of lending”, including borrowing from friends, family and strangers, which end up costing them much more.
“I think there’s a real need for innovative, ethical lenders to come into the market, and that’s one of the things we want to do.”