Welcome to our latest exploration into the evolving landscape of global finance. Today, we focus on a topic of paramount importance, yet one often overlooked in broader economic discussions – Financial Inclusion. Understanding its implications and recognizing its significant role in the global economic infrastructure can shed light on the innovative solutions being proposed to address it.
Financial Inclusion: Defining the Concept & Scope
Financial inclusion refers to the access and usage of affordable, formal financial services by all individuals, regardless of their economic or social standing. It is about lowering the “barriers to entry” to these essential services to ensure that everyone has the ability to participate in the economy. With widespread access to technology and services of all kinds in the United States, it might be a surprise that there are approximately 18.7 million people* who are “underbanked”, or had a bank account but used nonbank financial products and services during the year and/or otherwise do not have access to affordable and useful financial products and services. This is the issue that lies at the core of Financial Inclusion, which seeks to make these products and services available to anyone regardless of their income level.
To see just how deep this issue goes there are several factors we need to take a look at.
How Some Demographics Become Excluded
Let’s consider first the types of customers that banks like to have. These would be people with reliable incomes, good credit scores, and who can keep minimum balances in their bank accounts.
Now, of course this makes complete sense. Like any business, the safest and most reliable customers are the ones they prefer to have. Unfortunately this also means there is a large demographic that is cut off from the benefits provided by banks (some of which are bank accounts, loans, retirement accounts, investment accounts, etc).
This neglected demographic would be customers such as low income individuals, residents of rural areas, and people who work in informal sectors (for example, industries which often pay in cash such as people who make money from tips, freelancers, housekeepers etc). These individuals may not have the necessary paperwork or financial literacy to work with a bank and take full advantage of their products and services.
Not only that but when customers are located in remote areas, banks don’t want to open branches in these regions. This is because they often find the cost to set up a physical branch is not worth the ROI.
This problem is extended and made exponentially worse in developing countries around the world where the use of cash is more prominent or where technology and infrastructure are outdated or insufficient.
What is the consequence for these individuals? Well they might be forced to take higher risks with less trustworthy options. Maybe instead of investing in an index fund they end up investing in a friend’s business dealing only in cash and with little protections to the investor should the business fail or never happen. Maybe instead of saving money in an FDIC insured high yield savings account, they keep cash locked in a safe at home.
The Consequences of Financial Exclusion
Financial exclusion hampers an individual’s ability to accumulate wealth, invest in their futures, or mitigate financial risks. Furthermore, it can lead to an insidious cycle of poverty and social exclusion.
From a macroeconomic perspective, financial exclusion impedes the functioning of an economy. With such a large proportion of the population excluded from the financial system, the potential for economic growth and development is severely compromised.
The Price the Unbanked Pay Due to Financial Exclusion
As a simple example, think of your credit card. You probably don’t even think about it anymore but you likely use it daily. If you’re a bit more financially literate you may even have a card that offers you redeemable points that could be exchanged for cashback, groceries, gasoline, airplane miles, etc. With a year of spending on a credit card with good flier miles you could even afford some free plane tickets for your annual vacation.
The unbanked don’t have that option, and they may not even know they could. And that is just on the consumer side. Think about people who wish to open up small businesses and need to apply for small business loans but get paid in cash, so they can’t provide the necessary paperwork to qualify.
If we zoom out and look at how it affects entire communities of people we can see its impact when small businesses don’t have the funds to grow, create more jobs, and contribute to the economic growth of their city. And this can continue to extend to entire countries and stunt overall economic development.
What Problems Need to be Overcome for Financial Inclusion?
You’re likely thinking how Financial Inclusion sounds great and might be wondering why it’s not a thing yet. This is a rather complex issue with many hurdles that require attention in order to improve.
- Strict legal regulations: There is a balance that needs to be maintained between security and availability of financial products and services. Banks can’t just give anybody loans or credit when they ask for them without knowing who the person is and evaluating the risk of not being paid back. This risk evaluation is difficult for those who work in informal business sectors due to lack of paperwork. So there are regulations that need to be met, and likely adjusted to include a larger demographic of customers.
- Education about financial products and services: Many customers who don’t already have access to financial products and services know nothing about them, how to use them properly, how to avoid getting into debt using them, etc. So education in this regard is an incredibly important thing to address.
- Access to the internet: Many unbanked individuals may also lack access to the internet, especially in developing countries. This is a problem because much of how Fintech companies are working to help the unbanked is done online. So if those who need Financial Inclusion most don’t have internet access, how can they be helped?
These are just a few but you can see how they are obstacles that can take a great deal of time and effort to overcome.
How FinTech Companies are Tackling Financial Inclusion
Mobile Banking and Digital Wallets
Thanks to advances in financial technology there are many companies nowadays that operate entirely online and this is a dramatic improvement for the unbanked. How so you ask?
Let’s start with people in remote areas where banks don’t wish to open physical branches. Due to the widespread use of smartphones, many people can now have digital wallets and use mobile banking apps to store, send, or receive money digitally. Some of these apps also allow for investment accounts and more.
In addition, many mobile banking applications also require less paperwork to allow users to sign up which lowers the barrier to entry.
In these ways, many financial technology companies are now taking a chunk of market share from banks and helping people who have been neglected for a long time in the process.
Microfinancing and Peer-to-Peer Lending
Microfinancing platforms provide microloans to individuals typically unable to secure traditional funding. Similarly, peer-to-peer (P2P) lending platforms facilitate loans between individuals or investors. Companies like Kiva and Grameen Bank have been leading the way in these respective fields while fintechs with access to large populations of underbanked consumers are poised to make an impact in these fields as well.
Financial Education
In the movement towards Financial Inclusion it’s important for companies to educate their potential customers so that they not only see the value in their offers, but also trust this new medium of banking which is done entirely online.
Many companies offer educational resources, and thanks to websites like Youtube, average consumers are becoming more and more aware and informed about how to handle their finances and use financial tools.
Increasingly available internet access
As the world moves forward we are seeing internet access become available in more and more of the population worldwide. This is excellent news for the unbanked who will now be able to take advantage of banking products and services provided by online financial technology companies instead of banks.
According to Statista, over 64% of the world has access to the internet and social media as of April 2023.*
Tailored Financial Services
FinTech firms also provide tailored financial services to meet the specific needs of the unbanked and underbanked. Companies like Credit Karma offer free credit score information and loan recommendations, enabling users to make informed financial decisions.
Blockchain Technology
The utilization of blockchain technology represents another significant advancement in tackling financial inclusion. By eliminating intermediaries, blockchain can provide secure, transparent, and low-cost financial services. Additionally, blockchain supports cryptocurrencies, offering a stable and globally accessible alternative to traditional currencies, especially beneficial in regions with high inflation rates.
But how do Fintech companies asses the risk of unbanked individuals?
This is perhaps one of the most important questions in Financial Inclusion; since it is one of the biggest reasons banks exclude a large amount of people from using their products and services.
Fintech companies are able to calculate the risk of taking on an unbanked customer by leveraging Big Data and Artificial Intelligence tools that analyze documents such as utility bills, mobile phone usage, and social media as opposed to the documents that are traditionally required.
Conclusion
As technology advances we see more and more Fintech companies taking a bite out of the banking industry by providing products and services to a large underserved demographic. This innovation is one of the main reasons Financial Inclusion is slowly becoming not just a social movement, but also a thriving industry that provides the unbanked with financial tools to improve their life, which have been unavailable to them in the past. In time, these tools will cause a dramatic improvement in the lives of millions of people worldwide.
EMIDA Technologies is a fintech company offering digital access to millions of underbanked consumers via its 36-country retailer network. Our products & services enable financial inclusion for 3MM monthly users through 50K+ points-of-sale offering a cash onramp solution. Additionally, we offer IT cloud-based services, SAS & ISO options, and a mobile network. Learn more at Emida.com.
*Source: FDIC 2021 survey : https://www.fdic.gov/news/press-releases/2022/pr22075.html#:~:text=National%20Underbanked%20Rate%20and%20Use,and%20services%20during%20the%20year.
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EMIDA Technologies is a fintech company offering digital access to millions of underbanked consumers via its 36-country retailer network. Our products & services enable financial inclusion for 3MM monthly users through 50K+ points-of-sale offering a cash onramp solution. Additionally, we offer IT cloud-based services, SAS & ISO options, and a mobile network. Learn more at Emida.com.
