Financial Inclusion: Consumers, Banks, and the Economy

FINANCIAL INCLUSION IS IMPORTANT

The World Bank Group defines financial Inclusion (FI) as providing individuals and businesses access to useful and affordable financial products and services that meet their needs. This includes transactions, payments, savings, credit and insurance – all delivered in a responsible and sustainable way^[1]]. As of 2017, there are approximately 1.7 billion unbanked adults worldwide that need FI in order to participate in the economy.^[2] Specifically, FI enables people to obtain the necessary financing to grow their businesses, and save for major life events, for example. This financing is especially critical for those in emerging markets, where a large portion of the population does not have access to credit cards or bank accounts. According to an EY report from 2017, approximately 200 million micro, small and medium enterprises (MSMEs) do not have access to banking services. In addition, according to the Federal Deposit Insurance Corporation (FDIC), 25% of US households are unbanked or underbanked^[3]. Clearly, there is a largely untapped market with the potential to accelerate the global economy.^[4] In the following sections, we will review how three different stakeholders are affected by financial inclusion –the economy, consumers and financial institutions.

THE ECONOMY

As FI provides a larger population access to financial services and resources, the economy will have a greater potential for sustainable growth in the long run. According to EY, FI will boost the GDP of large developing economies such as India by up to 14%, and as much as 30% in frontier markets, such as Kenya^[5]. In addition, the same report states that the effective inclusion of individuals could generate $24 billion dollars in revenues for the economy, while the reduced credit value gap (CVG) for MSMEs could contribute up to $176 billion dollars. FI can also help impoverished communities make important investment decisions regarding health, education, and small business^[6]. As a direct result, these decisions promote job creation, business expansion, and the reduction of socioeconomic inequality, all of which benefit the economy in the long-term. In Niger, for example, digitized social transfer payments have been proven to shorten the traveling and wait times to receive funds, thus lowering the government’s administrative costs^[7]. In Indonesia, where agriculture is one of the main contributors to the country’s economy, but where there is a shortage of funding, a crowd-investing platform allows farmers to receive capital to grow their businesses^[8]. These few examples illuminate the power of FI services and their ability to grow the economy, particularly in developing countries.

CONSUMERS

With access to a financial account, people no longer need to rely on and transact solely in cash, or use their mattresses as saving cabinets. FI connects people to the formal financial system, making day-to-day living easier and allowing them to build assets, mitigate shocks related to emergencies, illnesses, or injuries, and make productive investments^[9]. Financial education, consumer protection and financial inclusion are essential ingredients for both the empowerment of individuals, particularly in the context of the changing pace of technological progress, and the advancement of digital financial services^[10]. Many of the financially excluded adults and businesses around the world lack the necessary financial information and history required by banks to support lending decisions, nor do they have access to tools to provide these institutions with the necessary KYC (‘know your customer’) documentation. This effectively cuts off their access to bank credit^[11]. And it is important to mention that these issues are not exclusive for developing countries. In 2014, approximately 64 million U.S. consumers did not have sufficient credit histories, to establish their credit scores^[12].

Overall, a lack of credit limits this population’s options when seeking certain financial services, such as applying for a loan, buying a house or choosing auto insurance. Moreover, a lack of credit history can have further consequences on a person’s life, such as affecting employment opportunities and insurance rates.

BANKS

Banks and lenders are considered to be some of the key players for driving financial inclusion. Many financial institutions have made significant efforts to address underserved markets and consumers, and several factors point to the advantages and potential value of targeting this segment. Developing economies are becoming more efficient and vibrant, growing at a much faster pace than established economies, and thus creating a growing consumer base. Accenture estimates that this growth will give rise to $380 billion dollars in new revenue from providing financial services to underbanked individuals and micro-enterprises^[13]. Essentially, FI simplifies transactions by either customizing offerings, innovating channels, or creatively mitigating risks for those less educated^[14]. Also, technological advances make it easier for financial institutions to target the unbanked population, increasing their reach at much lower costs than ever before. Finally, increasing competition between incumbents, challenger banks and fintechs makes it harder for banks to ignore or overlook the potential of this market, leading to more and more resources being directed towards the underbanked population in emerging markets^[15].

Overall, this industry is expected to grow significantly in the coming years, as technological advances in analytics, big data and machine learning allow for better and more cost-effective financial services products. In fact, the total transaction value is expected to show an annual growth rate of 18.2 percent between 2018 and 2022^[16].

WE’RE ON THE RIGHT TRACK!

Although there remains much to be done in the FI space, huge progress has been made in recent years. As of 2017, 69% of adults worldwide now have access to some form of financial account, a significant improvement compared to 51% in 2011^[17]. This can be attributed to many factors, including technological advancements in the banking, lending and payments spaces. Challenger banks, for example, now allow people in remote areas to open savings accounts with the use of a smartphone. In addition, alternative credit scoring allows lenders to assess people’s creditworthiness not only based on their limited financial information, but also based on their social media interactions, mobility and personal character traits through innovative psychometrics. In another example, blockchain-based payments startups are enabling people to send money across boarders safely and without paying exorbitant fees. Moreover, the private sector is working hand in hand with the development community in order to find commercially viable and sustainable solutions to not only promote financial access but also inclusion and usage. As long as the many stakeholders keep working together with this common goal in mind, we can be confident that financial inclusion rates will only continue to increase.

[1] https://www.worldbank.org/en/topic/financialinclusion

^[2] https://finca.org/blogs/financial-inclusion-matters/

[3] FDIC 2017 Report

^[4] https://www.ey.com/Publication/vwLUAssets/EY-innovation-in-financial-inclusion/%24FILE/EY-innovation-in-financial-inclusion.pdf

^[5] https://www.ey.com/Publication/vwLUAssets/EY-innovation-in-financial-inclusion/%24FILE/EY-innovation-in-financial-inclusion.pdf

^[6] https://www.imf.org/en/News/Articles/2016/09/20/sp092016-Financial-Inclusion-Bridging-Economic-Opportunities-and-Outcomes

^[7] http://blogs.worldbank.org/allaboutfinance/what-do-we-know-about-link-between-financial-inclusion-and-inclusive-growth

[8] Nextbillion, 2018

[9] WBG, 2018

[10] OECD South East Asia Report, 2018

[11] https://www.ey.com/Publication/vwLUAssets/EY-innovation-in-financial-inclusion/%24FILE/EY-innovation-in-financial-inclusion.pdf

^[12] https://nclc.org/images/pdf/pr-reports/report-big-data.pdf