An introduction to Financial Inclusion
Financial inclusion is defined by the World Bank by three main characteristics. 1. Individuals and businesses must have ‘access to useful and affordable financial products and services’; 2. These products and services must meet the needs of the individuals and businesses; 3. They must be delivered responsibly and sustainably. This includes transactions, payments, savings, credit, and insurance [1]. Thus, the first step to financial inclusion often is having a bank account.
Financial inclusion is only a long-term goal in some countries. As seen in Fig. 1, many countries have more than 80 % of their population with access to financial services. However, even as of 2017, other countries do not exceed 40%. In the latter, the main obstacles to accessing a bank account are often the costs and the distance to the bank itself. Other reasons include a lack of documentation and distrust in the financial system [2]. Financial inclusion can also tell us much more about the systemic inequalities of a country.
Fig 1: Adults with a bank account (% of country population) , 2017, Global Findex database [2].
As seen in Fig. 2, twice as many of the unbanked people live in the poorest households. Gender inequality is also reflected in the number of unbanked people worldwide (see Fig. 2). This has a huge number of consequences for sustainable development, in terms of equality of opportunities or financial safety. Hence, it must be addressed to promote equal opportunities.
Fig 2: a) Unbanked adults disaggregated by gender (%) and b) by Unbanked adults within the quintile economy income (%), 2017, Global Findex database [2].
To that intent, in 2015, the United Nations integrated Financial Inclusion in 13 of its 17 2030 Sustainable Development Goals [6]. Indeed, having a bank account improves the safety of people as it prevents them from carrying cash. Personal accounts also have positive individual behavioral consequences [3]. Additionally, financial institutions and the private sector can also benefit from financial inclusion, to improve tax collection, pay employees, reach new clients, and many more [3,4]. Importantly, promoting financial inclusion also provides a unique opportunity for innovation.
Fintech, or Financial Technology, is the use of innovative technologies to deliver financial services [9]. The fintech sector has opened the pathway for innovation to create new financial services within the context of the 4th industrial revolution. Fig. 3 shows the number of unbanked people that possess a mobile phone. ‘Mobile money’ plays an important role in fragile and conflict-affected economies. Moreover, it also boosts account ownership in parts of Sub-Saharan Africa. For instance, M-Pesa in Kenya enabled populations to pay and receive money with their phones with the use of only the mobile service. Sweden’s Minister of Finance, writing for the World Economic Forum, gives the example of a woman in Tanzania where the technology spread: “A woman in Tanzania, working on a local market, told me how the M-Pesa system for mobile financial services has transformed her life. Before it, she had to walk for one and a half hours through rough terrain with her cash in her pocket to get to the lake and buy fish. When she arrived, the fishermen often said that the catch had been unusually low and that prices unfortunately were very high. With no alternative, she had to pay up. Today she can call the fishermen and haggle over prices, transfer payments via her mobile and send a boy for the fish. No longer does she have to walk alone for one and a half hours. Her money is safe online and she can pay securely; she can spend it, as women so often do, on the health and education of her children.”. All this is possible without the conventional WiFi, it only requires mobile service, which is readily available in most of the countries [4].
Fintech innovations also offer the opportunity to lower the prices to open an account, and the distance to open accounts. The distance to a bank account in Kenya used to be around 9.2 kilometers, now the distance to an M-Pesa agent is around 1.4 kilometers [8]. The technology has spread through the whole of Sub-Saharan Africa, the share of adults using similar technology has doubled to 21 % since 2014 [3]. How did M-Pesa become so successful in such a short amount of time?
Fig 3: Unbanked adults owning a mobile phone, 2017, Global Findex database [2].
To be successful, M-Pesa needed a lot of support. This was especially relevant at the beginning of its operations as most traditional financial institutions ignore unbanked customers because of their lower-income. This leads to unprofitable business models [5]. Hence, Kenya’s government and the central bank had an important role in convincing banks that telecom operators were not competitors but collaborators. Communication between stakeholders was also essential as they all traditionally worked in different frameworks. International collaboration, such as the help of the Bill & Melinda Gates Foundation, was crucial [4]. So, what comes next?
One of the fastest-growing fintech regions in the last few years has been Latin America. In the second quarter of 2019, fintechs secured $481 million outpacing for the first time the sums raised by both Chinese and Indian fintechs in the same amount of time [7]. This makes it an ideal region for the future of fintech. Stay tuned as we explore fintech trends in Latin America in our next article!
[1] World bank IBRD-IDA website: https://www.worldbank.org/en/topic/financialinclusion/overview [2] Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess, 2018, The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution, Washington, DC: World Bank. [3] “Widespread mobile phones can deliver banking to the poor: World Bank”, The Economic Times, 19 Apr 2018. [4] Anders Borg, “Why mobile money is key to financial inclusion”, World Economic Forum, 01 Mar 2016 [5] Stephen Greer, Juan Mazzini, 2018, Financial Inclusion in Latin America: A Survey of Financial Institutions, CELENT [6] 2018, Igniting SDG Progress Through Digital Financial Inclusion, UNSGSA, Better Than Cash Alliance, UNCDF, World Bank [7] Mekebeb Tesfaye, “LATIN AMERICA FINTECH LANDSCAPE: An inside look at 5 of the most innovative regions propelling the LATAM fintech market to surpass $150 billion”, Business Insider, Dec 30, 2019 [8] Sarah Logan, “M-Pesa has completely transformed Kenya’s economy, this is how…”, CNBC Africa, 4 Jan 2017. [9] Bernard Marr, “The Complete Beginner’s Guide To FinTech Everyone Can Understand”, Forbes, 10 Feb 2017