November 21, 2016
As shocking as it may seem to the developed world, 39% of the world’s population, mostly comprised of the population in developing countries, does not have a bank account. Despite the increased adoption of non-cash forms of transactions (cards) with the volume having grown by more than 10% to reach ~426 billion in 2015, the circulation of cash has increased only slightly across multiple markets during the past five years. The latest World Payments Report suggests that in Europe and the US, cash-to-GDP ratio grew 4.4% and 3.9% respectively during 2013–14.
Source: Small Merchants, Big Opportunity; World Bank Financial Inclusion Database 2015
Account penetration, which Gallup defines as having an account at a formal financial institution or a mobile money account, is reported to be highly unequal across regions. It is almost universal in high-income Organization for Economic Cooperation and Development (OECD) economies (94%), while slightly more than half of adults in developing economies have an account.
The level of disparity was well demonstrated by the Center for Financial Inclusion, indicating a vast gap between particular regions.
Source: Mapping the Invisible Market, Center for Financial Inclusion
Although the US is in the league where the scale of the problem is not as severe as in other parts of the world, in 2015, in 7% of US households, there was no one with a checking or savings account. A report by FDIC published at the end of October, suggests that ~15.6 million adults and 7.6 million children in the US were unbanked in 2015.
In addition to poor account penetration statistics globally, among adults who do have an account at a formal financial institution, 15% (~460 million people) reported making no deposit or withdrawal in 12 months. The rate does not seem to be too low given that only 23% of debit card owners around the world use a card to make payments (in low and middle-income countries, the rate is at 14%).
Not only is there a vivid regional disparity in bank account penetration and disappointingly low debit card usage statistics, there is also a long-standing gender gap in account ownership. As reported by Gallup, 42% of women are unbanked, compared with 35% of men.
Access to the formal financial system is also stratified by wealth. Half of the unbanked worldwide – 1 billion adults – belong to the poorest 40% of households. However, the organization notes that in developing economies, the gap in account ownership between adults living in the poorest 40% of households and those living in the richest 60% narrowed by six points in the past three years. But this decrease stemmed overwhelmingly from rising account ownership among the poor in East Asia and the Pacific, while in all other regions, the gap remained about the same.
Global financial institutions invest significant resources into closing tremendous gap in access to banking. Mastercard and Visa, along with other financial institutions, shaped a coalition of partners last year to reach universal financial access by 2020.
The coalition will focus efforts on 25 countries (mostly African), where 73% of all financially excluded people live. India and China have the largest share of unbanked people. Together, they account for some 32% of them. The rest of the top-priority countries include Bangladesh, Brazil, Colombia, Cote d’Ivoire, DRC, Egypt, Ethiopia, Indonesia, Kenya, Mexico, Morocco, Mozambique, Myanmar, Nigeria, Pakistan, Peru, the Philippines, Rwanda, South Africa, Vietnam, Tanzania, Turkey and Zambia.
There are also regional alliances that are working on narrowing the financial access gender gap. Recognizing that commercial banks can and must play a vital role in closing the financial access gender gap, the Global Banking Alliance for Women (GBA) made a commitment in April 2015 with a subset of its members – Banco BHD León of the Dominican Republic, Banco Pichincha of Ecuador and Diamond Bank Plc of Nigeria – to provide financial access to 1.8 million previously unbanked women in Latin America and Africa by 2020.
They are much more vital to the global ecosystem initiatives aimed to provide access to the formal financial sector to the excluded. Technology companies significantly contribute to the goal, working with existing conditions in regions like Africa. One of the examples is the DigiTally project, which allows making mobile payments even in areas where their cell phone is unable to connect to a network. According to The University of Cambridge, DigiTally is an overlay payment scheme for use on mobile phones, whose goals are to extend mobile phone payments to areas with poor connectivity and reduce transaction fees. DigiTally achieves this by using thin, cheap electronics that can be stuck over existing SIM cards and inserted into phones.
To transfer money from one phone to another, the sender and receiver swap eight-digit codes generated by the overlay device, as explained by the New Scientist. Each plugs the other’s code into their own device to confirm that the transaction is correct. If both codes match, the payment is authorized. When the phones next connect to the network, their transaction history is uploaded to the servers of the mobile payment system used.
National ID systems also contribute significantly to the matter of financial inclusion as they allow ‘invisible’ groups of population to become visible to the formal system. For over a fifth of the world’s population, the inability to prove their identity means the inability to access financial services, the inability to go to school and receive education, the inability to access health and social welfare benefits among other hardships. Interestingly, countries with the most advanced solutions for national ID systems are mostly from the developed world. Some notable examples are Cambodia's Khmer ID, India’s Aadhaar ID, Indonesia’s e-KTP program, Malaysia’s MyKad, Pakistani CNIC by NADRA, Philippines’ UMID and more. Governments around the world also actively explore national biometric identification programs for the same purposes.