From Financial Inclusion to Financial Health: Addressing the Fundamental Barriers to Financial Inclusion – Part 2

Customers should have tools and an offline network that enable them to connect to an online financial services platform in an affordable way. They should also respond to a fundamental requirement: legally exist.


Mobile ownership is widespread among most markets – from 82% in Mexico and 87% in the Philippines to a staggering 93% in Nigeria – and they can be great tools to distribute financial services, as the 270+ mobile money services currently live globally show.

Smartphones in their turn present an opportunity to increase the scope of services offered and improve user experience. Their penetration vary massively across emerging economies though, and is much lower – say, 45% in Venezuela or only 4% in Uganda.

To tackle this issue, a hybrid model could be built. Simple transactions could still be SMS-based, while more complex operations would require access to a smartphone or tablet that the offline network would provide.

As smartphone adoption picks up – it is set to reach 63% of the population of emerging economies in 2020 – the need (and cost) to provide hardware to the offline network will gradually decrease. The migration from an O2O model to a purely (or mostly) online will improve its economics, which will, in turn, attract more competitors, which will contribute to a more efficient market and reasonable pricing for customers in the long run.

Offline network

In cash intensive markets, a network of offline agents is necessary to build the interface between the physical and digital worlds. Banks can be part of the network but, in most markets, sufficient capillarity will only be achieved with non-banks’ support.

Emerging markets showcase several success cases of effective offline networks. M-Pesa, with its >100k cash-in/cash-out agent network (mostly composed of airtime resellers), is a good example. Ayannah from the Philippines has built software to enable >7k retail outlets to become multi-product agents, selling dental and health insurance, but also airtime and online game pins.

Governments have a key role to play to enable other successful offline networks to flourish, by reviewing regulations that might limit the role of non-banks in the distribution of financial products, while maintaining adequate levels of risk management and oversight. Companies should provide their agents with a minimum level of financial literacy as part of their agency force onboarding process to ensure customer protection and transparency on product features and pricing.

Whereas offline networks will remain essential in the coming years, their importance is likely to decrease over time as transactions increasingly migrate from cash-based to electronic, naturally (as economies develop and formalize) or forcefully (as governments implement demonetization plans, such as the recent case in India shows).


Tools and networks are only relevant when interconnected. Adequate mobile network coverage, speed and capacity to cope with increasing data traffic are fundamental.

Today, mobile internet penetration in developing countries is lower than the mobile subscription rate (44% vs. 59%). This difference is explained by two factors: coverage and affordability (discussed later on).

Unfortunately, there is often little incentive for network operators to extend coverage beyond what we see today – building infrastructure might be uneconomical, especially in sparsely populated rural areas. Luckily, governments might frequently turn an impracticable investment into a profitable one:

  • Introducing flexible standards of service could decrease network deployment costs;
  • Promoting shared infrastructure would spread the network deployment investments among operators and decrease its burden to each individual player. Additionally, it could decrease ongoing operational costs;
  • Allowing operators to participate in the provision of financial services could add new revenue streams (see the Safaricom example below), potentially increasing customer lifetime value thus adding incentives to build the necessary infrastructure.

Source: Safaricom Limited H1FY17 Results Presentation, 2016.

The good news is that even in the worst case scenario, providing mobile money is still possible: where internet coverage lacks and operators do not offer financial products, USSD coupled with SIM overlay technology can be used by banks to provide SMS-based, operator-agnostic financial services. Among success cases, one stands up by its scale: China’s F-Road, which has 4.3 million customers in rural areas, processes 32 million transactions per month and partners with 1,100 financial institutions.

Eventually, adding another element of connectivity could increase the efficiency of the ecosystem: an interoperable payments system.

Properly connecting mobile/e-money players goes beyond building technical infrastructure to allow their systems to exchange information. A functional governance system should guide decision-making and enable effective risk management, and efficient business agreements should create economic incentives for players to participate in the system.

Today, most markets present some sort of interoperability, but there is no standard approach. In some countries, non-banks have set up rules to work together, isolated from mainstream financial services providers. In others, market-wide solutions are being built, including both banks and non-banks. BiM, a nationwide, fully interoperable digital financial services platform launched in Peru in 2016 is a great example of what can be achieved when the government, financial institutions, operators, and other relevant players cooperate.

The Level One Project by Bill and Melinda Gates Foundation is another great example – it is working towards a blueprint for an interoperable mobile payments system for developing countries. It would allow multiple use cases (such as P2P, G2C, and B2B) and onboard several digital finance operators – banks and non-banks – under one platform, generating scale benefits, thus lowering costs than existing payment infrastructures. This system would also decrease barriers for new players to entry and access customers, which would in turn increase competition in the market – pushing for increased product innovation, service quality and potentially decreasing costs for consumers.

Source: Bill and Melinda Gates Foundation, The Level One Project Guide, 2015.

Independently of the approach, one fact is clear: improving interoperability is still an ongoing effort worldwide.


Tools and connectivity come at price, and it needs to fit into people’s budgets.

The total cost of mobile ownership is a key factor in predicting mobile internet usage. Increasing availability of cheaper smartphones will contribute to the growth in device ownership, but the affordability of data plans is not following suit.

Fortunately, mobile data prices are gradually decreasing and flexible pricing models are pushing usage, as fixed-term data bundles 'adoption shows. Safaricom has, for example, attributed its 42.7% increase in mobile data revenue (FY15–FY16) to its bundles, which offer 1, 7, 30 or 90-day Internet access.

In addition to data plans, taxation should be revised to decrease total mobile ownership costs – high mobile-specific taxes are all too common in the developing world.

Source: GSMA, The Mobile Economy 2016.


Legal identity unlocks access to civil rights, social protection systems, and financial services. However, in a world with 2.4 billion people lacking a government-issued identity and in the midst of a refugee crisis where millions are undocumented and many face statelessness, a huge identity gap has been formed. How does one close it?

Traditional, paper-based identification systems have limited outreach. Technology, from biometrics to distributed databases, can add efficiency and security to the identification process and make it digital, and thus more scalable.

India has taken the lead by implementing the world’s largest biometric identification system ‘Aadhaar,’ issuing e-IDs to almost 1.1 billion people. It is part of IndiaStack, an ambitious project that aims at providing presence-less, paperless and cashless service delivery to Indians. Aadhaar’s unique identification number can already be used for example to receive welfare benefits and open bank accounts.

Source: IndiaStack, IndiaStack. Towards a presence-less, paperless, and cashless service delivery, 2016.

Aadhaar’s widespread penetration and multiple use cases are still an exception rather than a rule in the emerging world.

It shows that technology is an enabler, not an agent of change. Strong political will, supportive legal frameworks and commitment of resources by local governments and international development agencies are paramount to provide the world’s vulnerable population with an official identity and its associated rights.

Building an appropriate regulatory environment

If the cost of compliance for a low-income, low-revenue client is the same as for a high-income, high-revenue one, incentives to bank the un(der)bank will be limited. Governments need to implement proportionate regulation to tackle this issue.

Several jurisdictions already grant different sets of licenses according to the scope of services and/or value of the balances/transactions allowed. Tiered KYC adoption is also growing.

Examples include of proportionate regulatory frameworks in the emerging world include:

  • India: Has recently rolled out a payments bank license, enabling the emergence of new digital financial services providers, such as Paytm (tech) and Airtel (telecom). They cannot issue loans or credit cards but can provide other services the population currently lacks of, from current and savings accounts to debit cards.
  • Mexico: Has a comprehensive tiered KYC system and an innovation-friendly regulatory framework and is further advancing by proposing a FinTech law that will give regulatory clarity for innovators. The law is expected to be approved in the next few weeks.

Besides proportionate regulation, top-down support for innovation is also key. Luckily enough, regulators are increasingly becoming more proactive in their approach to FinTech: sandboxes are being rolled out in several countries – from the UK to Thailand – to test and incubate new technologies to develop the financial sector and promote financial inclusion.

Huge economic opportunity, profitable business models

Financial inclusion is a stepping stone for overall economic development. It has the potential to boost emerging economies by expanding economy formalization and tax revenues, increasing productivity and grasping the benefits of the multiplier effect of digital money. It would also improve business dynamics and generate a significant number of new jobs across different sectors. It could, by itself, increase emerging markets’ GDP by 6% in 2025.

Financial services’ credit books could increase by as much as USD4.2 trillion, and operating costs could decrease significantly. This would ultimately lead to improved unit economics, and profitable business models to serve the currently un(der)banked.

Eventually, promoting financial inclusion should not conflict with business interests, provided tailored, technology-intensive business models are in place, and where governments act as enablers.

Source: McKinsey, Digital Finance For All: Powering Inclusive Growth In Emerging Economies, 2016.

Going beyond financial inclusion

Financial inclusion is a key goal, but not the end game. It needs to be supported by strong educational efforts so that the newly banked avoid the evils of irresponsible spending and uncontrollable debt.

Financial education is not an option – it is a must. It will enable the world to build the next generation of customers who are financially included, financially healthy.

Note: Carla is a smart, hard-working mother of three that I had the pleasure to meet a couple of years ago in Sao Paulo, Brazil. She inspired me to understand more about financial inclusion and its impacts on social development.

Sources and additional reading:

  • Safaricom Limited H1FY17 Results Presentation, 2016