March 3, 2016
Financial inclusion is one of the most important and complex problems that is often aimed to be solved by FinTech. As surprising as it may seem, in 2016, when the financial services industry is as hot as it has ever been, 2 billion people don’t have access to formal financial services and 50% of women globally are financially excluded. These are quite dramatic numbers for the year when FinTech is on the rise with solutions for almost anything.
We strongly believe that financial inclusion is one of the keys to a prosperous society. The developing world is the one most suffering from financial exclusion and the one with endless opportunities for the brave ones to make a change.
However, not only businesses but also the governments must take actions to facilitate financial inclusion. As it has been a widely discussed topic, there are six important pillars often mentioned to be able to significantly boost financial inclusion in the developing world.
Financial Access and Literacy
Financial literacy is extremely important for two reasons. Firstly, it boosts the usage of financial services and secondly, it allows making the right choice for a sustainable financial future.
Access itself is not enough. Even if FinTech was able to provide access to 2 billion people that currently don’t have access to formal financial services, it wouldn’t make a big difference if those people are not using the services. According to Asia Foundation's publication last year, in developing countries, around 10% of adults with a formal account are not making deposits or withdrawals in a typical month. For comparison, in developed economies, the same statistics is at a 2% level.
To use financial services, the population needs to be educated about it. It could be challenging for people to use the service if it is too complex. Financial literacy is also an important cornerstone for the next pillar of financial inclusion – consumer protection. In under-digitized countries with the lack of AI application and online marketplaces, financial services are mostly promoted and sold by financial agents. The lack of financial literacy of the population provides complete power to the agents to push the services in a manipulative way.
The main target for financial education should be youth. Financially educated young people in the future will be able to make sustainable financial choices, which will have a positive impact on a society.
One of the reasons widely mentioned by global financial institutions reporting financial inclusion issues is related to financial identity. Poor population in the developing world often doesn’t have a formal financial history, or even financial identity (not mentioning that some don’t even have identity documents).
In fact, globally, there are 2.4 billion people without an official identification document. This is an especially big problem for the female population. Nearly a fifth of unbanked women don’t have an account because of the lack of documentation along with other reasons. India’s government has demonstrated a way to deal with it – to create tiered documentation requirements to open small accounts and a digital financial identification system.
There are certainly ways to establish a financial identity, one of which is suggested to be alternative information collection. In the US, there are already FinTech companies that are offering alternatives to FICO scoring. The same type of financial identification can be built for the developing world. Alternative data (utility payments, cell phone bills and rental and remittances payments) can create a financial identity to abolish the obstacles for the population to use financial services.
Biometrics can also play a vital role in establishing financial identity. Major financial institutions are already piloting biometrics for different purposes. Creation of a financial identity can become one of the purposes of biometrics when there is no other data available. Biometrics can also improve the usage of financial services as they are easier to use for the financially illiterate and the poor.
With the smartphone revolution, the developing world has moved a step closer to financial inclusion. Challenger banks/neo-banks represent an opportunity for the underbanked population to access financial services they weren’t able to access with traditional banks.
Mobile technologies made it all possible and democratized banking for the LATAM region. Mobile banking is especially beneficial for Africa where mobile money could significantly improve the livelihood of the poor.
Financial services such as cash deposits and withdrawals, third-party deposits into a user account, retail purchases, prepaid airtime fueled by cash and other services have a much higher adoption potential with mobile.
The numbers prove the potential. By 2019, 73% of Chileans will have smartphones; in Mexico, that number is 70%. And here is the most important part: while mobile penetration is growing, the number of underbanked is not changing significantly. The growing smartphone user base with stagnating stats of the underbanked population is a sign that it is a great opportunity to facilitate financial inclusion for challenger banks.
Alternative Forms of Banking
Challenger banks represent an alternative way to bank the population. Another way to bank the population in developing countries could be through branchless, agent-powered banking. Established and spread points of contact with population can serve as branches (post offices, retail commercial outlets, kiosks, pharmacies, etc.).
Microfinancing for Individuals and Micro-, Small- and Medium-Sized Businesses
Microfinancing is one of the forces that can significantly impact financial inclusion in a positive way. MFIs are an extremely viable alternative to traditional bank loans, which the poor population or family-operated small businesses can’t afford.
MFIs have seen significant growth as well as a boost in its customer base. Top MFIs are in Bangladesh (ASA, Jagorani Chakra Foundation, Grameen Bank, Bangladesh Rural Advancement Committee, etc.), India (Bandhan (Society and NBFC), Microcredit Foundation of India, Saadhana Microfin Society, Grameen Koota, etc.), Brazil (Banco do Nordeste), Colombia (Fundación Mundial de la Mujer Bucaramanga, Fundación WWB Colombia – Cali, Consumer Credit Union Economic Partnership, etc.), Morocco (FONDEP Micro-Crédit, Association Al Amana for the Promotion of Micro-Enterprises Morocco, Fondation Banque Populaire pour le Micro-Credit, etc.), Ethiopia (Amhara Credit and Savings Institution, Dedebit Credit and Savings Institution, etc.) and Mexico (Banco Compartamos, S.A., Institución de Banca Múltiple).
However, with all the benefits microfinancing brings to developing countries, there are still certain drawbacks. Some of the issues mentioned with regard to MFIs in the developing world are related to harsh collection practices that have a traumatic impact on families. MFIs also face a problem of high transaction costs as they have to move small funds for a large customer base.
Consumer security is especially important for the developing world where the level of financial literacy needs a significant improvement. While financial education is being rolled out in developing countries at a different pace, it’s important to protect financial services consumers from fraud related to lending, undisclosed information and privacy violations.
Consumer security can be an obstacle to the economic growth and development of the financial services industry if measures are not taken to build adequate infrastructure for efficient dispute settlement.
Governments should pay extra attention to data protection and improve visibility and the ability to compare the services. Transparency, fairness, responsibility and fair recovery practices are considered as some of the most important elements of consumer security.