June 7, 2016
Even in 2016, the matter of a simple access to formal financial services is extremely relevant. Given that there are around 2 billion working-age adults globally (38%!) that do not use formal financial services, the global financial services industry has a long way to go in democratization and reach. However, emerging FinTech could outrun banks and become a solution for those 2 billion as well. Another data point, provided by the World Bank, is even more horrifying – 73% of the world’s population is unbanked.
It would seem illogical that in the days of augmented reality, advanced AI, IoT and booming FinTech ecosystems around the world, there is still a place to leave out such a significant part of the world's population.
Moreover, it’s not just individuals – there are regions where businesses (as paradoxical as it sounds) are financially excluded. More than 200 million formal and informal micro, small and medium enterprises (MSMEs) in developing economies are either unserved or underserved in terms of their financing needs.
But however dramatic it looks, the situation is certainly improving and between 2011 and 2014, 700 million people became account holders at banks, other financial institutions or mobile money services providers, decreasing the number of financially excluded individuals by 20%, from 2.5 billion to 2 billion adults.
But let’s pay closer attention to a particular country – the US. One would assume the developed world has fewer issues with the underbanked and unbanked. Unfortunately, it’s not quite the case. A month ago, the World Bank has published a paper on the payment aspects of financial inclusion with insights on the underbanked households of the US.
The data provided by the organization suggests that in the United States, 16.7 million adults or 6.7% of the adult population (16+) were unbanked in 2013 and an additional 50 million adults (20% of the adult population) were underbanked.
In the interview with the LTP team, Max Haynes, CEO of PaySwag, commented on the current situation with banking for the underbanked, To put the problem into perspective, unpaid traffic fines have left 4.2 million Californians with suspended driver’s licenses, $4.9 billion has been lost due to unpaid care in American hospitals, and the default rate for subprime auto loans has left a $250 billion deficit for our country.
Without debit or credit cards, the underbanked have limited methods of payment, often relying solely on cash transactions. In the current collections environment, the process for making cash payments for utility bills, municipal fines or the repayment of loans often involves waiting in hour-long lines at administrative offices, an onslaught of additional fees, and all around inefficiency.
Reasons for not having a bank account
The research indicates that unbanked households in the United States remain out of the banking system for mainly two groups of reasons: economic and attitudinal.
A majority (57.5%) of unbanked households reported not having enough money to keep in an account or to meet a minimum balance as one reason they did not have an account, and slightly more than one-third (35.6%) of all unbanked households reported this to be the main reason, the World Bank reports.
Interestingly, roughly for one in three (34.2%) unbanked households the reason to not have a bank account is their dislike of or distrust in banks. Moreover, slightly more than one in seven (14.9%) unbanked households reported it to be the main reason for staying away from the banking industry.
Further, almost one in three unbanked households (30.8%) reported high or unpredictable account fees as one reason they did not have accounts. This is the main reason for ~13% of unbanked households.
A particular insight provided in the paper gives hope that economic factors can be a strong incentive in inclusion in the banking system. It appears that almost 18% of previously banked households were more likely to say high or unpredictable fees were the main reason they were unbanked compared with households that never had an account (~10%).
Historically, banks and other financial institutions have found it difficult to capture the unbanked and underbanked segment due to constraints in resources and in-house capabilities. With the rise in technology and mutual collaboration among players from different industries, we are now finding newer ways to approach the problem of financial inclusion. One of the crucial success factors for financial inclusion in the US is the core technology being implemented. The way the overall planning for implementation is done plays even a greater role itself.
The optimum solution would be a combination of numerous local provider ecosystems that eventually reach all citizens of a country and will comprise a large number of front-end entities trusted by the community such as banking agents, cash-in/cash-out outlets or microfinance institutions; a payment infrastructure that links these institutions to the broader financial system; and a smaller number of well-capitalized and regulated entities that hold and manage the financial risks that the more inclusive system has originated.