How Technology Aims to Make Banking More Accessible
Basic financial services make it easy to pay for day-to-day needs, fund goals, and run a business. But over two billion adults worldwide lack access to essential financial tools. Financial inclusion strategies aim to change that, and technology makes it possible to make an impact on a massive scale.
What Is Financial Inclusion?
Financial inclusion is a movement to ensure that individuals and businesses have access to affordable and effective financial services. Services range from basic transaction accounts like checking accounts and include additional services like credit and insurance.
PayPal CEO Dan Schulman describes three essential aspects of modern financial inclusion:
- Universal access to digital financial systems
- Safe and secure transactions which let consumers and businesses operate with confidence
- Affordable participation in the economy for all (make and accept payments, get loans, save for future goals, help the community, and more)
It may be easiest to understand financial inclusion by examining the problems that financial inclusion solves. Without high-quality financial services, individuals and businesses face significant challenges.
No bank account: Without a bank account, individuals typically turn to “alternative financial services.” Those services may have higher fees than regulated institutions, and they typically don’t offer the same consumer protection (deposit insurance and protection from fraud and errors, for example). Living without a bank account requires time-consuming legwork to get funds and pay bills in person. Plus, accounts provide a safe place to save for the future. But with technology, consumers can bank, pay, and get paid from anywhere at a very low cost.
Limited access to credit: If you have high credit scores, borrowing is easy. But some people have thin credit or bad credit, and some nations don’t use credit scores. Without easy access to loans, borrowers rely on informal lenders, which may charge high (or predatory) rates and fees.
The informal economy: In many parts of the world, especially rural areas, cash rules. Businesses are unlikely to accept plastic or electronic payments, and storing cash (instead of depositing it in a bank account) is risky. Businesses find it hard to build assets for expansion, and they may have a limited choice of trading partners—suppliers who accept cash and customers who pay with cash.
Obstacles and Solutions for Financial Inclusion
Financial inclusion strategies can pave the way for low-income individuals and budding businesses to participate in the mainstream economy—on favorable terms.
Technology plays a key role in everything from providing information to delivering the products people use, especially for populations that have traditionally been excluded from the banking system. For example, Kenya introduced M-PESA, a mobile payment system, in 2007. By 2016, 90% of the adult population was using the service. And customers don’t just send money to friends—they receive wages electronically, pay bills, and get loans. Kenyans still use cash, but especially for the poor, M-PESA creates possibilities that didn’t previously exist.
Financial literacy: To some degree, educating people about financial topics helps them use higher-quality products and make better decisions. Financial literacy helps people understand basic financial concepts (like compound interest), avoid mistakes, and develop a culture of savings.
Service availability: Especially rural areas, quality financial services are hard to find. But technology can help make services available, even with limited infrastructure. Mobile phones can help consumers and businesses transact business as long as cellular service (and possibly a battery backup) is available.
Mobile wallets: Technology is a critical piece of large scale financial inclusion. Mobile wallets are an alternative to cash, which is inefficient, risky to carry and store, and impossible to track. A basic mobile wallet can store value and make small peer-to-peer transfers. But more evolved systems enable a variety of bill payments and business-to-business payments.
Distrust: For financial inclusion to be successful, individuals and businesses need confidence in providers. If legitimate consumer protection is not yet available, it needs to be developed—and explained to the public. Financial institutions (banks, lenders, and insurance providers) also need to be transparent about fees and avoid nasty surprises for customers.
Affordability: Banks are notorious for fees. For those with no extra money to spare, a monthly fee or overdraft charge can empty an account and lead to even more fees. Again, technology is the most likely solution, as new customers can join service at little or no marginal cost to a mobile wallet provider. Prepaid debit cards are another alternative, and some provide FDIC insurance on funds in your account.
Eligibility: Some people can’t open an account at a traditional bank or credit union—even if they want to. Regulatory requirements like Know Your Customer (KYC) require banks to gather the information that individuals might not have available. For example, opening an account at most U.S. banks requires a valid government-issued ID. Some propose increased financial inclusion by using tiered KYC rules. For example, you might be allowed to open a low-risk account (that limits how much you can save, spend, and transfer each month) with minimal documentation. But to work with higher dollar amounts, you’d need to satisfy KYC and anti-money-laundering (AML) rules.
Access to credit: It’s hard to get a loan unless you have a high credit score, easily documentable income, or collateral to secure a loan. That leaves much of the world’s population unable to borrow. But financial inclusion initiatives often aim to create credit reporting agencies and expand their reach. What’s more, microlending provides access to funds for small businesses worldwide—at an affordable rate.
Insurance: When disaster strikes, the financially excluded rarely have sufficient insurance in place. To change that, insurers are developing simplified offerings that are easy to work with. Once again, technology is critical to helping insurers serve low-income customers on a large scale. Customers need the ability to enroll on a mobile device and make small premium payments—while remaining profitable for insurers.