According to reports from Mastercard, approximately two billion people around the globe are “unbanked.” This means they lack access to a bank account or other basic financial services. This is a conscious choice in some cases, but for the majority, such services are simply not available.
Being unbanked is closely tied to lower incomes; consequently, it’s more common in regions where poverty is more pronounced. In sub-Saharan Africa, for example, only one in three adults has access to banking services. A survey performed in Latin American showed that over 30% of the population lived in poverty, and nearly half the population was unbanked as of 2017.
Financial struggles can also be found in the US and Europe, though. Nearly 45 million live below the poverty line in the United States, while a 2018 report showed there were close to 110 million residents of the EU-28 at risk of poverty.
Trying to increase access to banking services should be viewed as a market opportunity for financial institutions. It’s also a chance to make a positive impact on poverty worldwide by accelerating the movement to what economists call “financial inclusion.”
Financial inclusion helps level the playing field between different income demographics, helping both individuals and families improve their overall financial health. At the same time, inclusion can offer substantial long-term benefits to financial institutions that move now to provide these services.
Financial Inclusion and it’s Positive Global Impact
The opportunity to access affordable financial services can open doors for individuals, households, and communities. Being unbanked, on the other hand, has the opposite effect; for instance, the Inclusion Foundation reports that lack of access to basic banking services cost UK citizens up to £500 a year.
Even the most common banking benefits, such as the ability to use debit cards, access ATMs, or pay by check, are impossible without a bank account. Thus, financial institutions that provide services to previously unbanked households offer more than mere convenience: they empower those people to make their own financial decisions and invest in their futures.
For financial institutions, this creates an expanded customer base with built-in upsell possibilities. New clientele could take advantage of safer and less expensive services without needing to rely on untrustworthy sources.
Financial inclusion seems like a win for all parties. So, why aren’t we making more progress?
Technology is advancing at a continuous and remarkable speed, making the possibility of financial inclusion more real than ever before. We have the global potential to create financial systems that benefit people across all levels of the income spectrum. That being said, we still need to address at least three primary challenges.
#1 Formal Identification
The lack of officially recognized identification documents can be a formidable obstacle to the unbanked. Opening a bank account in nearly any nation requires a documented, verifiable identity, and with good reason. Proof of identity helps prevent both money laundering and the funding of illegal transactions.
This is not problematic everywhere. In the US, for example, identification validation is a given; citizens are issued a social security number at birth, and that serves them the rest of their lives.
In other parts of the world, however, acquiring such identification is often a complex and expensive process, and may be less useful in day-to-day life. For comparison, a US social security number not only allows bank access, it’s also the path to a driver’s license, a passport, the ability to vote, government benefits, and more. In underdeveloped nations, these factors often do not apply.
Financial institutions should collaborate with private foundations and government offices to develop a system that allows for easier access to ID documents. In turn, this would open the door to increased financial inclusion.
#2 Education and Trust
To serve the unbanked, financial institutions must offer products and services suited to their needs. Having a bank account is only the first step on the path toward inclusion, though. Access to banking benefits is pointless if people don’t understand why those benefits are needed.
The key to achieving true financial inclusion is improving financial literacy. Over 350 million adults in developing countries have at least one bank account, yet still opt to use cash for day-to-day transactions. Until people are fully educated on how a bank account can open doors to financial welfare, financial inclusion will be nothing more than a good intention.
The issue goes beyond basic financial education. Technological advancements can serve as cornerstones of an expanded financial inclusion. That said, many consumers—particularly those with less financial experience—demonstrate little or no faith in either the reliability or the security of these new tools.
Again, education is needed here. There is also an opportunity for governments to step up, though, establishing clear guidelines and regulations much as they did with the US’s Fair Credit Billing Act. This could give consumers confidence that they understand product benefits and are protected from bad actors.
#3 More Providers
While some form of government support is necessary, inclusion will not happen without an organized push from both private groups and major financial institutions. The market demand is there; we need more players to get into the game.
This is not without its challenges. Remaining fiscally sound while catering to low-income clientele can be tricky. Financial institutions can counterbalance this by looking for innovative ways to optimize revenue. By employing digital channels, for example, providers have an opportunity to reach more customers at lower cost in any number of underdeveloped regions.
Leveraging digital channels won’t completely eliminate upfront costs, of course. Banks may need to invest in traditional brick-and-mortar branches in new areas to help build trust and confidence. Fortunately, the lower costs associated with digital operations can help offset initial expenditures.
FIs Have the Initiative
The current economic climate offers a unique opportunity for banks and other financial institutions to grow their revenue through financial inclusion. Providers will have to move quickly, though. They will require flexible strategies that can adapt to a rapidly changing market in order to take full advantage of the situation.
Providers must recognize the benefits of catering to the unbanked and how it will positively impact the global picture of financial inclusion. Inclusion has the potential to significantly influence overall poverty and pave the way to a wider, more secure, and more profitable customer base. To reach that point, however, financial institutions must recognize the benefits of assisting this vast demographic, and act accordingly.