Financial Inclusion 101

Financial inclusion is expected to spread even more as new FinTech solutions are entering markets across the world. What is financial inclusion? How did it start and how is it being spread?

What is Financial Inclusion?

“Individuals and businesses have access to useful and affordable financial products and services that meet their needs”- the definition of financial inclusion according to the World Bank.

A staggering number of 2.5 billion adults (*) still do not have access to formal financial services around the world. Financial inclusion appeared as an important global policy agenda in 2004 when the correlation between the accessibility to financial services and poverty reduction was first recognized. It attracted more attention globally in 2006 when Consultative Group to Assist the Poor (CGAP), an independent think tank promoting financial inclusion in developing countries, officially introduced the concept of “Inclusive Financial System.” In recent years, governments and international institutions have been actively pursuing FinTech-enabled initiatives to promote financial inclusion.

*Estimated by Financial Access Initiative
http://www.financialaccess.org/blog/2015/6/16/new-global-estimate-reveals-that-half-the-world-is-unbanked?rq=unbanked

Financial Inclusion and New Technologies

Perhaps the best-known financial inclusion initiative is Grameen Bank, a micro-lender founded by Nobel Peace Prize winner Muhammad Yunus. Another well-known example is M-PESA, an African-based money-transfer network that utilizes text messages sent via mobile phones. M-PESA utilized the existing mobile phone network to increase the accessibility of financial services among unbanked population. With M-PESA, users can execute financial transactions such as deposits, withdrawals, transfers and payments via text messages even if they do not have bank accounts. More than 70,000 local supermarkets and business owners act as agents, handling physical transactions of cash. With M-PESA, users can pay utility bills, receive their paychecks, and pay at restaurants and stores as most retailers have the cash registers equipped with M-PESA. Financial inclusion is expected to spread even more as new FinTech solutions are entering markets across the world.

More on Financial Inclusion and initiatives for unbanked population:
“FinTech is key driver of financial inclusion”
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5 Q&As on Financial Inclsuion

NRI’s Ryoji Kashiwagi, senior researcher and FinTech specialist, has shared his thoughts on most common questions regarding financial inclusion.

Q：What are the major differences in financial inclusion in emerging markets and developed countries?

The largest difference is whether or not the financial infrastructure already exists. Developed countries are equipped with financial infrastructure the group who does not generate enough revenue (and subsequently may have the highest infrastructure maintenance cost) are overshadowed. The extension of financial services to this group of people with new technologies at low cost serves as financial inclusion in developed countries. In the meantime, in developing countries where financial infrastructure does not exist, the important method for financial inclusion is the development of new financial network with the existing networks, such as mobile networks. In addition, biometric authentication systems as well as blockchain may still be utilized in countries with low literacy rate and lack of legal, court and asset preserving system.

Q: Why is FinTech a key driver of financial inclusion? What are the greatest opportunities and/or difficulties?

FinTech not only generates higher-level functions/services but also lower cost services within the conventional financial infrastructure. Conventional infrastructure is typically much more expensive, and by lowering the cost of financial services, FinTech is contributing to financial inclusion.
Growth opportunity exists in 2.5 million unbanked populations across emerging markets. Financial services can replicate the agility in which mobile phone services rapidly spread across developing countries in recent years.. However there are some obstacles to implementation, including interference from underground organizations as well as corrupted government that is unable to enforce the policies promoting financial inclusion.

Q: In your view, what are the most effective ways to increase the banked population?

Law enforcement is most effective. In India, the law requires banks to provide bank accounts for customers with no account balance. However, considering how expensive conventional bank accounts are, today it is often more realistic to use mobile payment accounts instead.
The investment in the creation pf the infrastructure is equally necessary as marketing to and educating the population on their financial options. Educational activities are particularly essential as these bank accounts won’t be used without any awareness campaigns to build interest within the population.

Q: Are these financial inclusion initiatives being driven more by governments or private sector institutions?

It is clear that their governments are leading the initiatives In India and South East Asia. As G20 has been prioritizing financial inclusion, it seems that majority of initiatives are being led by governments, but NPOs and NGOs are deeply involved as well. At the same time, private sector has been aware of the opportunities within unbanked populations for a while, and is making its own investments across the developing world. I believe that both governments and private sectors will promote financial inclusion collaboratively.

Q: Are there any interesting differences to how Japan deals with financial inclusion vs. US and other countries?

In Japan, accessibility of financial services is not a problem- 97% of Japanese population has bank accounts. However, it is hard to provide higher-level financial services because of the higher cost of the services in Japan. For example, social security is currently paid only once every 2-3 months, and it is shown that this limited frequency is not effective in reducing financial vulnerability among citizens. With lower-cost services, it could be paid more often and have more positive impact on people’s lives.
In addition, in Japan, the upper limit of loan rate is strictly defined, and people who cannot receive loans with that rate have to rely on underground loans. By lowering the upper limit of loan rate, on the premise of utilizing the technologies to identify and assess risks, the quality of people’s live can be improved.