Most of us view access to financial services to be a basic right, akin to having clean water and a roof over our heads. However, data from the World Bank (1) shows that 38% of the world’s population don’t have access to responsible credit, and more than half of adults in the poorest households are unbanked customers.
So what are the reasons for this surprising statistic? In the developing world the main reason for financial exclusion includes lack of access to bank infrastructure such as branches or ATMs, particularly in rural areas. Low levels of financial inclusion are exacerbated by lack of access to technology, or education on how to use it, meaning many are excluded from the option of accessing traditional banking services online.
However, it’s not just the developing world where financial inclusion levels are low. In the EU alone, there is a significant disparity between countries. For many EU member states, over 90% of the population hold a bank account, while in others, such as Romania, only 39% hold a bank account (2). In this case, it is not lack of access to technology that is causing the issue, as the majority of people in Romania have access to the internet. Instead, reasons include the proliferation of the ‘gig economy’, low disposable incomes, indebtedness, high transaction costs and closure of bank branches in some areas.
Having no official financial history does not mean that such individuals are incapable of responsible banking, of being entrepreneurial, or growing a business. However, traditional finance institutions have proved reluctant to address the issue and consider lending to applicants for whom there is no data. As a result, non-bank lending in the form of home and digital credit has provided a safe entry point for tens millions of consumers into mainstream consumer finance.
Today we see a wide range of mobile banks and alternative digital lenders who are using a combination of innovation and technology reach those currently disadvantaged by financial exclusion. Mobile technology has been integral to this development, as has the application of non-traditional data and machine learning to assess customers’ creditworthiness.
Big data and AI make it possible to serve customers with little or no financial history. This is because they use a combination of both traditional and non-traditional data, for example mobile phone payments, data from social media or the way in which a person interacts with a website. As a result, they can provide a more accurate and complete assessment of risk, as well as allowing companies to find the most appropriate product for individuals and small business looking to access credit.
By providing affordable and accessible products in a responsible manner, fintech companies are helping to protect underserved customers from the unregulated ‘grey’ market where secured lending can lead to indebtedness and, in extreme cases, loss of assets.
Fintech companies themselves benefit from the use of technology too. From a commercial viewpoint, they will see both their cost per customer acquisition and of handling customers reduce. This will incentivise a further increase in the range of financial products available to underbanked people and businesses.
However, technological innovation is not enough to eliminate financial exclusion and governments must also take a more proactive role. The development of a simple, transparent, stable and prudent regulatory environment provides a solid foundation on which other measures can be placed. If regulation is poorly implemented there is a risk that well-intended measures could in fact have the opposite effect, in the worst case scenario driving financially excluded individuals towards unlicensed lenders. As such, regulation must be prudent and well thought through, requiring valuable input from the market.
Active government support of healthy competition between traditional financial players, fintech companies, and non-financial companies encourages a better outcome for consumers. Investment in financial and legal infrastructure also helps attract additional investment in the financial sector, as well as addressing issues of access for individuals.
Finally, more specific measures supporting digitalisation of the sector make a difference, such as the creation and adoption of digital IDs, and a reduction in the reliance on paper documentation.
Underpinning all these initiatives is central funding for financial literacy and education programmes. Better educated consumers will not only demand suitable products but also give confidence to lenders and governments that traditionally underbanked consumers are considered in their lending decisions and take their responsibilities seriously.
A failure to act on financial exclusion is essentially a denial of opportunity to boost not only the prosperity of individuals, but also the prosperity of countries as a whole, where it can act as a positive influence on the economy.
When taking all of this into account, we see that technology plays a crucial role in improving financial inclusion, but it needs to be supported by efforts and commitment from other players in both the public and private sectors. Therefore collaboration is essential to moving financial inclusion up the agenda and driving it forward as a commercial, economic and political priority.
Viktoria Ruubel,
Chief Product Office, IPF Digital
SOURCES
- http://www.worldbank.org/en/topic/financialinclusion/overview
- http://databank.worldbank.org/data/databases.aspx?qterm=financial%20inclusion&pagenumber=1
