By Ronny Lavie, Managing Editor at The Fintech Times.
Did you ever sit at the dinner table as a child, refusing to eat, and had your mother angrily tell you that you should consider yourself lucky, as many children in * insert name of developing country * have nothing to eat at all? While, sadly, that is still the case today, the adult equivalent of that is, every time you use your credit card or take money out of an ATM, you should remember that literally, billions around the world do not have access to those same services.
The financial industry is facing huge changes, with innovations in cryptocurrencies, blockchain and AI coming through. The scope of future possibilities seems limitless and exciting. That’s all great stuff, but, on the flipside of that, it is estimated that 2 billion working-age adults worldwide – that is over half the global adult population – are financially excluded. That doesn’t mean that they weren’t able to join in with the latest hot crypto sale. No, it means they don’t hold an account at a formal financial institution.
What is financial inclusion?
The World Bank defines financial inclusion as individuals and businesses having ‘access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.’
Living in the UK, you might think that financial inclusion is not an issue that is relevant to you, but you’d be wrong – 1.5 million adults in the UK are unbanked.
Being financially included opens the door to financial security and independence. It allows the individual to save, take out an affordable loan or mortgage and grow a business. Financial exclusion is a cycle – the more marginalised a person is, the harder it will be for them to enter the system, the more marginalised they’ll become. This cycle is likely to continue with their children, grandchildren and so forth.
How did we get here?
Reasons for financial exclusion vary from country to country and from person to person. What it comes down to is the paradox of paradoxes – it’s really expensive to be poor. In many countries, opening a bank account costs money. In America, for example, you even have to pay every time you want to take your own money out of your own account. This might have something to do with the fact that 7 percent of households in the US (1 out of 13) are unbanked. Additionally, for households with a limited income, the risk of going into overdraft is ever present. Unplanned overdraft fees can be crippling to those who already struggle.
Having a wad of cash under your mattress encounters no extra charges, which is why many choose this option instead. But, of course, this is not without its risks either.
The world’s poor currently operate in what is known as the informal economy. Saving, borrowing and day-to-day expenses are managed not through recognised financial institutions, but through cash-in-hand transactions, pawnbrokers, moneylenders, relatives or, indeed, keeping cash hidden in the home. The odds of losing the money, either through fraud or theft, are extremely high. Speaking of extremely high, loan repayment rates in these situations are also just that. Of course, the money lenders cannot really be held accountable for this, as many lendees have no formal identification or credit history, and so the risk of loaning to them is considered significant.
Which brings us swiftly to another prevalent issue – a lack of credit history making it difficult, and often impossible, to get good rates on a loan, open a bank account or even set up an account with a utilities company (many low income households use meters, which end up being much more expensive to run. Again, the paradox of poverty’s additional cost). But if you can’t afford to get on the financial services ladder, as it were, then how are you going to get a record of your financial history? In many countries, you also need proof of address to open a bank account, but if you pay for everything in cash, how can you obtain that? The cycle continues.
To really understand the issue, we have to understand the reasons poverty exists in the first place. Of course, it will take much more than one newspaper article to cover that topic, but the underlying driver can be summed up as wealth disparity. Sofie Blakstad, Founder and CEO of financial trust platform hiveonline, explains – “Wealth disparity is caused by income disparity, but accumulates more. So a few people are earning half of the world’s wealth, and half of the world is earning nothing. Income inequality in itself is not the issue – it is actually the perpetuation of wealth inequality, which comes back to taxation.”
The solution for this is not something that we are likely to see in our lifetime. However, much can be done through empowering individuals, in all countries, to be financially independent and secure. Hiveonline is one company helping to do just that. It allows customers to enter into contractual arrangements, either with their customers or with financial institutions, and works on a system of reputation building. The good thing about reputation, is that you can take it with you wherever you go, allowing people the freedom to travel without having to start building their financial identity up from scratch again. The idea of measuring a person’s credit ‘worthiness’ by their character, and not their financial history, is a visionary one and might just open the door to people who have so far had it repeatedly slammed in their face.
What else can be done?
Financial inclusion doesn’t just feed on poverty. Sometimes it is a choice that stems from a lack of trust in the government and, by extension, in the country’s financial institutes (which are often controlled by or linked to the government).
Not deterred by the challenge, more and more companies are launching initiatives aimed at empowering individuals, mostly in the developing world. One of the most successful of those is the Kenyan mobile-based service M-Pesa, which, according to a 2016 report published in Science magazine, has lifted 194,000 Kenyans out of poverty since its launch. That number is bound to be higher now.
Digital neobanks like the UAE’s Now Money and Brazil’s SmartMEI also help both individuals and small businesses manage their financial transaction in a more sustainable way.
But the change doesn’t end with actual financial transactions. Countries where most citizens operate in the informal economy more often than not are plagued with high levels of corruption. People who don’t make money as part of a formal economy, don’t pay tax. When the government has no money coming in, it cannot pay its employees a decent wage or run services in the country properly. This all leads to a free-for-all, which can be dangerous in every conceivable sense of the word.
In 2009, M-Pesa helped reveal that police officers in Afghanistan were having a large chuck of their paid-in-cash salary ‘shaved off’ by their superiors. Which is exactly why access to formal digital services is so crucial – the opportunity for fraud is almost non existent.
In Ghana, where 90 percent of agricultural lands are undocumented, it can take two years to get a mortgage. Several companies, such as Bitland and Land Layby Holdings, are using blockchain to end corruption and simplify procedures. Schemes like these will give regular people, including government workers, the opportunity to purchase a house on just their base salary, without the need to receive, or hand out, bribes. As more people enter the formal economy, their lifestyle will improve and their country will benefit from an increased GDP.
Many people within the industry are recognising blockchain’s potential as a game-changer across the board. “Blockchain solves the problem of manipulation. When I speak about it in the West, people say they trust Google, Facebook, or their banks. But the rest of the world doesn’t trust organisations and corporations that much — I mean Africa, India, Eastern Europe, or Russia. It’s not about the places where people are really rich. Blockchain’s opportunities are the highest in the countries that haven’t reached that level yet,” Ethereum inventor, Vitalik Buterin, explains.
Mihai Ivascu, Serial social-impact blockchain entrepreneur and Founder & CEO of blockchain-based platform Modex, believes that “at a time when we face division across political and socio economic lines, blockchain technology has the potential to become a great equaliser, because, by definition, blockchain overcomes any limitations, by giving everyone a chance to get involved. Blockchain – and cryptocurrencies – make it easier for people in general, and consumers specifically, to be better protected from potential abuse, and ensures that everyone gets treated fairly by big financial providers, no matter what part of the world they’re from, or their situation.”
Even politicians are getting onboard the blockchain and crypto train. Al Gore was quoted as saying “When bitcoin currency is converted from currency into cash, that interface has to remain under some regulatory safeguards. I think the fact that within the bitcoin universe an algorithm replaces the function of the government is actually pretty cool.”, while former PM David Cameron said “Obviously you’ve got amazing opportunity using blockchain technology in areas like banking and finance and insurance, but I think some of the public policy applications are potentially transformational.”
On the other side of the blockchain revolution, Santander has estimated that the technology could save banks £16b per year in admin costs, which can help bring the cost of traditional financial services down, helping a wider margin of people take that route as well.
Technological advancements mean that even people in the most remote corners of the globe can benefit from access better services. Apollo Agriculture is using agronomic machine learning, remote sensing, and mobile phones to help farmers in emerging markets maximise their efficiency and scalability.
While fintechs and other private companies can make drastic changes in the global financial landscape, they will need support from official bodies. That support is forthcoming in the form of the World Bank Group’s Universal Financial Access 2020 initiative. Launched in 2015, the initiative has the ambitious goal of assisting 1 billion adults (so, half of the currently unbanked population) to gain access to a transaction account by 2020.
In the UK, The Financial Inclusion Commission – an independent body of experts and parliamentarians – is aiming to eradicate financial exclusion in the country altogether by the 2020 general election.
There is no denying that the road to equality – financial or otherwise – remains a long one. However, new technologies, and the inspirational people who are willing and able to use them to make the world just that little bit better for everyone, deserve to be celebrated.
