Financial inclusion: Accessing the unbanked and underbanked across the globe through technology

By Bethan Cowper | 22 March 2017

Bethan Cowper, Head of International Marketing, Compass Plus

According to the World Bank, an estimated two billion working age adults worldwide – equating to just under 40 per cent of all adults – do not have access to formal, regulated banking facilities. Contrary to popular belief, these numbers aren’t just representative of the world’s poorer countries: The lack of access to banking products affects every nation; from 14 per cent inclusion in the Middle East to 69 per cent in East Asia and the Pacific; the UK boasts in excess of 97 per cent financial inclusion, whilst in America, seven per cent of households are unbanked, with a further 20 per cent falling into the underbanked category.  

These figures may seem dire, but there has been great progress in expanding financial inclusion across the globe over recent years – and all of these initiatives have been powered by payment technology. Financial service products, including accounts, savings and credit, and the channels by which to access them cards, ATMs, online etc. have become a gateway for social and economic inclusion. For the first time in history, financial inclusion is geographically possible, with innovations such as mobile money, e-commerce and other digital financial services bridging the gap to segments of the population that were previously inaccessible.

Research from the Gates Foundation indicates that digital payment systems can reduce transaction costs to financial service providers in developing countries by up to 90 per cent. In the US, Diebold has estimated that transactions that would approximately cost an FI $4.25 in branch, only cost $0.20 online. Whilst payment ecosystems differ on an international, regional and local scale, some facts are overarching – and it is the move away from cash that has enabled the level of financial inclusion we see today.

M-Pesa in Kenya is undoubtedly the most well-known and well-established case study; using simple mobile handsets to offer mass access to financial services. As it stands today, according to FMI, Africa accounts for 32 per cent of the global mobile money market revenue, with a subscriber base of over 100 million thanks to the surge in the uptake of text-based mobile payment systems, influenced by, and including, M-Pesa. At the end of 2015, Safaricom disclosed that M-Pesa revenue was up 27.2 per cent from 2014.

The success of M-Pesa underlines the importance of designing a usage-based revenue model rather than dividing customers into profitable and unprofitable based on their bank balance and income. By offering a low-cost transactional platform with higher volumes of smaller value payments, initiatives such as M-Pesa can offer a range of services, from bill pay to remittances.

Africa certainly doesn’t have the monopoly on mobile; many geographies have had significant success with utilising the channel for financial inclusion. As one of the pioneers of mobile banking in Asia, the Philippines has shown how the mobile device, in conjunction with a good business model, an understanding of consumer requirements, and the support of the government, can be harnessed to deliver low-cost and efficient financial services to the region. There are no banks in over a third of the country’s 1,600 cities, however, the number of mobile SIM cards in proportion to the population lies at 114 per cent, 20 per cent higher than the global average. By incentivising usage, the mobile phone is now the main way to transfer money across the archipelago. According to Bloomberg, reaching the 78 million Filipinos who don’t yet use their mobiles for payments should yield $2bn in additional monthly transactions, proving that that lower income customers are both bankable and can drive profits.   

In Brazil, a country with a young, tech savvy population, a large unbanked population and increasingly favorable economic conditions, there are more mobile phones than people. With new regulations encouraging more competition in mobile payments and the rollout of successful near-field communication projects in the region, the country is actively using mobile payments to reach the underserved at banking agent locations.

Moving away from mobile, agent banking is another tool for increasing inclusion – popular in Brazil, using post offices, lottery outlets and retail vendors to reach poor clients in rural areas. With lower operating costs, these trusted outlets can process everything from money transfers to bill payments, deposits and withdrawals and even account applications, usually using point of sale terminals or personal computers that link to banks' servers. Many countries in Asia have followed a similar model; using peer monitoring and group-based approaches, microfinance agencies have introduced e-banking, agency banking and other branchless initiatives to overcome the costs associated with branch banking.

In Iran, high inflation rates and a lack of high value denominations of cash have meant that previously unbanked populations have had to adopt electronic payments to avoid the dangers associated with carrying large amounts of cash. This led to an increase of 53 million cards issued in 2015 alone.

Understanding the end customer and developing products specific to them and their behaviours is key to driving successful inclusion initiatives. In 2012, the Nigerian Government conducted a survey to establish the key reasons why people were actively choosing not to bank. It then launched a national financial inclusion strategy with the aim of increasing citizens' access to financial services from 36 per cent to 70 per cent penetration by 2020.

As part of this initiative, the country arranged knowledge exchange visits in order to explore the successes and hurdles that Brazil, Colombia, Kenya, South Africa, Philippines and Cambodia had experienced in similar ventures. As a result, an electronic national identity card that doubles as a prepaid card was rolled out, opening up access to secure financial inclusion for millions of its citizens. By offering electronic identity coupled with prepaid capabilities, the card has been promoted to instil habit-forming financial behaviours and actively boost trust in mainstream financial services.

India is also hoping to persuade consumers to adopt banking as a habitual behaviour. The Prime Minister’s People’s Wealth Program kicked off in 2014, aiming to help all Indians open bank accounts with the first goal to ensure that 75 million Indian households had bank accounts by August 2015. Every account-holder was offered minimal fees and free life and accident insurance to ensure take-up of the program.

However, it isn’t always lack of access that prevents people from utilising banking services. This is increasingly apparent in the US where many feel it’s financially unviable to run a current account or lack trust in the financial systems in place. Nearly 45 per cent of unbanked households in the US have previously had a bank account and, according to a study by The Pew Charitable Trust, one third of these households cite fees as the main reason for deciding to no longer utilise these services, though only five per cent of the unbanked population cite the actual cost of banking as the key issue (FDIC).

Regardless of reason, the issue remains that financial institutions across the globe struggle to profitably serve lower income households. Existing business and service delivery models have to be re-evaluated; it is expensive to reach the unbanked, to understand their needs and develop relevant products and services. However, whilst technology is significantly narrowing that cost, there is a huge untapped market at the bottom of the pyramid. As financial inclusion is increasingly seen as part of the social inclusion agenda, it becomes even more important to ensure that everyone has the education, the access, and the incentive to ensure they are adequately financially served across the globe. There are useful lessons countries can learn from each other to ensure the implementation of relevant, effective and successful financial inclusion programs.