Leveraging Tech to Improve Financial Inclusion
Financial inclusion is a favorite cause in the financial services industry.
Financial inclusion is a favorite cause in the financial services industry. We all tout its benefits, but few people working in finance or banking have themselves experienced what it means to excluded from the United States financial system. We both have. Our experience has shaped our view of how the financial services industry can better foster financial inclusion with smarter application of technology. This is true not just in the United States but in other regions where an even greater percentage of the population lacks bank accounts and lives a cash-based existence, such as Africa or the Middle East.
When Ismail moved to the U.S. as a highly paid executive at a major technology firm, he brought his wife and children to live in New York City. He was tasked with billion-dollar lines of revenues and closing deals worth hundreds of millions. Yet he could not easily open a bank account because he lacked the required documents – a U.S. identification and other proofs of his extended residency. Finally, a friend with a private banker vouched for him, enabling him to open a checking account. This is an intervention not available to the vast majority of people living in the world.
When Marija emigrated to the U.S. and attended university, she was on the fast track at Georgetown, one of the finest educational institutions in the world. For the same reason, she, could not open a bank account. Only after she took a job as a bank teller and built an employment record was she able to take this most basic step of financial inclusion. Marija had earlier experienced the precariousness of living in the cash economy as a teenager in Serbia in times of hyper-inflation. Whenever her mother received a paycheck, she would rush down to the streets to exchange money on the black market into more stable European currencies so that the family would have enough money to eat and pay the rent.
The benefits of financial inclusion are known and numerous. Households lacking access to bank accounts or relatively affordable mechanisms for receiving, paying and spending money end up using a significantly higher percentage of their income on expensive, cash-based financial options. These options, like money orders and payday loans, tend to have much higher fees and usurious interest rates. Households suffering from financial exclusion are disproportionately poor and less educated. The highest percentages of these excluded households are in less well-off countries. But even in the United States, according to the latest FDIC surveys, 5.4% of households were unbanked. That group makes up 7.1 million households. Excluding people from the financial system also holds back economic growth; money that could have been spent on goods, services and education are instead trapped in the cash economy or used to pay punishing fees and interest.
As senior leaders at NCR, we are both now in a position to help reduce financial exclusion. In fact, we believe that the world is at a signature moment. Just as economic growth has dramatically reduced global poverty rates, ubiquitous, cheap and connected technology can dramatically reduce financial exclusion rates. It is now up to us as an industry to make that happen. If we put our mind to it, we believe we can dramatically reduce financial exclusion within the next five years in the developed world, and within the next decade in the developing world.
Fostering increased access to technology, greater openness in the financial system, and a more robust and fair marketplace for financial products will move us towards this goal. Combined, these three forces factors are already driving a fast-paced revolution in fintech. This revolution that is both a moral imperative to improve lives and a once-in-a-generation business opportunity that will benefit society by increasing overall economic growth.
While the Digital Divide still exists, technology progress and reduced costs are quickly shirking that divide. According to Our World in Data, 640,000 new people come online every day. Smartphones and cheap or free data access are the critical instrument of progress. Today low-end smartphones cost less than $100 and forward thinking carriers, such as Jio in India, are offering low-cost wireless data plans. While data plans for smartphones vary widely by country and are often pricey, WiFi access is far cheaper and often free. If these trends continue, the number of people who do not have access to the Internet will continue to fall.
A whole generation of new banks, such as Chime and Monzo, have built businesses based entirely on mobile phone applications. In China, for example, where digital payments are now the dominant form of exchange, the phone has become the predominant gateway to financial services. In the developed world, fewer people are using cash and employers are moving quickly away from paper check payments. COVID further accelerated the transition from cash to digital payments.
Traditionally, the unbanked and underbanked use digital financial services at a much lower rate than higher demographic households. But we have clear evidence that digital financial inclusion can work in less developed economies. In Africa, over 200 million people use mobile e-cash systems. In Kenya, the M-Pesa mobile cash systems is nearly universally adopted. With smart product designs, we can change that. The M-Pesa system was designed with local culture and values in mind.
The tremendous pressure upstart fintechs are placing on traditional bank processes is causing a welcome unbundling of financial services, and competition on multiple levels. Venmo, for example, offers to give customers who set up direct deposit instant access to paychecks. Traditionally, banks have taken a day or two to process these deposits. For the poor and financially excluded, two days can mean the difference between paying rent on time and incurring a penalty. Unbanked users who want to move money across borders in relatively small sums, as are common for remittances, can now pick from a number of options, including cryptocurrencies. Zelle, which is managed and owned by a consortium of major U.S. banks, allows users with accounts to instantly move money with no fees.
Smart entrepreneurs see an untapped market in the unbanked and the financially excluded and they are responding with innovation. Dozens of startups today seek to provide affordable financial services to these groups. Some notable examples include:
At the same time, numerous other potential onramps to the financial system are popping up like mushrooms. ATMs are morphing into digital financial services outposts, where users can not only take out cash or deposit checks but also pay bills, purchase online credits for Amazon, or even apply for loans.
As ATMs start to behave more like smartphones and less like giant cash dispensers, then regions with robust banking sectors suddenly have an entirely new type of bank branch that is more accessible and lower cost. This can directly address one of the key issues with the unbanked, namely — getting transportation to a bank itself. In the future, an ATM may even serve to house multiple banks, with a digital storefront that can switch between institutions, reducing the total cost. In other words, as banks become more like software, then the malleability and opportunities multiply.
Collectively, these shifts are all part of the new digital plumbing that is reducing friction and costs, all of which ultimately will make it possible to profitably serve lower income customers in ways that have never been possible before. Let’s also not forget the role of improving back office technologies. JP Morgan Chase has the ambitious goal of reducing the marginal cost of every service it offers to near zero by digitizing and streamlining legacy processes with modern technology. Zero marginal internal cost gives banks and other service providers far more wiggle room to create products that cater to the financial excluded.
While the winds of technology trends may be at our backs and the rapid rise of fintechs may be providing the impetus to rethink financial services, there are still a number of concrete steps that the financial services industry should consider.
There remains much work to be done. In parts of Africa and in countries like India and Pakistan, financial exclusion harms more than 50% of the population. Even in China, roughly 25% of the population remains unbanked. In reality, financial inclusion or exclusion is a choice we as an industry can make. We must pay close attention to the technology trends, the design of our products, and the processes we put in place to access our products.
For example, the entire buy-now-pay-later industry that offers free credit to shoppers relies on standard credit reports and having a bank account. So these new services actually perpetuate financial exclusion. If these services had been explicitly designed for inclusion, buy-now-pay-later could be a boon to the poor and the unbanked who, more than most, could benefit from interest free or very low-cost loans. This design for inclusion is doable and a matter of thinking differently about the problem. Atlanta-based Urjanet aggregates utility payment info to provide an alternative measure of credit for people who may be too poor to own cars, buy a house, or hold a credit card. In an era of ubiquitous data, there are many ways to take this data and turn it into smart ways to bring people into the financial system rather than focusing on keeping them out..
Making this shift will require us all to walk in the shoes of those who are on the outside looking in, to try to imagine what it might be like to live a life of financial exclusion. We have experienced financial exclusion in our own lives and have sharp memories of what it felt like. We are now fortunate enough to be in a position to shape products at a major enterprise to break down financial barriers and offer greater access. The time is now. The technology is here. The opportunity is massive. Let’s make a big dent in financial exclusion, not in our lifetimes but in the next decade – or even sooner.
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