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Finance

Financial Inclusion: reaching out to the unbanked

Reading time: 5 minutes

FinTech has undoubtedly been a fairly popular buzzword in recent times, but one of its most promising applications is often overlooked: granting access to financial services to the unbanked, those who are most short of it.

What does it mean to be unbanked?

Being unbanked means lacking a bank account, either at a financial institution or through a mobile money provider. In 2011 the World Bank, supported by the Bill & Melinda Gates Foundation, launched the Global Findex database to enquire about financial inclusion in over 140 countries. The database was then updated in 2014 and 2017. The results were striking: 1.7 billion people worldwide do not own any type of bank account (2017). Even more remarkable, however, is that roughly two thirds of them have access to a mobile phone. This leaves the door open to financial inclusion through means other than traditional banking.

Who are the unbanked?

Unsurprisingly, most of the unbanked are to be found in developing economies and approximately half of them live in just seven countries: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan. Some of the overrepresented groups are women (56%), the poorer share of the population (particularly in countries where few adults are unbanked) and those with low educational attainment. People out of the labour force are more likely to be unbanked vis-à-vis workers.

Why are they unbanked?

The answer to the question is clearly complex; however, the 2017 Findex survey asked the unbanked themselves why they did not have a bank account. Most of the replies identified the insufficient quantity of money as the primary reason for not opening an account. Other disincentives are the cost of the account itself and the distance of financial institutions, another family member already having an account (particularly for women), lack of the necessary documentation and distrust in the financial system. Culture and beliefs are to be taken into account, even though only a limited share of respondents listed religious concerns as the sole cause preventing them from opening an account.

Why should we care about financial inclusion?

Financial inclusion has the potential to substantially improve the welfare of a vast portion of the global population by providing them with the benefits of basic financial services. Being able to easily and safely transfer money might make more transactions possible, while the use of accounts can incentivize saving, with positive effects on the ability to manage consumption, to handle unexpected cash outflows or to invest in education. Businesses and enterprises can benefit from an increased availability of credit, which might otherwise be scarce or even absent. The effect of shocks – such as natural disasters, theft or medical expenses – might be lessened thanks to an increased ability to raise money (in addition to savings).

Financial inclusion might also prove valuable in addressing inequality issues, particularly in terms of gender balance and of gaps between richer and poorer.
However, one should be cautious when drawing swift conclusions: so far evidence in favour of the effectiveness of financial inclusion has been ambiguous at best. In fact, among the countries where a significant share of the population owns mobile money accounts, only Côte d’Ivoire, Gabon, Kenya and Senegal have no gender gap in the use of such accounts and, if all account types are taken into consideration, inequality persists.
On the other hand, in India the gender gap has shrunk by 14 percentage points over the last three years and it appears that the spread of mobile money accounts promoted saving and investment in women-headed households in Kenya.

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The gap between rich and poor displays high variability and it can be relevant both in countries where the overall account ownership is relatively high, such as Brazil, and in those where less than half of the population is unbanked. Globally, the gap has remained almost unchanged since 2011, widening in some economies and contracting in others.

How can FinTech help solve the problem?

Being FinTech an umbrella term, there are several ways in which it could contribute towards making financial inclusion a reality.

First, cashless payments can make transactions trouble-free and reliable, even across geographically distant locations. This is especially relevant for remittances, for which cash and over-the-counter transactions are still in use.

Alternative sources of finance for small businesses include microfinance and peer-to-peer lending, which can be digitalized through mobile money accounts.
To date there are two main mobile money models: the mobile accounts can just be a proxy for a traditional one held at a financial institution or they can be completely independent. In the latter case, adopted in Kenya with M-Pesa (which will be analysed in greater detail below), the service is provided by mobile network operators, while the payment services connected to bank accounts, particularly popular in China, are offered by third-party providers such as Alipay or WeChat.

Another promising FinTech trend which could make its way to the unbanked is robo-advisory: it may yield substantial benefits by allowing individuals to invest with low fees, making it possible to save for retirement or for other long-term goals, such as education. A similar result may be achieved thanks to passive investments: buy-and-hold strategies which involve little or no trading of the assets. ETFs (Exchange Traded Funds) are a fairly popular – and relatively established – form of passive investments; they are a type of fund which is traded on stock exchanges, like a stock and (generally) replicates a benchmark index (the S&P 500, for instance). Given their nature, they require little human intervention, and therefore offer cost advantages.

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A success story: M-Pesa in Kenya

M-Pesa is an excellent example of FinTech for financial inclusion ante litteram: it was launched in 2007 in Kenya and it has since generated admirable results, expanding to other markets. “M” stands for “mobile” and “Pesa” means “money” in Swahili. The service allows users to deposit, withdraw and transfer money (similarly to a bank account) and to pay for goods and services with just a mobile phone. An internet connection is not needed for these basic functions, as the system is based on SMS.

When it was jointly launched by Vodafone and Safaricom, the service was meant to be used just for microfinance loans; it soon became clear that it could serve a much broader scope.
In addition to the aforementioned increase in saving in women-headed households, the spread of M-Pesa helped financial resilience: data shows that the consumption of mobile money users was less affected by downswings in income with respect to non-users. Researchers also found that such system increased investment and that it lifted 2% of households out of poverty.

Deficiencies and potential risks of a FinTech-based approach

The Global Findex database sheds a positive light on the role that FinTech plays in the shift towards financial in- clusion. However, there might exist a dark side.

As mentioned previously, it is still unclear whether FinTech alone has the potential to effectively address inequality issues, which appear to be rooted in the cultural, economic and institutional paradigms of many countries.

By providing easy access to credit, the FinTech revolution might allow individuals to fall into hazardous levels of debt, therefore increasing the likelihood of default in the areas concerned.

Moreover, many traditional accounts are opened, but never or seldom used: incentives to keep them active may come, rather than from the use of FinTech, from rerouting wages and transfers from cash to those accounts, both in the private and in the public sector. For instance, the Indian government recently adopted an aggressive policy, introducing biometric cards to boost account ownership. Such programs, however, tend to concentrate a vast and varie- gated amount of data into the hands of the financial services providers, leaving the door open for data breaches.

Only time will tell whether we’re progressing towards a sunny spot or falling into a shady spiral.

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Dal cartaceo di marzo 2020

Author profile
Deputy Director | barbara.balcon@studbocconi.it

I’ve been part of Tra i Leoni since my first semester at Bocconi and I’m now a Deputy Director. I’m a third year BIEF-Economics student and I mainly cover finance and campus life. In 2019 I wrote “Word on the Street”, a weekly column about the story behind the names of campus buildings and spots, while last semester I was the head of our Global Edition.

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