More than 2 billion adults are estimated to lack access to the regulated financial sector. They rely on informal financial services even when receiving public transfers and remittances.
Digital payment systems are changing this reality and can go even further in promoting financial inclusion. Through their mobile phones people without a bank account can make and receive payments at a low cost. The promises of “digital finance” are many. It can: increase the incentives for saving, promote insurance, increase women’s economic participation, reduce information asymmetries that can limit access to credit, reduce the cost of financial transactions for individuals and governments, as well as help detect illicit money flows. Most of these processes, in turn, can significantly improve financial resilience. Yet, there are also perils related to increased financial inclusion through digital technologies. Regulatory and operational steps must be taken to assure the protection of consumers’ data and funds, assure the reliability of service provision, and prevent new forms of financial fraud.
What is Financial Inclusion and why does it matter?
Some facts and figures:
- Only 16% of low income consumers globally have access to formal financial accounts. Access for women and rural consumers is even lower.
- Just 41% of adults in developing countries have a bank account. Those who do have some access to financial services, often find that they are poorly suited to their needs.
- Access to financial services helps individuals accumulate, increase, and protect their money. It also allows them to weather financial shocks (i.e, increase their financial resilience).
- More than 60 governments across the world have set financial inclusion as a formal target. The United National General Assembly unanimously adopted a new agenda for sustainable development by 2030. Five of the 17 Global Sustainable Development Goals championed by the Agenda mention financial inclusion.
- According to a study by the Gates Foundation (2013), in most developing countries, mobile money providers can provide accounts at roughly 6% lower costs than banks. What is needed, in fact, is a “new framework for understating payment systems” that can simplify those systems “and their underlying market dynamics”.
- Progress has been made globally to reduce financial exclusion. According to the World Bank’s Global Financial Inclusion Index data (Findex), the number of financial excluded people has decreased from 2.5 billion to 2 billion from 2011-2014. At this rate, the expectation is that the gap will be reduced significantly by 2020. The goal for universal financial inclusion has been set.
- Expanding access to accounts is not the same as establishing useful accounts, however. The challenge hence is to make financial services more user-friendly, flexible, and reliable. Supervision and regulation are essential parts of services expansion.
According to the World Bank’s Global Finindex survey, when asked whether they would be able to come up with funds in emergencies, people in high, middle and low income countries responded identically. Approximately 1/3 answered “no” and 2/3 answered “yes”. However, while people in high income countries were more likely to turn to formal sources, those in low income countries were more likely to turn to family and friends.
According to the Consultative Group to Assist the Poor (CGAP), a global partnership of 34 organizations housed at the World Bank, digital financial inclusion is “the access to and use of formal financial services by excluded and underserved populations. Such services should be suited to the customers’ needs and delivered responsibly, at cost both affordable to customers and sustainable for providers”.
Why increase financial inclusion through digital platforms?
As the World Bank’s 2014 Global Development Report explains, transaction costs are an obstacle for financial inclusion when “financial providers cannot profitably serve low income consumers. Technological innovations such as mobile banking, mobile payments, and the biometric identification of individuals can help decrease these costs”.
A Gates Foundation report (2013) estimates that, in most developing countries, mobile money providers can provide accounts at roughly 60% lower costs than banks.
- The World Bank (2014), “The Global Findex Database 2014: Measuring Financial Inclusion around the World”
- The World Bank (2016). World Development Report: Digital Dividends.
- The US President’s Global Development Council (2015), “A Call to Action on Financial Inclusion
- The Bill and Melinda Gates Foundation, Financial Services for the Poor Special Report (September 2013), “Fighting Poverty Profitably: Transforming the Economics of Payments to Build Sustainable Inclusive Financial Systems”
- CGAP Brief (February 2015), “Digital Financial Inclusion: Implications for Customers, Regulators, Supervisors, and Standard-Setting Bodies”
- The Economist Intelligence Unit, “Global Microscope 2015: The Enabling Environment for Financial Inclusion
- United Nations General Assembly (2015), Transforming Our World: The 2030 Agenda for Sustainable Development”
- Center for Financial Inclusion, Accion (2015), By the Numbers Benchmarking Progress Toward Financial Inclusion June 2015.
- G-20 Global Partnership for Financial Inclusion.
- Better than Cash Alliance (UN Development Fund)