The future of finance can be brighter if it’s accessible to the widest swath of society. Broad-based financial inclusion is the enabler of the Sustainable Development Goals, and achieving it is of utmost importance today.
Digitalization spans the world across different industries and verticals. The financial industry is not an exception. We’re fast-moving to the cashless future and digital financial operations. We used to think it was for the better. Yes, it’s for the better indeed if speaking generally, but not for all. Whom does the existing financial system usually exclude? You might be surprised, but it’s hundreds of millions globally.
All these people don’t have checking or savings bank accounts. Consequently, they can’t benefit from digital financial disruptions. The lack of documentation, high costs, long distances, and general distrust of a banking system are the most common obstacles to opening a bank account. While this problem feels sharper in developing and underdeveloped regions globally, it also exists in countries with higher living standards. For example, 7% of the population remains unbanked in the United States, and 4% of UK citizens still have no access to financial services. It negatively affects their lives and the economy in general.
These people are out of the cashless society and out of the digital economy. Do those who are in want to leave hundreds of millions out? The majority would say no. A sustainable financial future should be for all, with no exceptions. Inclusive finance is a huge step toward this better reality, and fintech has tremendous potential to make it true.
What is financial inclusion and why does it matter?
Financial inclusion is the provision of equally accessible financial services for everyone regardless of their income level. It also means involving underserved individuals, entrepreneurs, and SMEs into the formal economy, in which they can prosper and integrate into a broader market. Both consumers and banks can benefit from it. Financial inclusion empowers people to build their wealth and allows banks to extend their customer base. Governments also benefit from inclusive finance since a more connected society can increase the velocity of money and economic growth.
Financial inclusion matters because it enables everyone to participate in the economy and improve their well-being by incorporating digital technology into daily money operations. All this creates a favorable environment for small businesses, allows individuals to reach their life and financial goals, and contributes to the country’s welfare.
What happens to the financially excluded
There are four basic types of financial products that have dramatically changed in recent years: credits, payments, savings, and insurance. Almost everywhere globally, people with low income can’t access them due to a range of factors. However, we already have the necessary experience and digital technologies at hand to make these services affordable for broader categories of the population. Low financial inclusion leads to the following four negative causes interconnected with basic types of financial products.
Limited access to credits
The lack of access to financial services means the inability to take credits and loans for small enterprise owners. It works like a roadblock for them and stops them from investing more and scaling their businesses. Further investing in small enterprises could make them more profitable, improve many people’s lives, and positively affect the economy. Also, banks miss these people as prospective consumers.
No means of making/receiving daily payments
According to The World Bank’s recent statistics, around 150 million people live in extreme poverty, mostly in rural areas. The majority doesn’t have access even to essential financial services, like receiving or making contactless payments. Most of these people are small-scale farmers that sell animal products and vegetables. Among them, many artisans produce and sell ware to local vendors.
They are all stuck in a cash-based informal economy vicious circle with no access to credit/debit cards and online money transactions. Deprived of mobility, they are also deprived of the opportunity to build their wealth by using the privileges of modern technology.
Inability to make savings and build a financial safety
With no ability to save money on bank accounts and online wallets, people can’t also create their financial cushion and confidence in the future step by step. Savings are critical financial resources that can help people improve their lives in the long run, start their own businesses, and fund kids’ education.
No access to insurance services
Another negative consequence of insufficient financial inclusion is that low-income individuals and small enterprises can’t access insurance services. Every business faces highs and lows. Taking risks is the entrepreneur’s required step, no matter the niche. Insurance could help them feel more confident in times of vulnerability and avoid financial shock during downturns. Moreover, it would allow them not to get to extreme poverty thanks to the continuity of the cash flow provided by insurance.
How to accomplish financial inclusion
Financial inclusion is often considered a key enabler of 17 Sustainable Development Goals and one of the ways to decrease the level of poverty in the world. Financial institutions can achieve it through these four approaches to modern finance.
Increase financial literacy
Financial empowerment of individuals and small business owners is impossible without financial literacy. Educating underserved customers and youth can help them understand essential financial concepts and develop the skills necessary to manage money effectively and reach their financial goals. Finance hasn’t always been as complicated as today. While the economy has been based on cash operations earlier, it actively incorporates e-payments, credit cards, debit cards, and mobile transactions today. As a result, finance becomes more diverse, and understanding key modern financial concepts is critical for full-fledged participation in the economy.
Transparently communicate a service offering
Transparency should be a key value in the thinking of ethical banks, fintech startups, and other financial institutions. It means providing relevant information about the financial management strategy, policy, and assessments to the public in a timely, open, and clear manner. In addition, financial service providers have to prioritize transparency in their messaging to customers to build trust-based relationships and encourage their confidence. The language should be clear, transparent, and simple enough so that every consumer can understand it and trust the company.
Address age, gender, and racial wealth gaps
On the way to reaching financial inclusion, organizations should start targeting segments of society that have been excluded financially before. For example, banks can introduce age-friendly programs to increase the accessibility of financial services for older people and help them understand how they can benefit from specific services and products.
Also, we should take steps to overcome the gender gap in banking. It is still difficult for women to take out loans or credit in many countries. It’s a significant barrier for many female entrepreneurs that look to get funding and start a small business. Racial wealth inequality takes place in existing financial systems as well. Race remains the main dividing line when it comes to taking credits and loans.
Traditional banks and fintech companies can narrow gender and racial gaps by introducing new programs to stabilize consumer cash flow, build credits, and create financial resiliency. For example, bank accounts free of overdrafts, early payday services, and account maintenance can help smooth the income volatility. Fintech companies can assist customers in taking loans and credits by using machine learning and AI-enabled data analytics solutions. They can also help consumers boost savings by offering savings accounts, automated savings, and microinvesting features.
Embrace fintech innovations
Emerging technologies and digital innovations shape a new vision of more inclusive finance. E-wallets and mobile fintech applications that allow online peer-to-peer payments are excellent examples of digital products fostering financial inclusion.
Many fintech startups emerge today with a mission to make personal financial management easier. As a result, we can see more and more startups that offer fintech solutions and services encouraging more mindful spending, saving, and wealth creation. What’s most important: they are designed with inclusivity in mind and aim to make financial services more accessible for different categories of society.
Setting a new vision of the financial future
Financial inclusion matters. It’s a key direction traditional banks, financial institutions, and startups should take to reimagine a current system that misses a significant segment of consumers and contribute to a sustainable future in general. Emerging technologies like artificial intelligence, machine learning, and biometrics are our allies on the way to reaching this goal. We already have the necessary digital innovations at hand to make financial inclusion closer to reality. Now, just steps toward its implementation are required.
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