I spoke to a neighbor recently who mentioned his mother was having trouble paying rent. It’s not that she didn’t have the funds; her issue was literally paying the rent.
For years, she’d apparently been using cash to purchase a money order each month, then mailing that to her landlord. This is harder to do these days, with most bank lobbies being closed for COVID-19 reasons. When his mother called him for assistance, my neighbor was shocked to discover she’d never even had a bank account. She’d simply never seen the need.
That attitude seems almost unbelievable in this day and age. In reality, some two billion people around the globe currently don’t have access to even the most basic financial services, such as a checking account. Like my friend’s mother, some people make a conscious (if often uninformed) choice; others simply have no other option.
Being “unbanked” is closely tied to lower incomes, so it is naturally predominant in certain areas. In sub-Saharan Africa, for example, only one in three adults have access to banking services. In Latin America, a 2017 survey showed that over 30% of the population lived in poverty, and nearly half the population was unbanked.
The problem isn’t exclusive to developing economies, though. Even her in the US, nearly 45 million live below the poverty line, while in the EU, roughly 109.2 million residents are at risk of poverty. Obviously, there are multiple social and economic reasons behind this phenomena. One potential remedy to the situation, though, would be alleviating some of the roadblocks to what economists call “financial inclusion.”
The Global Benefits of Financial Inclusion
Having access to safe and affordable financial services—and understanding how to use them—has been proven to open doors for both individuals and families. Many everyday benefits you or I may take for granted, like debit cards, ATMs, and paying by check, aren’t possible for those without a bank account. Even purchasing a money order to pay the rent involves additional fees and other financial limitations.
The Inclusion Foundation reports that not having access to basic banking services would cost the average person in the UK up to £500 a year. On the other hand, providing banking facilities and services to unbanked households would have a major positive impact on individuals’ economic status, and empower those people to make their own financial decisions. Rather than remain victims of their circumstance, they could invest in their futures.
Financial inclusion—this leveling of the playing field between different income strata—can serve as a dynamic bridge between unachievable potential and realized outcome. Additionally, inclusion benefits the financial institutions providing the services, and in fact, the economy as a whole. So why hasn’t it happened yet?
Understanding the Challenges
Ongoing advances in technology have made the possibility of financial inclusion more real than ever. Globally, we have the potential to build financial systems that benefit people across all levels of the income spectrum. Doing so, however, will require moving past existing obstacles:
1. Lack of suppliers
While much can be said for a grassroots movement, inclusion will not happen without the support and input of both the government and major financial institutions. Unfortunately, the latter seems in some cases to be moving in the opposite direction. It was only a few months ago, for example, that Bank of America eliminated the only free checking account it offered that had no minimum balance requirement.
Remaining fiscally-sound while catering to low-income clientele can be tricky. That said, requiring a minimum balance or a monthly fee is essentially erecting a roadblock to those customers.
2. Lack of knowledge
To attract the unbanked, financial institutions must offer products and services suited to their distinct needs. That’s a moot point, however, if people don’t understand the benefits of those products.
The key is improved financial literacy, which will lead to more informed financial decisions. Ultimately, this will produce a smoother and more profitable operating model for banks.
3. Lack of trust
As I noted earlier, we’re seeing a rush of technological advancements these days, including blockchain, virtual currencies, mobile banking apps, and more. While these could serve as cornerstones of an expanded financial inclusion, not everyone is on board here. Many consumers—particularly those with less financial experience—demonstrate little or no faith in either the reliability or the security of these new tools.
Again, education is important here, but there is also an opportunity for the government to step up, establishing clear guidelines and regulations, as they did with the Fair Credit Billing Act. This could give consumers confidence that they understand product benefits and are protected from bad actors.
4. Lack of opportunity
While financial exclusion is primarily an issue with lower-income individuals, the group is not fairly split along gender lines, according to recent data. Globally, women are 7% less likely than men to have basic transactional accounts. The causes behind this seem varied, but are often revealed to be a circumstantial lack of opportunity.
As with the unbanked in general, providers see less incentive for catering to women due to both smaller margins and higher upfront customer acquisition investments (in areas such as financial education). For inclusion to significantly impact overall poverty, however, plan architects must recognize the benefits of assisting this vast demographic, and act accordingly.
5. Lack of identification
Finally, one of the most blatant stumbling blocks keeping parties unbanked is the lack of officially recognized identification documents. Nearly all nations mandate that banks require some type of formal ID for even the most basic services … yet the process for acquiring such identification can often be complex and arduous. Streamlining these processes to allow for easier access to ID documents would in turn open the door to increased financial inclusion.
Just the First Step
Of course, having a banking account is just one step in the overall path to inclusion. Over 350 million adults in developing countries have at least one bank account, yet still opt to use cash for day-to-day transactions. Simply having the ability to write a check isn’t enough: until people understand how a bank account can open doors to financial welfare, financial inclusion will be nothing more than a good intention.
