While today’s world is becoming increasingly cashless, it is hard to imagine living without a bank account. Banking is considered a safe and stable way to manage its finances. Alternative financial services are interpreted as exploitative and risky. As policymakers continue to emphasize the role of financial institutions in the poverty reduction, it is important to ask why people are shunning banks in favor of riskier, less convenient alternatives. One problem is that the banking system was not designed for low- and middle-class households. Charges are levied to combat overdraft fees, debit card fees, ATM withdrawal fees, transfer fees and other charges. These fees, which occur in every corner of the banking system, are a significant burden and barrier to entry for low- and middle-income people. To make matters worse, these fees are hard to avoid.
Innovation and financial inclusion
The financial services industry has a rich history of innovation, from credit cards to Internet banking, but fintech is often associated with new start-ups. A general resentment of traditional financial firms for their inability to adapt to new customer needs has, in part, facilitated the emergence of the fintech industry.
Fintech innovation focuses on unbundling banking services and improving their front end for retail customers through better customer service, branding and pricing.
Innovation is driven by frontends that specialize in offerings that enhance the customer-centric facets of financial services. Fintech startups provide a concept of “unbundling” banks that offer only one type of product or service and focus on doing just that. Organisations such as the World Bank, the G20 and the European Bank for Reconstruction and Development are taking a broad range of initiatives to enable people to make a more effective use of financial services. At the same time, payment and telecommunications companies such as Visa, Mastercard and Vodafone are bringing new financial services and opportunities to developing countries.
Overcome barriers to traditional banking access and bridge the gap in financial inclusion
One of the blatant and least discussed insights into financial inclusion today is the number of people who do not have access to banks or similar services. Advances in fintech can help to ease access to banking for underserved communities. Fintech trends such as digital payment systems and microfinance can help overcome barriers to traditional banking access and bridge the gap in financial inclusion. As a result, thousands of people can be brought into the banking system by providing easy and secure access to credit transfers, savings accounts and mobile payment services. Basic bank accounts are a first step toward greater inclusion and can serve as a gateway to other financial services such as credit and insurance for starting and growing businesses, investing in education and health and managing risk.
Although opening a bank account for people around the world is a ritual of transition, a significant proportion of the world population still does not have a bank account and does not use banks for a significant portion of their financial needs. People who do not have a bank account or are underfunded tend to use alternative forms of financial services to meet their money needs such as cheque and cash dispensers, payday loans and money orders. Alternative financial services tend to offer services similar to those of traditional banks, but at a higher price. They can offer benefits to the customers who do not have a bank account, such as a more convenient access to their account, but they are often more expensive than comparable accounts offered by banks.
Underfunded people do not take full advantage of traditional financial services, including banks. On the other hand, it refers to adults who do not use traditional financial services or have no access to them. These people do not take full advantage of these services, often not even the banks, and resort to alternatives such as payday loans, cheque cashing services, prepaid debit cards, etc. According to a 2017 FDIC survey, 52% of the US households without a bank account said they did not have enough money to run an account. Two billion adults do not have access to bank accounts in the world, but two-thirds of them own mobile phones! A third of adult (1.7 billion people) are without a bank account and more than half of people without a bank account – including women, people in poor households and rural areas – are unemployed.
The Federal Reserve recently found that half of US adults are unable to cover $400 in emergency spending without borrowing – a alarming statistic and speaks to the economic uncertainty that is an everyday reality for many. These regional imbalances can be attributed to the greater need for basic financial services in the underdeveloped world.
Providing easy, secure access to credit transfers, savings accounts and mobile payment services can make a big difference in many underdeveloped countries. In countries with developed financial institutions, opening a bank account includes hurdles such as formal identification, minimum deposits and access to the internet and local bank branches.
In the United States, for example, there are 14 million people who have no bank account and 50 million who are underfunded. In some cases, people leave behind few data crumbs that can give clues as to who they are, why they are “bankrupt” or “undervalued,” or have no credit history. In other cases, consumers leave a trail, but this trail is not accessible to the companies and agencies that need it to verify the creditworthiness of a credit card, mobile phone plan, or home.
Tackling social concerns
Fintech companies dedicated to social change are not only providing exceptional customer service to their users, but are also addressing how they can improve the lives of thousands of people around the world. The fintech industry has made improving and democratizing consumer financial health a key goal, but to achieve that it must learn more about their customers and how they spend their money. Otherwise there is a big gap in the knowledge of financial services companies and that gap will only widen when a customer is a member of one or more minorities or underserved groups.
In order to successfully achieve financial inclusion, it is essential that countries demonstrate strong political engagement and coordination between relevant public and private actors in order to create the framework for far-reaching policies that promote responsible access to finance, financial capacity, innovative product delivery mechanisms and high-quality data to influence policy-making.
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