1.1 Importance of Financial ServicesFinancialservices are essential to drive a healthy economy and enable the well-being ofboth households and businesses. Financial Services enable people to save, invest, borrow, improve theirsocial status and protect themselves against risk.
Surprisingly, in manycountries and global economies, the many individuals and small businesses lack access to even the basic understandingand access to savings and credit products, which hinders economic growth and propagatespoverty. The ability to have access to financial services has a directcorrelation to economic growth and also reducesincome inequality amongst individuals. 1.2 The Problem of FinancialExclusionThe termfinancial exclusion was first coined in 1993 by geographers who were concernedabout limited physical access to banking services as a result of bank branchclosures (Leyshon and Thrift, 1993). There was also trepidation about people nothaving savings of any kind. By 1999, the term financial exclusion was usedin a broader sense to refer to people who have difficulty in accessingmainstream financial services (Kempson and Whyley, 1999). Globally,there are over 2.5 billion adults who are excluded from accessing basicfinancial services and are considered underbanked or unbanked and don’t haveaccess to the appropriate banking facilities to improve their economicwell-being.
Women in many developingcountries are highly impacted and excluded from accessing formal financialsystems and services. Many householdsliving in poverty operate entirely in the cash economy, particularly in the developingworld. This means that they rely oncash, physical assets such as jewelry and dubious money lenders to meet theirfinancial needs. These informalfinancial service providers are insecure, expensive, and complicated to use.
They offer very little to no assurance whenproblems arise with transactions or when an individual is in desperate need offinancial help. Even in the richestdeveloped nation in the world by Gross Domestic Product (GDP), the UnitedStates of America, approximately 70M people are unbanked or underbanked. (Bill and Melina Gates Foundation) 1.3 Financial Inclusion is the SolutionFinancial Inclusionis an important global and worthwhile goal.
Access to regulated banking for businesses and families providesnumerous benefits such as:· theability to deposit and build funds securely (with government protections) · useformal and trackable payment instruments to facilitate financial transactions · accessaffordable credit· obtainsound financial advice Alternativefinancial services can be expensive and often fail to meet consumers’longer-term financial needs like funding their education, buying a home andplanning for retirement. 1.4 Impact of Global Urbanization on Financial InclusionGlobalizationand Urbanization in the developing world is a result of regulatory changes,global economic conditions and the developed world creatingopportunities for the poor in developing nations like India and China. The trade increase and outsourcing ofmanufacturing and services has created a rise in urbanization of developing nations. This urban growth comes from poor peoplemoving from villages to large cities to obtain jobs. This creates anenvironment that we are experiencing today which is the rise ofmega-cities. There are many cities inthe world with populations over 10 million people.
The largest of which isTokyo with approximately 38 million in its metropolitan area. (See Figure 1.0)Source: (http://www.newgeography.com/files/cox-wua-16-3.
jpg ). The housing, infrastructure andfinancial services challenges must be addressed for individuals to survive asthe poor shift to large cities. Ensuringthey have access to formal financial services will help them protect and growtheir earnings, solve and manage financial crises, send and receive paymentsand manage their small businesses or farms.Historicallyfrom a Global perspective, financial exclusion originated because of a fragilefinancial foundation in rural areas with limited education. In urban areas theeconomics of banking were built on the core objective of making profits throughthe adoption of banking products, new cost saving technical devices (AutomaticTeller Machines (ATM), Mobile Banking, and Internet Banking) by the bankinginstitutions. The cost to build bank branches, deploy technologies and educatethe masses on ‘ financialliteracy did not have the Return on Investment (ROI) for the banking industry.
Further the Banks were not incented to expand these facilities to rural areas.Thefundamental mix of economics, politics and religious/cultural factors indeveloping countries like India, where there is the distrust of governmentalinstitutions and financial institutions by society, ultimately results infurther enhancing the problem of financial exclusion.For those who are financially excluded, the following will apply:· Individuals on a low incomeand those with a poor credit history.· May be elderly, migrants,single parents, and the disabled or those on long-term sickness.
· Financial exclusion canboth be caused by social exclusion leading to a deepening of social exclusion.· Constant struggle to pay essentialbills · Inability to financiallysecure their future or saving for emergencies becomes near impossible.· This term can also apply toexisting banking customers who do not earn financial institutions any profit infees or interest and are therefore sometimes denied access to other productsand services.3.
1 Rising EconomyFinancialInclusion follows two major global trends; rising economy in developingcountries and increasing decline of poverty. Financial inclusion gives people and companies in developing countriesaccess to proper financial tools which allows businesses to make safer and moresecure transactions between other businesses worldwide. It also enables people to become morefinancially active and to begin making payment transactions digitally or bybanks rather than cash; this allows them to collect interest rates which theywouldn’t have access to if they continued using non formal methods of paymentsuch as cash or physical assets. 3.2 Poverty Rates DeclineFinancialinclusion will also aid in decreasing high poverty rates with giving accessiblebanking tools for saving, spending and transferring money in a more organizedway. It will also reduce fraud and givepeople a better chance of moving out of poverty as well as being able to handlefinancial shocks.
With the amount ofpeople escaping extreme poverty in third world countries they have created theterm, ‘The developing world’s middle class’. This describes people who aren’t below the poverty line, but are belowthe OECD (Organization for Economic Co-operation and Development) standards ofwhat’s considered ‘middle class’. (BethRhyne “Financial Inclusion by 2020? FiveGlobal Trends that will Shape the Answer) Smartphonepenetration globally is expanding rapidly. There will be an estimated 6.1 billion users globally by 2020. A number of financial technology (FinTech)companies are collaborating with telecom operators to leverage telecom data toprovide access to financial services in emerging markets like Kenya and India. The United Nations General Assembly adopted the 2030 Agenda on September25, 2015 for Sustainable Development called the Sustainable Development Goals(SDGs). The Agenda is a combination of many years of negotiation and wasendorsed by all 193 member nations of the General Assembly, both developed anddeveloping—and applies to all countries.
This agenda was a promise by leadersto all humanity everywhere to make a better planet for everyone. The SDGs comprise an ambitious 17 goals. While the SDGs do not explicitlytarget financial inclusion, greater access to financial services is a keyenabler for many of them. Access to financial services can help achieve theSDGs.
The initiative also focuses on outlining opportunities for businesses andgovernments to expand financial inclusion in emerging countries by digitizingcash payments of wages and transfers and bring individuals into formal bankingrelationships. Governments have beenhighlighting the role financial inclusion can play to attain many of the SDGs.This includes eliminating poverty, creating jobs, improving gender equality orgood health, among others. Financial inclusion can help ease the refugee crisiswe are currently facing. Tens of thousands of Syrian refugees and others areentering Canada and Europe without a bank account or access to financialservices.
Many of whom want to send payments back home to help their friendsand family. As governments address theseglobal issues they must ensure that financial inclusion is a part of the wayhow new immigrants are integrated to society. 4.1 PeopleFinancialexclusion has disadvantaged people in poverty who lack basic bankingtools.
They require these tools toproperly and effectively save, spend and borrow money. These tools will help them in case ofsetbacks, unexpected financial shocks and health emergencies. These households use cash economy methods tocarry out all of their transactions. Cash economy methods include using cash, assets (such as land, livestock,and jewelry) and suspicious money providers to complete their financialpayments.
These methods are insecure,expensive and have limited resources. They are also a dangerous way to make payments as there is much fraud,corruption and theft involved in this system. This leaves people stuck in extreme poverty with a very slim chance ofescaping.4.2 Government and EconomyFinancialinstitutions and governments also lose. Most transactions across emergingeconomies are conducted in cash compared with 50 percent in developedeconomies. For example, more than99 percent of transactions by volume in Ethiopia, India, Nigeria, andPakistan are in cash, with buyers using cash for everything from real estatetransactions to vehicle registration. Similarly 94 percent of alltransactions in China remain in cash.
For governments, cash-based paymentsystems create major challenges for tax collection and in some cases this leadsto tax evasion and corruption. Individuals and businesses resort to cashand the informal financial system with high costs and greater risks. In many cases they may completely forgobusiness opportunities entirely.
4.3 Challenges to Achieve Financial InclusionFinancialexclusion extends beyond just the poor. Many of the developing world’s lower middle class are also underbankedor underserved. Language and educationalbarriers are common problems. Many people do not know how banking works;therefore, they never bothered using a bank or financial tools. There are alsomany issues that arise for people who don’t speak the same language as thosewho are promoting these banking tools. Another challenge is a mistrust in banks.
Many people hesitate to entrust all of theirmoney somewhere they don’t know. Theyfear of bank fraud and security of cashless transactions. Those who do try to use financial servicesface inefficiencies in bank branches, high prices and limited understanding in accessingthe broad range of savings, credit, and insurance products that are commonplace in advanced economies. 5.1 GovernmentFinancialinclusion can help the government and strengthen the financial foundation of a country. Eliminating financial exclusion will reducepoverty rates and give people the opportunity to properly manage theirmoney. With more users registering theirmoney to banks it creates a more organized infrastructure which helps thegovernment collect taxes, reduce criminal activity, avoid corruption and alsohelps to grow the economy. With morecompanies in the country making proper banking transactions with otherbusinesses worldwide, the country its people will all prosper.
5.2 BanksBanks arein a position with many opportunities as well as challenges in helping towardscreating a financially included society. They are able to create digital banking platforms as an easier, moreaccessible tool to process financial transactions. They also have the ability to create anddevelop an ecosystem and network of digital banking by forming partnershipswith other banks. However, they also have many challenges. Many people living in poverty don’tunderstand the purpose of how to use banks properly. With the lack of understanding of thecapability of banks, ultimately leads to the lack of usage. Another challenge is the separation betweengovernment and banks.
Without the help of the government, banks are unable todeliver services to their maximum capacity. There is also an overall distrustof banks. Many people fear putting theirmoney in a bank in case of fraud, lack of security for their money and personaldata etc. 5.3 People in need of Financial ServicesPeople infinancially excluded countries live on cash economies. This means, dangerous and insecure paymentmethods, no organization to their money or finances and a lesser chance ofbusiness opportunities. The cash economysystem they are continuing to use is full of corruption, fraud and theft.
By continuing to use this system, they willbe unable to prosper to their full ability and will not be able to escapepoverty. 6.1 IndiaIn August of 2014, the Prime Minister of India had announced theywill be commencing the mission of achieving financial inclusion. They were the first country to adapt to alarge based eco-system for digital financial inclusion.
After two years of this program, over 260million bank accounts had been created and the percentage of the populationwith active bank accounts had increased over 10%. The Indian government has been working withorganizations such as the Bill and Melinda Gates foundation to create newdigital banking models that are easy to use and accessible to poor householdsas well as digitizing government payments to further encourage this system(Bill and Melinda Gates Foundation – Where We Work) 6.2 Sub Saharan Africa – KenyaAnother country who has largely reduced financial exclusion isKenya. They have been using the mobilemoney system M-Pesa developed by Safaricom a mobile telecom operator for over adecade now.
M-Pesa has reached 80%of households in Kenya and makes it easier and more accessible to use financialtools. M-Pesa allows their users tomake international transfers, loans and health provisions. This system had aided 2% of Kenyanhouseholds to escape extreme poverty. In2016, over 6 billion transactions were made in Kenya and 614 million of them inDecember of 2016 alone.
M-Pesa alsohelps small enterprises by giving them opportunities to expand theirbusinesses. (CNN)Governments have been focused on and workingtowards eliminating financial exclusion. They are working with both industry and non for profit entities to buildagendas for financial inclusion as a policy objective. Governments recognize that Financialinclusion will enable economic growth and alleviate poverty. Governments can playan important role in helping to educate the population, promote savings. As Government controls the transfer of moniesto individuals, they can focus on social payments, wages, and pension paymentsonto electronic channels ensuring that these channels are linked to easilyaccessible, basic banking transaction accounts.
The role of Government hastraditionally been to ensure infrastructure, including nonfinancialinfrastructure, is working and providing oversight, and in ensuring thatfinancial institutions do not undermine consumer protection. The role of government in financial inclusion requiresthem to do better outreach, oversee appropriate products and services, and ensureconsumer trust. Government is the regulator to make sure that financial systemsare fair for both the service providers and the consumers. They also ensure that criminal activity isprevented in the financial systems. These activities can be high risk in both the developing and developedworlds. Such activities are Anti-Money-Laundering (AML), which refers to a set of compliance procedures and lawsdesigned to stop the practice of generating income through illegal means. Agood example of proceeds of crime could be from drug trafficking.Manybanks have long histories of commitment to their country’s citizens thatcontinue to motivate their efforts today.
In order for Banks to address FinancialInclusion they are focused on the following: 1.Building on digital payments, including addressing payments from government topeople (G2P) these are items like procurement, payroll, social transfers,pensions, etc. 2. Focusingon the underbanked and use data and analytics to understand their needs forfinancial services. 3.Cross-sell the full range of products.
4.Address the usage gap by building financial capabilities and education ofconsumers about financial products. 5.
Develop the ecosystem through bank-led partnerships, increasing customerconvenience while sharing costs and risk. 6.Enable remote account opening using digital IDs7.Align all systems to digital banking, benefiting banked, underbanked andunbanked customers. Asbanks are addressing these items they are facing barriers to FinancialInclusion.
The top barriers are:1.Lack of trust – in banks, in digital, in agents – leading to lack of uptake. 2.Lack of financial capability and digital literacy – leading to lack of usage. 3.Agent networks – building them, equipping them, ensuring their quality. 4.
Data – privacy, security, cost, lack of capacity to analyze the data, lack ofwillingness for parties to share data, and regulations around these issues. 5.Regulatory issues, especially pricing, capacity, and KYC requirements. 6. Lack of coordination amonggovernment bodies. 7. Lack ofconnectivity/infrastructure. The continent of Africa isat the leading edge of mobile financial services.
With the high penetration ofmobile phones in the telecommunications sector has led mobile banking to reallytake off successfully. This is especiallyprevalent in Eastern and Southern African regions. In Sub-Saharan Africa (SSA), 36 countries out of 54have successfully deployed mobile banking services. Mobile telephony has been instrumental in scalingfinancial services and eliminating geographical constraints.
Mobile banking transactions are also morecost efficient as software can complete transactions and identity and securitycan be managed through digital algorithms. Digital combined with mobile has also been assisting commercial banks tohave a cost efficient expansion strategy. There are a number of factors thathave driven success and variation in the success of mobile banking. These factors are:· Mobile phone usage andpenetration· Financial infrastructuredevelopment and partnerships· Population density· Government and regulatoryenvironment· Private companies fundinginnovationMobile banking services withthe help of mobile communication devices and collaboration with telecomoperators to help in regulatory compliance could play a large role in helpingto combat financial exclusion. The scope of these services includes accountonboarding, remote deposits, performing balance checks, account transactions,payments, etc. A mobile payment is a type of transaction in which the mobile deviceplays a key role in authorization, verification and fulfillment of a paymenttransaction.
Mobile payments are a substitute to cash for Point of Salepayments, bill payments, phone recharge, money transfers etc. Almost 41% ofIndia’s households are unbanked and approximately 67% of all retailtransactions are still being conducted in cash. The country has a mobile phonesubscriber base of 873 million (from 165 million in 2007) (TeleTech 2014www.deloitte.com/in).
Mobile phones could act as a perfect platformto offer financial inclusion in terms of banking or payment services. Mobileoperators could have the advantage of reach, already built retail channels andcustomer service infrastructure. Financial Technology(Fintech) is the use of software algorithms and digital platforms to enhancethe availability and delivery of financial services to end consumers.
The roleof Fintech is to create efficient solutions that meet regulatory compliance andsometimes disrupt mainstream business/banking models by creating alternativemeans of providing services. Fintechs are playing amajor role in financial inclusion. Forexample, Fintechs are using social biometrics and behavioral data to validateindividuals. For example, systems cansearch and verify on public domains about your work, if you own a mobile devicewith good credit, where you went to school. Using these methods you can createcredit risk scores outside of traditional methods. Fintechs can use the cameraon your phone to verify IDs. Facial recognition and fingerprint recognition forsecurity. Fintech holds huge potentialand opportunities to challenge the norm and combat financial exclusion.
As newtechnologies are developed, financial services will be provided with greaterspeed, efficiency, and with many different points of access like mobile phones.Access to financialproducts and services are becoming more common and accessible for consumersthat live in rural locations or regions without the structures of a moderneconomy. Fintech makes these products and services more accessible and moreaffordable by lowering the cost of doing business for the financialinstitution, a savings which can be passed on to the consumer. Combine thiswith the fact that globally people have access to affordable mobile phones andcellular data networks we may one day have a world where no one is excludedfrom accessing financial services.
The importance of financial inclusion is huge, these tools are keycomponents to creating a financially healthy banking system in someone’shousehold or business. Giving people thechance to properly learn how to use financial tools is very important. Places such as India and Kenya have seentremendous improvement within the last few years with poverty rates decliningand their economy rising due to the amount of people registering with banksinstead of relying on the cash economy system. The global issue of financial exclusion is negativelyimpacting the people in need of these services as well as the government andeconomies of these countries. Telecomcompanies have created digital banking solutions that banks have partneredwith. Governments of these countriesalso joined these models and added G2P payment transactions to be paid withthese models.
The groups workingtogether to solve the issue of financial exclusion will be extremelybeneficial.