Almost half a century has gone by since the electronification of payments, followed by a number of different technological innovations in the industry. Still, billions of people remain ‘unbanked’ and dependent on cash, barter goods and informal methods of saving and lending. Recognizing the role that financial services play in facilitating economic growth and reducing exposure to economic vulnerabilities, global policy makers have embraced financial inclusion as a top development priority.
In 2012, the World Bank issued a report, based on research funded by the Bill & Melinda Gates Foundation, called the Global Financial Inclusion or Global Findex database, which consistently measures how people around the world save, borrow, make payments and manage risk. This first of its kind database shows that worldwide, only 50 percent of adults have access – through an individual or joint account – to a formal financial institution.
In high-income economies account penetration is nearly universal, with 89 percent of adults reportedly having an account at a formal financial institution, as opposed to only 41 percent in developing economies. Globally, more than 2.5 billion adults do not have a formal account, most of them in developing economies.
The challenge is at the grassroots
The financial inclusion discussion, in effect, is mostly centred on poor economies, stating objectives that prove specific ‘intervention’ can help poor households improve their lives and spur economic activity. Although, identifying these pockets of disparities affecting billions of people, often living in remote regions of the world, and introducing them to a formal financial system is a complex challenge.
In fact, examining the reasons for this disparity, the Global Findex states that three quarters of the world’s poor (earning less than USD 2 per day) do not have access to a bank account, not only because of poverty, but also due to costs, travel distance, and paper work involved.
In recent years, there have been instances of institutions focusing on different parts of the challenge, either through technology-driven solutions or alternative methods of micro-financing. However, in isolation, these become short-lived answers to the bigger issue at hand. This leads us to understand that there needs to be greater collaboration between organizations and governments worldwide, who have a collective responsibility to undo the challenges of remoteness and infrastructure connectivity, and reach the ‘unbanked’.
This change can be brought about by building a payments infrastructure that fosters partnerships between various stakeholders, including merchants, banks, policy makers, NGOs, mobile operators, micro-finance institutions and payment service providers, who can effectively implement new products and technology for secure financial services, and educate the people of its benefits.
Driving change through technology and partnerships
The World Bank confirms that electronic payment technologies “can have a positive impact on a variety of microeconomic indicators, including self-employment business activities, household consumption and wellbeing.” In regions such as Sub-Saharan Africa, where 80 percent of the population remains ‘unbanked’, tailor-made innovations in financial services go a long way in changing mindsets.
A prime example of this is the M-PESA or mobile payment system in Kenya, which was modeled to increase financial outreach by providing deposit and withdrawal services to the people. Safaricom, the biggest telecom provider in the region, introduced M-PESA in 2007; by 2009, nearly 40 percent of Kenyans were subscribed to this service. M-PESA allows for easier circulation of money; conducting safer and convenient business transactions, and helps vendors reduce transaction costs and direct their savings back into the business. This alternative to a physical banking system has since been adopted by other countries in a bid to drive financial inclusion.
Botswana, Orange Money launched a mobile prepaid card in 2013 underwritten by the African Banking Corporation Botswana. The card is linked to Orange Money’s existing mobile wallet and at present they have issued over 20,000 cards. Current penetration of the carded wallets is 10 percent, which means there exists a big opportunity for growing acquisition. Corporates are starting to use Orange wallets for salary disbursement to their non-banked employees, thereby growing financial inclusion within the non-banked sectors.
Such success stories prove the effectiveness of combining technology with the right partnerships, consumer education and financial literacy, which when they work together as a conducive whole, can pull off an interoperable, duplicable system that achieves true inclusion in different environments. For added efficiency, these systems also need to be scalable so they can operate across borders, given the fact that people are not static and want to be able to move with their money.
Innovation thrives in places that have been willing first to allow the market to develop, and then introduced the right regulation in order to ensure entirely justifiable and important mechanisms like consumer protection principles, which are essential when digital financial services are developing quickly.
That is why financial inclusion initiatives need the support of positive government regulation that focuses on germinating these ideas and encouraging innovation and partnership. The government also needs to simultaneously create consumer protection tenets that govern the way financial inclusion initiatives are implemented, but not to the extent that good innovation is discouraged by overly onerous rules.
Looking towards Qatar, a high-income economy
While the Global Findex report shows a greater need for financial inclusion among the poor economies of the world, it does not discount the even high-income economies such as Qatar, who can benefit from improvements in the financial system.
The report states that only 66 percent of the adult population in Qatar (only including citizens and Arab residents) has an account at a formal financial institution, and only 17 percent used their account to receive wages, while 25 percent used the account for savings. The report also indicates that 13 percent of the population took a loan from a formal financial institution, while 31 percent borrowed money from family and friends, or through other informal methods. Fifty percent of the population has a debit card, while only 32 percent has a credit card.
These numbers are relatively lower than the global averages for high-income economies, a reason for which may be the lack of effective consumer education that encourages residents and citizens to resort to formal financial services. Learning from the developing nations, perhaps the solution lies in implementing far-reaching and easily adoptable systems that utilize technological advantages in Qatar, such as the high penetration of smartphones, and seamless access to the internet.
In conclusion, stakeholders in the global financial system need to aim to help more people achieve their objectives, whether it is to build a successful retail business, acquire new customers at a bank, send money to a family member, buy something from a store in another country or while on-the-go, go on holiday, or develop their own payments technology.
Essentially, financial inclusion is the key to empowering people from different strata of society, and consequently improving economies around the world, and the private and public sectors should encourage awareness and award initiative to drive this shift.