Banking the Unbanked Population: Building Financial Inclusion Through Fintech
As COVID swept across the globe in the past year, decimating world economies, economic inequality issues came to the forefront of social and political discussion. While most of the focus was on racial and gender-based wealth gaps and income inequality, financial inclusion is an equally important issue.
Financial inclusion is the equitable access for individuals and businesses to affordable financial services such as transactional bank accounts, savings and investment opportunities, and credit and insurance. Lack of access to these resources exacerbates income and wealth gaps and keeps the unbanked and underbanked populations from full participation in the global economy.
Fortunately, advances in fintech are helping to ease access to banking for traditionally underserved communities. Fintech trends such as digital payment systems and microfinance help overcome access barriers in traditional banking and bridge the financial inclusion divide.
The Unbanked Population
One of the most glaring but least discussed financial inclusion insights today is the number of people who still do not have access to bank accounts or similar services. Worldwide, the unbanked population amounts to approximately 1.6 billion people, or 20% of the global population. And, shockingly, according to 2019 Federal Reserve estimates, the unbanked and underbanked population in the U.S. is 22% of adults — 63 million people.
Unbanked and underbanked populations are disproportionately women, people of color and young adults. Worldwide, 56% of the unbanked are women, and 30% of unbanked adults are under 25. Women represent such a large fraction of the unbanked, largely due to their tendency to rely on a male family member having a bank account.
Even those with access to bank accounts frequently experience challenges in accessing other financial products such as loans. These are the underbanked. Within the U.S., predatory and discriminatory lending practices such as redlining have plagued minority communities for decades and limited full access to financial systems and resources.
Equitable access is not a problem limited to individuals. Businesses, in particular small businesses and minority-owned businesses, are also frequently underserved.
Access Issues for the Unbanked and Underbanked
While poverty is a significant reason that much of the world remains unbanked, it is far from the sole factor. And fintech trends can effectively help eliminate many of these barriers.
- Affordability: Traditional banking has always been an overly costly option for much of the unbanked and underbanked population, with monthly account fees, check-cashing fees, teller fees and ATM fees combining to limit access to those already facing financial difficulties.
- Distance: Much of the world, particularly the developing world, cannot easily reach a brick-and-mortar bank.
- Distrust of financial institutions: Events such as the subprime mortgage crisis and the resulting housing crash and bank bailouts have heightened distrust in the traditional banking system.
- Financial literacy: Many adults lack sufficient financial literacy to understand their options. Lack of financial literacy also exacerbates distrust in traditional banking.
Digital access to financial resources is one of the best solutions for many of these issues. Digital platforms allow for any time, anywhere access and branchless financial institutions, reducing many logistical barriers to access. Digital access does come with its own challenges — for instance, the cost of phone technology and the availability of high-speed internet. But with 3.6 billion phone users worldwide in 2020, 24/7 real-time digital access to financial products is becoming simpler for financial institutions to provide.
Banking the Unbanked Population: Fintech Trends That Are Advancing Financial Inclusion
Current fintech trends include a variety of products and services that can help drive financial inclusion. Traditional banks can and should also consider how they can adopt some of these practices to serve their communities better. The variety of fintech resources available could fill a book, but two of the most effective fintech tools for addressing financial inclusion are microfinance and digital payments.
In 2015, the United Nations Department of Economic and Social Affairs launched the #Envision2030 agenda. Number one among its 17 goals is eliminating poverty. Achieving this goal, in turn, requires “ensuring that all men and women…have equal access to economic resources, as well as access to…financial services, including micro-finance.”
While some consider financial inclusion and microfinance to be interchangeable terms, they are pretty distinct. Financial inclusion is a goal, whereas microfinance is a range of products and services that can lead to financial inclusion. Microfinance provides services such as credit, savings and insurance, typically to low-income and unemployed individuals. The availability of these services keeps people from resorting to more predatory services such as paycheck loans and other high-interest loan services (or even worse, loan sharks), which keep them locked in a cycle of financial hardship.
Microfinance programs also have been incredibly successful in helping small businesses thrive. In addition to the numerous private institutions providing micro-lending (e.g., Kiva), the U.S. Small Business Administration has its own microloan program.
For those lacking trust in traditional banking institutions, peer-to-peer lending (like Kiva) and crowdfunding (e.g., Kickstarter and Indiegogo) provide viable and effective microloan sources. More importantly, they can help overcome many of the hurdles associated with traditional lending, including credit score problems and significant documentation requirements.
The availability of digital payments is one of the most significant fintech trends for improving financial inclusion. Many people across the globe are the sole source of financial support for family members or friends in other countries. Low-income individuals and families account for a substantial portion of this demographic and need to be able to transfer money easily, quickly and at low cost.
Traditional banking methods for international money transfers are cumbersome and expensive. Given the small amounts low-income individuals are able to transfer, transaction fees can eat up a large percentage of the transfer, reinforcing the wealth gap. Moreover, international transfers at traditional banks frequently require physical presence at the bank, and low-income individuals may not be easily able to go to a bank during limited bank hours. Finally, traditional banks often require substantial documentation for international money transfers.
An increasing number of digital payment systems are devoted to making transfers simpler, more efficient, and less costly. And the explosion of cryptocurrency has seen an associated rise in cryptocurrency-based digital transfer platforms.
The Path Forward
Traditional banks and credit unions must continue to rapidly expand the range of services they offer, particularly digital services, if we are even to come close to the U.N.’s financial inclusion goal by 2030. Lumin Digital helps banking institutions build personalized digital experiences for their users, focusing on those resources each community needs the most. Contact us to discuss how we can help you advance your digital banking offering so you can continue to improve how you serve your community.
Kiara Taylor has more than 10 years of experience in finance, ranging from fixed income to emerging markets. She enjoys writing on the impact of both micro and macro trends on global finance.
Global Finance – World’s Most Unbanked Countries 2021
Investment News – Financial literacy is important for financial inclusion
United Nations – #Envision2030 Goal 1: No Poverty
Investopedia – What Is Microfinance?