Through Ismail Amla, Executive Vice President, Professional Services, NCR Corporation
The benefits of financial inclusion are well known and numerous. Households that don’t have access to bank accounts or relatively affordable mechanisms to receive, pay, and spend money end up using a significantly higher percentage of their income on expensive, cash-based financial options. These options, like money orders and payday loans, usually have much higher fees and exorbitant interest rates. Households affected by financial exclusion are disproportionately poor and less educated. The highest percentages of these excluded households are in less affluent countries. But even in the United States, 5.4% of households were unbanked, according to the latest FDIC survey. This group includes 7.1 million households. The exclusion of people from the financial system also slows down economic growth; Money that could have been spent on goods, services, and education is instead trapped in the money economy or used to pay high fees and interest.
I think the world is in a defining moment. Just as economic growth has dramatically reduced global poverty rates, ubiquitous, cheap, and connected technologies can drastically reduce financial exclusion. It’s now up to companies like NCR and the broader fintech ecosystem to work together to make this happen. Together, we believe we can drastically reduce financial exclusion within the next five years in the developed world and within the next decade in the developing world.
Fostering improved access to technology, greater openness of the financial system, and a more robust and fair marketplace for financial products will bring us closer to that goal. Taken together, these three forces are already driving a rapid revolution in fintech. This revolution is both a moral imperative to improve life and a unique business opportunity that will benefit society by increasing overall economic growth.
While the digital divide still exists, technological advances and reduced costs are rapidly eclipsing this divide. According to Our World in Data, 640,000 new people come online every day. Smartphones and cheap or free data access are the crucial tools of progress. Today, low-end smartphones cost less than $100, and forward-thinking carriers like Jio in India are offering affordable wireless data plans. While data plans for smartphones vary widely by country and are often expensive, WiFi access is much cheaper and often free. If these trends continue, the number of people without access to the Internet will continue to decrease.
A whole generation of new banks, like Chime and Monzo, have built businesses based entirely on mobile phone applications. In China, for example, where digital payments are now the dominant form of exchange, the telephone has become the dominant way of accessing financial services. In developed countries, fewer people use cash and employers are quickly moving away from paying paper checks. COVID has further accelerated the transition from cash to digital payments.
Traditionally, unbanked and unbanked people use digital financial services at a much lower percentage than larger population households. But we have clear evidence that digital financial inclusion can work in less developed economies. In Africa, over 200 million people use mobile e-cash systems. In Kenya, the mobile M-Pesa POS systems are accepted almost everywhere. We can change that with smart product designs. The M-Pesa system was developed with local culture and values in mind.
The tremendous pressure emerging fintechs are putting on traditional banking processes is leading to a welcome unbundling of financial services and competition at multiple levels. Venmo, for example, offers to give instant access to paychecks to customers who have set up direct deposit. Traditionally, banks have taken a day or two to process these deposits. For the poor and financially excluded, two days can mean the difference between paying rent on time and being penalized. Unbanked users looking to move money across borders in relatively small amounts, as is common with wire transfers, can now choose from several options, including cryptocurrencies. Managed and owned by a consortium of major US banks, Zelle allows users with accounts to move funds instantly with no fees.
While the tide of technology trends has us at our backs and the rapid rise of fintechs is spurring us to rethink financial services, there are still a number of concrete steps for the financial services industry to consider.
- Remove the usual obstacles. Minimum fee credits or service fees drive low-income consumers away. In fact, according to the World Bank, the number one reason for not having an unbanked account is simply lack of funds. Sure, that’s something that can be done. CapitalOne, a major US bank, just announced that it will stop charging overdraft fees but will continue to offer overdraft protection.
- Create incentives for mobile banking. According to the World Bank, low-income consumers are more likely to have a mobile connection than internet at home. Developing mobile banking and financial services products that appeal to the unbanked will reduce exclusion. It’s also just good, universal product design. There is a very good reason why the smartphone is the dominant financial platform in most parts of the world that are either mainly unbanked or only recently banked.
- Expand access points to advanced digital services. There’s a reason convenience stores, supermarkets, and other businesses have ATMs. Because ATMs attract customers and make it easier for them to pay. In the digital economy, the same entry points for shops can become equally important as hubs for the digital delivery of financial services, possibly even co-branded between banks and shops. Physical real estate combined with intelligent digital access points brings services closer to those in the community who may not be able to make it to a bank branch on their own – and who otherwise may not have easy access.
- Emphasize prepaid products. In 2017, nearly 27 percent of unbanked U.S. households used prepaid cards, according to an FDIC household survey. Prepaid credit cards or debit cards can provide a glide path to credit histories that can open other key doors. These cards are more secure than cash or checks and can be used to make online purchases.
- Find new ways to analyze and give access to customers. In the US, several companies are using artificial intelligence to create alternative and more accurate credit rating systems. Developed by former Google executives, Upstart examines over 1,000 other indicators to assess whether someone is likely to pay off their loans. In fact, Upstart is more accurate than traditional credit scoring products and is particularly good at identifying people who may not get credit through traditional underwriting processes but are actually pretty good risks. Similar systems can operate at the lower levels of finance and credit where the unbanked might operate.
To make these kinds of changes, we all need to put ourselves in the shoes of those who look inside from the outside to imagine what it might be like to live a life of financial exclusion. The time is now. The technology is there. The opportunity is huge. Let’s make a big dent in financial exclusion, not in our lifetime, but in the next decade – or even sooner.