Governments key to solving financial inclusion

Around 1.7bn people are unbanked according to the World Bank, down from 2.5bn only seven years ago. Considerable progress has been made in just a few years with innovations in fintech taking much of the credit for providing financial services access to almost a billion people. However, 50 percent of adults globally still remain excluded from the traditional banking system.

Accelerating financial inclusion through fintech

The enormous potential of fintech to create a more inclusive financial system and to stimulate economic growth is widely recognised. And with three billion new smartphone users expected in emerging markets by 2020 (Ericsson), McKinsey estimates that emerging economies could boost their GDP by $3.7tn by 2025 by fully embracing digital finance.

Mobile is playing a central role in connecting more people to financial services. In India, Jio Mobile rolled out its subsidised 4G service, clocking up 200m subscribers in just two years and helping to unleash a socio-economic revolution in India. In Kenya, mobile money is transforming the economy with three quarters of its population now in possession of a mobile money account largely thanks to mobile wallet operator M-Pesa.

Governments worldwide are undertaking a number of initiatives to support fintech development and accelerate financial inclusion. One of the major regulatory moves recently happened in Brazil, where its National Bank released new regulation for credit startups to increase competition and reduce interest rates for end-customers. Mexico earlier this year enacted a fintech law to promote financial stability while also introducing a regulatory sandbox under which fintechs can operate.

Barriers to financial inclusion

The efforts and growth of fintech and digital finance have been significant however there remains a number of barriers to driving further inclusion within emerging markets. The number one problem is the level of poverty and the financial catch-22 of requiring a credit history in order to get a loan (while a loan is required to build a credit history). Lacking the necessary ID documentation further complicates the matter and the World Bank estimates around 1.5 bn people globally are without the required paperwork to enter the financial system.

In 2014, India launched the Prime Minister’s People’s Money Scheme enabling the opening of free bank accounts with no minimum saving threshold. The initiative was recognised by the Guinness Book of World Records for orchestrating the largest number of bank account openings in a week – a staggering 18m. However, in spite of such efforts, India has a high number of dormant accounts. With inactive accounts often due to financial illiteracy, greater efforts at promoting awareness and understanding as well as the provision of educational materials in a variety of local languages (over 1600 languages are spoken in India) would help to drive usage.

The absence of broadband and increasing scarcity of, and distance to, physical bank branches continues to present obstacles to access. The issue is further compounded by under-developed transport infrastructure particularly in rural areas. Distrust in the financial system is also a commonly cited barrier.

The next wave of financial inclusion

With identity at the core of increasing financial inclusion, fintechs and financial institutions are leveraging smartphone penetration, data science techniques and emerging technologies such as biometrics and blockchain to dramatically improve identity capabilities.

Innovations in data science and machine learning together with the rise of alternative data sources have enabled unbanked individuals to build digital and financial identities. These identities allow them to demonstrate credit worthiness and eligibility for a range of financial services previously inaccessible to them. Electronic KYC capabilities and biometrics are leading the next wave of inclusion and are already making headway among the unbanked populations.

One example is Aadhaar – an extraordinary undertaking by the Indian government to get the country’s entire 1.25bn population onto a single biometric card system embracing 1600 languages and almost 300m illiterate adults. Today 99% of India’s adult population is covered on Aadhaar and the system is working towards narrowing the gender and economic class gaps through granting its citizens access to financial services across the country.

Nationwide adoption of Aadhaar significantly streamlined the KYC processes spurring growth in bank account openings as well as the adoption of electronic wallets. However, India’s Supreme Court recently banned private companies from using Aadhaar for eKYC. The ruling could be considered counter-intuitive as the exclusion of Aadhaar for identity verification will also mean exclusion from many financial services.

Governments key to financial inclusion success

Financial inclusion is on the rise and while efforts are reaping rewards there is plenty of work to be done to address the remaining 1.7bn unbanked. India has shown that connecting the remaining unbanked need not be a dream for years to come and there is much to be learnt from its financial inclusion campaign based on the pillars of digitalisation and infrastructure creation. However, governments in particular will continue to play a central role across a range of functions, namely in the roles of legislator and regulator as well as the infrastructure sponsor.