Financial Inclusion: Equity and Prosperity

Insights

• Researchers in 2022 analyzed data from more than 1,500 commercial banks in 36 emerging markets and found that financial inclusion increases bank stability.
• A 2023 study from the Central Bank of Nigeria found that two supply side indicators — number of ATMs per capita and bank branches per capita — is positively associated with environmental sustainability, particularly among non-European Union countries.
• Financial inclusion is considered an enabler for seven of the United Nation’s 17 Sustainable Development Goals.
• About 1.4 billion adults — a population the size of India — still do not have financial accounts.
• True financial inclusion requires that people have complete access to all financial services, including payments, transactions, savings, credit, and insurance. This access must also be affordable and sustainable, not just a temporary solution that disappears in hard times.

Global and corporate leaders predictably focus on the highest profile economic trends, whether it’s monitoring interest rates or counting the tens of thousands of US tech jobs eliminated so far this year. These front-and-center factors are critical to understanding the economic landscape. However, this view of the financial food chain does not reflect all the elements needed to keep economies humming and also promote equity — an outcome endorsed by most governments and corporations.

Greater participation in the financial system is a proven way to support individuals on the margins, support economies, and support sustainability. Studies consistently show that financial inclusion not only reduces poverty but also provides a variety of financial and nonfinancial benefits.

Researchers in 2022 analyzed data from more than 1,500 commercial banks in 36 emerging markets. They determined that financial inclusion increases bank stability. A 2023 study from Dr. Peterson Ozili of the Central Bank of Nigeria found that two supply side indicators — number of ATMs per capita and bank branches per capita — is positively associated with environmental sustainability, particularly among non-European Union countries.

Some of the world’s most powerful institutions prioritize financial inclusion; it is considered an enabler for seven of the United Nation’s 17 Sustainable Development Goals. Queen Máxima of the Netherlands, the UN’s special advocate for inclusive finance, has educated and pressed the international community on this issue since 2009. The World Bank and International Monetary Fund regularly advocate for financial inclusion and provide critical data on the progress made. This has led to great advances in the past decade: Financial account ownership increased from 51% in 2011 to 76% in 2021.

Alongside the commitment of global leadership, technology plays an important role in facilitating many of the changes needed. A 2022 study in the Asian Economic Policy Review concluded that “digital financial services has been a key driver of financial inclusion,” which accelerated during the Covid pandemic. Additionally, fintechs have expanded well beyond just digital payments to allow customers to receive loans without a credit history. Tala, for example, has more than eight million customers and has loaned more than $2.7 billion, primarily to those who previously had little or no access to credit.

Even with this progress, about 1.4 billion adults — a population the size of India — still do not have financial accounts. Further, true financial inclusion is more than just the percentage of account holders. People need complete access to all financial services, including payments, transactions, savings, credit, and insurance. This access must also be affordable and sustainable, not just a temporary solution that disappears in hard times.

Further progress to close this gap will take the dedication of NGOs, the regulatory might of governments, and the ingenuity of businesses. A critical step for banks is to adopt new technologies and processes that reduce the cost per account. This basic cost to create and maintain an account, from billing to “know your customer” and anti-money laundering regulations, can discourage financial institutions from pursuing some low-income customers. In other cases, these costs are recovered through fees that can put people in difficult financial circumstances and push them even closer to the edge.

In the financial services sector, there is still hope that technology — and more creative ways to use it — can further enhance financial inclusion.

Blockchain has not broken through yet. But major groups such as the Open Money Initiative and UNICEF have been looking at blockchain as a way to circumvent traditional gatekeepers in the financial systems. Blockchain-based systems could validate the identities of those applying for accounts and also reduce the transaction costs from banks or clearinghouses — particularly for peer-to-peer payments or remittances. Companies like BitPesa and Abra are currently using blockchain technology for remittance services.

However, organizations will need to grapple with the sustainability impact inherent in blockchain systems. And if cryptocurrencies are used, governments will need to grapple with the frequent use of it for illegal activity, and users will have to manage the risk of value volatility. Most cryptocurrencies are speculative financial instruments, not actual currencies. PayPal recently created a stablecoin that is pegged to the US dollar in an attempt to get some cryptocurrency benefits without the downsides. Even so, there are already several examples of failed stablecoins in the brief history of this concept.

Despite the technology transformation of the past decade, back offices at financial institutions have lagged, often still using Excel spreadsheets. A switch to low-code tools and help from generative AI could push the cost-per-account even lower by automating workflows. Generative AI can effectively lead customers through the process of requesting loans or opening accounts, although this requires internet access that some potential customers might not have. For now, banks are still only experimenting with these ideas in most cases, particularly when it comes to generative AI.

These tools can reduce IT maintenance and programming costs for financial institutions. If some of those savings can be passed on to customers in the form of lower fees, these changes might reduce barriers to entry to the banking system — perhaps with regulatory prodding. The enhanced digitalization also allows banks to create more personalized financial products that can target underserved groups.

Such solutions, however, touch on just some of the factors that exclude people from the financial system. Many people in both rural areas and low-income urban neighborhoods have no physical bank branches or other financial institutions nearby. That is particularly a problem for those without reliable transportation. And if they are sufficiently remote and without internet connection, mobile phone-based services do not offer a suitable alternative.

The lack of identification, which national digital IDs seek to solve, also creates hurdles. However, these IDs often create their own sets of problems, from concerns about their use for government repression to cybersecurity threats.

Digital technology can encourage and enable financial inclusion, but it has to be part of a broader strategy to build trust in financial systems, educate users, and collaborate widely. We have experienced a great deal of success so far in fostering financial inclusion. But we have not yet succeeded.