Financial inclusion - A word with many meanings

In recent years, the usage of the term "Financial Inclusion" has risen exponentially. As with any buzzword, it is used and misused by many companies to boost their corporate image and get support from different governments (e.g. subsidies).

As with so many buzzwords, the term has become so much overloaded, that it now encompasses a wide variety of initiatives. Very broadly, it includes a range of financial and non-financial products and services to combat financial exclusion. This exclusion can have many faces and degrees:

• In developing countries, financial exclusion usually means unbanked, i.e. people not having access to a bank or more specifically to a bank account. Such an account allows to store money and send and receive payments. This lack of access can be caused by a lack of knowledge (banking services not simple enough) or general distrust (banking system not considered safe and sustainable enough) in the financial system, banks charging too high costs (bad pricing) or banks located too far away from their consumers (bad convenience).
• In other countries, so called developed countries, (even though there is a percentage of unbanked people even in the richest countries), we are dealing more with underbanked, which consists of:
  • Financial products and services charged at such prices (e.g. loans), that they are not affordable or provide insufficient value-for-money. This can be because they are too largely packaged or have a too high price, due to the risk calculated by the bank.
  • Financial products and services not granted to people, due to risk management measures taken by banks.
  • Complex and inadequate products being sold to customers (e.g. through misleading practices and biased financial advice), unaware of better alternatives.
  • The inability of people to understand banking products and services, which makes them also inaccessible.

In short, we can consider that "Financial Inclusion" aims to ensure that every day financial services are available to everyone at a reasonable cost and are offered by institutions, which are responsible, sustainable and properly regulated.

Internationally Financial Inclusion is high on the agenda, as it is a strong enabler for the Sustainable Development Goals of the United Nations. Even though these goals don’t explicitly define "Financial Inclusion" as a goal, it is featured as a strong enabler for 8 of the 17 goals. The reason for this, is that a well-functioning financial system spreads opportunity and fights poverty and that it allows people to build out their professional activities much more easily via:

• Less time and risk in transacting money, i.e. instead of having to physically exchange cash (requiring sometimes hours of travel), a bank payment can be executed in a matter of seconds (in developing countries often via mobile payments). One study showed that in developing countries receiving social benefits through mobile phones saved recipients an average of 20 hours in commuting and wait time.
• Allows to finance activities, i.e. use debt for investing in a business to leverage future profits
• Allows to save money for the future (i.e. plan for long-term goals), which protects from the risks of daily life (unexpected emergencies such as medical emergencies, death in the family, theft, or natural disasters) and allows to build a working capital.

Even though problems with "Financial Inclusion" are still large (still around 1.5 billion adults are unbanked), great progress has been made. According to the World Bank, more than a billion adults have gotten access to banking accounts in the last 10 years. Especially China and India have been very successful in financial inclusion over the last years, but also in Africa countries like Kenia (M-Pesa helped more than 200.000 people out of extreme poverty) and Tanzania can present impressive achievements on this front.

But also, in developed countries there is still work to be done. With about 20% of households in the US being unbanked or underbanked, there is still a large gap from offering affordable and reliable financial services to everyone. In Europe percentages are a bit better, but the financial mainstream is also still not covering everyone.

But even more important in developed countries is the lack of financial literacy and the lack of financial responsibility (i.e. the responsibility to save money for the future). In the US, most of the population fails on one or both fronts and contrary to the significant drop in people being unbanked and underbanked in recent years, this percentage is actually increasing instead of decreasing.

As the above demonstrates international institutions and governments have a strong interest in improving "Financial Inclusion". Not only will it improve the wellbeing of their citizens (more opportunities, less poverty, more protected against unexpected negative scenarios…​), but also because financial inclusion helps to:

• Reduce corruption
• Reduce tax evasion (by reducing the size of the informal economy and providing greater transparency in financial transactions)
• Ensure that aid (foreign and domestic) arrives effectively to the people who need it the most
• Reduce administrative costs and improve efficiencies in government tasks (like pension payments, tax collection…​)
• Increase security in a country (people walking around with large sums of cash poses a security risk)
• …​

While the traditional incumbent banks are not very active in the domain of "Financial Inclusion" (as they consider it too risky and not profitable), a lot of Fintechs are focusing on these domains. This underserved or not served population can be an interesting niche group, which can be profitable, if managed correctly. This great market opportunity creates new high-tech services deployed by low-cost Fintechs, which allow to serve those groups in a profitable way.

In general, we can identify 5 groups of Fintechs active in this domain:

• Fintechs offering traditional banking products and services, but considerably reducing costs (commissions) compared to traditional players, by typically cutting out manual tasks and intermediate players through technology. Typical examples here are remittances (money transfers) and peer-to-peer lending.
  A very successful example is the story of TransferWise, which took on the competition against giants like Western Union, by providing these international money transfer much faster (e.g. a transfer to India can be done in a matter of seconds, where before in took several days) and cheaper. With international remittances (i.e. income earned by emigrants in developed countries to their families back home) the largest source of charity (over 200 million people sent over 500 billion dollar in 2018 back home), reducing the commissions can save billions worldwide, which can be used for further developing lifes at home. Today TransferWise in the UK accounts already for 20% of the money flows leaving the UK and this percentage continues to grow. The success of TransferWise has furthermore inspired many other Fintechs in the domain, such as Mobetize Corp., Remitly, Regalii, peerTransfer, Currency Cloud, Azimo, WorldRemit, Ripple…​
• Fintechs atomizing banking products, i.e. products for which incumbent banks have defined minima (e.g. minimum of 500 EUR for a loan), which are too high for certain people to access. Through technology Fintechs are able to work away those minima completely or to a fraction of those of the incumbent banks. Typical examples are micro-credits, micro-insurances, micro-savings, micro-pension, micro-investments (also called fractional trading), low-cost robo-advisors…​
  The most known example in this category (even though not really a Fintech) is the Grameen Bank in Bangladesh, which offers micro-credits for a staggering amount of almost 3 billion dollars to more than 9 million customers. This bank has however less enabled these microfinancing via technology, but rather via an army of employees of the bank and the BRAC institution.
  More recent in the domain of Fintechs, we can take the example of Robinhood, which enabled investing and trading to the masses (first in US, but now also in the UK), by a very user-friendly front-end, the removal of transaction fees and the introduction of fractional trading (i.e. as certain stocks like Alphabet, Amazon or Berkshire Hathaway cost more than $1000 per share, they could not be sold to smaller investors. Via fractional trading investors can now buy a partial share allowing to invest also in these firms even with only $5 or $10).
• Fintechs offering products specifically focused on the issues of these groups of adults, e.g. loan advances (pay day loans) or specific mobile payments (not only through smartphones but also through normal mobile phone) in developing countries (like M-Pesa).
  An interesting success story in this category is the story of M-PESAlaunched by Vodafone in 2007, which allows to make payments via a simple mobile phone. Studies have showed that M-PESA has allowed to raise the income of the average Kenyan using M-PESA by 5-30%.
  Another interesting example is the Fintech WageStream, which offers a product, which allows to extract money from your salary immediately based on the number of days already worked that month. E.g. if you already worked 5 days, you can already take 1/6th of your salary, which will be paid by your employer at the end of the month.
• Fintechs allowing to accept existing financial products to a larger audience via more advanced risk-calculation techniques, which are much more personalized and take into account much more factors than just financial factors, such as social (e.g. social media) and psychological factors. These Fintechs also help people to improve their traditional credit scoring (e.g. by building up a credit history for young people), move gradually away from blacklisting (e.g. 1 build forgotten to pay can have a very long negative impact) or provide specific solutions for freelancers and other self-employed people.
  Examples of such firms are:
  • Uulala offers mainly to the Latin community in the US credits, based on their behavioral habits and purchase history, rather than based on their credit history
  • Koyo offers credits to the underbanked in the UK, by analyzing the transaction information of the customer’s accounts via Open Banking technology, rather than using traditional credit scoring.
  • Companies like Lenddo, FriendlyScore and ZestFinance provide credit scoring based on information like social media activity, browsing history, geolocation and other smartphone data
  • Uber is providing specific loans to its drivers, based on the drive-info collected about the driver
  • CreditLadder helps also to improve credit scoring of people in the UK, based on rent payments (traditionally excluded from credit score) also retrieved through Open Banking
  • Alipay developed a scoring system for merchants based on real-time transaction data on commercial platform to provide credit facilities
  • Sesame Credit (from Ant Financial) is a credit scoring system in China, using a high number of variables, such as shopping habits and social media posts.
  • Credit Karma offers a free credit score simulators, which allows users to see how specific credit choices impacts their credit scoring.
  • …​
• Fintechs simplifying the understanding of existing financial products, through more intuitive user experiences, more transparency on costs and financial risks and clear explanations and trainings on the offered products. This group of Fintech also tries to change customer’s behaviors for the good, by pushing them to save more (via techniques like saving goals, automatic saving of the roundings on every transaction, budget plans…​).
  Some examples of such Fintechs and associated initiatives are:
  • Digit offers an algorithm, which monitors continuously the customer’s spending and transfers automatically small amounts of "unmissed" money (which won’t impact the cash flow needs of the customer) to a saving account.
  • Greenlight offers a debit card for children which provide parents a solution to monitor their purchases and define rules which type of purchases are allowed. Such a tool allows to learn children to responsibly handle money.
  • Walmart implemented a price-linked savings program to its pre-paid card, giving customers a chance at a jackpot each time they saved money. This type of gamification helped to increase saving by close to 40%.
  • Emeritas NBD went one step further and partnered with a fitness app. Based on the average number of steps taken by the user per day, the interest rate of a saving account is determined. This helped customers not only to work out, but also resulted in a considerable increase in savings.
  • Different gaming companies are promoting saving by rewarding virtual coins, which can be used in games. Examples are Long Game, Acorns, Moroku, Flourish…​
  • BBVA offered points to their customers, when they watched educational videos about certain financial products and services. These points could afterwards be converted into gift.
  • CommBank of Australia allowed its customers to simulate buying and owning a property, allowing to see immediately the impact of certain financial decisions.

Ultimately these Fintechs can help millions of unbanked and underbanked individuals to improve their financial wellbeing and work away the poverty premium (i.e. it is very expensive to be poor as banks and other companies charge much higher prices to low income households as risk of missed payments is much higher).
As these Fintechs deploy more modern technologies than the traditional financial industry, people (and countries) using these technologies can actually leapfro

g traditional financial service consumers. E.g. countries like Kenya, China or India have already today a much higher usage of mobile payments than Western countries with a strongly established banking community. Furthermore, with the success of these Fintechs, incumbent banks have noticed the potential of "Financial Inclusion" as well, which will further accelerate the reduction of the unbanked and underbanked population and will help strongly in reaching the United Nations Sustainable Development Goals. This can only be considered as a positive evolution.