By Ram Devanarayanan, Head of Business Consulting, Infosys Finacle
Asignificant segment of the world’s population remains excluded from banking. Yet as physical cash retreats, it is increasingly important to hold at least a current or checking account. How can society in general, and banks in particular, reduce the proportion of unbanked individuals, and reap the rewards of financial access for all?
The lack of access to banking services may be one of the most pressing economic issues facing modern societies. Without a bank account, many services and activities are simply out of reach. Gaining regular employment and secure housing depends to a large degree on access to banking, and in turn the lack of a fixed address can create its own barriers to opening an account.
In practice, banking exclusion affects two groups more than others: those who are less digitally aware or unable to access digital services, and those that cannot meet regulatory or other criteria.
For example, in 2020 the Financial Conduct Authority reported that some 1.2 million UK adults had no current or e-money account of any sort. With around 5,000 UK bank branches closed since 2015, these individuals are at risk of being shut out from the banking and financial services they need to go about their day-today activities. In 2021, some 6% of the population in France, Italy and Spain were without access to the services of banks or similar organisations, 7% in Israel and the United States, 20% in China and India, and 71% in Morocco. Globally, various sources place the unbanked population at around 1.7 to 2.0 billion people.
Less digitally aware unbanked populations
Branch closure is not a new phenomenon. Cost pressures and digitalisation of services have inexorably driven retail banks to cut expensive brick-and-mortar networks and focus on a smaller number of larger centres. Changes that were already in the pipeline were brought forward at speed by the lockdowns triggered by the COVID-19 pandemic; applying for a loan or mortgage on Zoom or FaceTime became normalised within a few short months.
For older generations familiar with personal visits and physical paperwork, the removal of local branches also cuts their access to financial services. In many cases, these individuals depend on cash and cheque transactions to run their lives, with no recourse to payment cards, online banking and mobile apps.
However, this segment of digitally less-aware individuals are excluded only for practical reasons; in every other respect they remain valuable customers, amenable to loan and investment propositions.
A bank in the Nordics demonstrated that it is possible to resolve many of these types of challenges. Following detailed research, the bank discovered that user interface changes greatly improved user acceptance, and helped customers make successful transitions to digital banking. For example, by creating task-focused, step-by-step instructions with only one action on each view, more customers learned to feel comfortable with the online experience. Lately, many banks and similar services have introduced biometric authentication to replace passwords and simplifying login processes.
In addition, in place of branches, banks are forging new high-street partnerships, with retailers, coffee shops, and co-working spaces. These points of contact replace the high capital investment of fixed bank branches with low-cost shared operations, reaching out to digitally excluded customers in a way that they understand.
Genuinely excluded unbanked individuals
Individuals in the second unbanked group face a very different set of challenges, centred around lack of authentication. Typically, this shows up as missing or unacceptable documentation for Know Your Customer (KYC) processes, and can act as a significant barrier to opening a bank account. Refugees and immigrants, among others, may not possess relevant paperwork, have no local financial history, or offer identification documents that the bank’s systems do not recognise.
For example, as of 1970, banks in the United States banks were required to obtain a Social Security Number (SSN) for all account-holders. In turn, obtaining your SSN depended on an application that gave proof of age, identity, and citizenship or immigration status. The SSN requirement no longer applies, and many formerly excluded potential customers can use alternative identity documents, perhaps originally issued outside the US.
As such, demands to see physical passports and photo-driving licences no longer apply, a change that accelerated during the pandemic. More recently, online verification processes have become perfectly acceptable provided they meet the banks’ risk criteria.
However, large numbers of people remain outside the banking and financial systems. In some cases, potential customers do not meet even minimal identity criteria, and in other cases banks are reluctant to onboard new accounts that may offer little value.
Financial access for all
Despite the current difficulties, financial access for all may be within sight. For example, the branch network for Digibank by DBS is based on a partnership with the India based Café Coffee Day chain. Individuals with a smartphone and their identification number (available to anyone resident in India regardless of citizenship status) can open a Digibank account in just a few minutes.
Elsewhere, new ways to open a payment-card account that do not have strenuous KYC barriers can act as the first steps to creating a financial history. Often this route will be via embedded finance options, such as instalment accounts offered by retailers. In these cases, the transition from unbanked to banked may be almost invisible, where the primary channel is a retailer, telco, internet service provider or TV company.
Key enablers here are fintechs, who see opportunities to recruit accounts with highly targeted offers, such as micro-loans available as embedded finance. With focused offerings, fintechs will accept relatively high account acquisition costs in return for the opportunity. These offerings extend the reach of the financial ecosystem to the unbanked, creating a pathway to full engagement.
Banking innovation, technology, investment
Solving the challenges of financial access for all is likely to involve a combination of banking innovation, technology, and infrastructure investment.
Banking innovation is happening in front of our eyes. Online and app-based banking has removed many of the access barriers, and fintechs are leading the charge into niche and embedded banking services. Going forward, virtual branches and virtual lobbies will enable greater ease for customers to transact and manage their financial services.
To enable fintech and bank innovation, the latest software platforms can enrol large numbers of new customers at low cost and scale to support millions of new accounts – even those with very low, or even zero, deposit balances. With high-efficiency transaction services and deep analytics, the platform technology enables banks to use data to provide highly tailored offerings such as micro-loans to individual customers.
And last but not least, a prime infrastructure example is the Unified Payments Interface (UPI) in India. By establishing a common payments standard across the country, even the smallest of street vendors can use UPI to accept payment by card or smartphone, encouraging millions of traders and their customers to join the banking system. In addition, with a ‘no frills’ banking account, those on a lower income are able to access basic banking facilities and benefit from financial inclusion. These accounts can be maintained without or with a very low minimum balance. In effect, the unbanked can start their banking journey without even realising it.
Driven by innovation, enabled by technology, supported by infrastructure, financial access for all is clearly within the banking industry’s grasp. The cost of account acquisition is declining, and with data-fuelled ways to create value from each customer, the future is positive.