By Alexander Jones, International Banker
Gradually, the world is taking the necessary steps to boost financial inclusion, allowing those long-term unbanked and underbanked populations who are typically found in remote locations and/or developing economies to have access to a broad array of financial services. Small businesses are often the lifeblood of developing economies, but in many cases, a significant proportion of them are far from maximising their utilisation of financial services for a variety of underlying reasons. As such, they continue operating without bank accounts and don’t use—or, indeed, are not even aware of—the scope of financial products and services from which they could be benefiting.
The last decade or so, however, has seen technology play a pivotal role in closing this gap, both in developed and emerging countries, with fintech (financial technology) in particular driving financial services towards consistently greater levels of accessibility and democratisation around the world. Ultimately, this enables more people to access previously inaccessible financial products and services than ever before. Spanish lender Banco Bilbao Vizcaya Argentaria (BBVA) identified seven key ways for achieving financial inclusion through tech solutions:
- Develop an attractive and significant customer experience: By designing simple, elegant services, customers can conveniently access financial systems in an uncomplicated manner. For example, “saving circles”, known as ARAC in the United States, are a popular alternative for people without access to checking accounts, allowing customers to receive and lend money to people they know and trust, with each member of the circle contributing an amount of money monthly and one member receiving an overall amount on a monthly basis. Companies such as Clearstreet are now digitising these circles to improve accessibility to them.
- Socialise financial products and services: Customers want to participate socially with their savings, as evidenced by the rise in the number of peer-to-peer (P2P) funding sites such as Prosper.
- Commitment between financial institutions and their customers: Banks must keep engaging in dialog with their customers to build loyal relationships and involve them in certain financial services. BBVA highlighted the Juntos financial tool as providing a communication platform via SMS (short message service) between banks and customers and empowering lenders to build personal relationships with their customers at scale.
- Boost access to banking resources and improve financial health: Generate innovative tech-powered solutions that help people manage their savings better. India’s CreditMantri, for example, is an online credit “trainer” that helps users improve their loan ratings.
- The use of blockchain beyond cryptocurrencies: As an immutable record of information and transactions, blockchain can enable financial inclusion through many applications. Bitland, for example, uses the technology to verify property in Ghana and Honduras, while Coinbase employs it to facilitate P2P transactions.
- Generate alternatives for making inroads in financial inclusion: According to BBVA, “the use of information and knowledge through the application of Big Data enables financial institutions to offer more customized packages of banking services.”
- Biometrics: Alternative user-identification and authentication methods such as iris recognition and selfie facial recognition not only make access to financial services easier but ensure that user security is maintained.
Fintech is not the only channel through which innovation can drive financial inclusion. Co-ordinated governmental and regulatory action also plays a crucial role in inspiring greater financial access for the underserved. The Alliance for Financial Inclusion (AFI), for example, is a policy-leadership alliance owned and led by member central banks and financial regulatory institutions with the mission of empowering policymakers to increase the access and usage of quality financial services for the underserved “through formulation, implementation and global advocacy of sustainable and inclusive policies”. Its core vision is to make financial services more accessible to the world’s unbanked populations, and it has partnered with regulators, international organizations and private-sector leaders to achieve this, specifically by driving practical solutions and facilitating the implementation of impactful policy changes through its cooperative model that embeds peer learning, knowledge exchange and peer transformation.
Central banks and financial-regulatory bodies from more than 80 emerging and developing countries are just some of the AFI’s members, and in 2018, they signed the Sochi Accord: FinTech for Financial Inclusion. The accord pledges to strengthen the group’s determination and affirm its commitment to leveraging digital financial services and fintech for financial inclusion. It also aims “to accelerate the access and usage of financial services with a special focus on closing the gender gap, managing climate change risks, mitigating of de-risking challenges, advancing the inclusion of forcibly displaced persons, reducing the financing gap for small businesses and lowering costs for cross-border remittances while simultaneously promoting financial stability and integrity”.
In 2018, the group published a key report, “Digital Transformation of Microfinance & Digitization of Microfinance Services to Deepen Financial Inclusion in Africa”, which specifically deals with how microfinance providers in Africa have leveraged digitisation to boost financial inclusion. “The digitization journey of financial services providers has been accelerated by the rapid adoption of internet and smartphones,” the report observed. “Traditional microfinance providers have begun to explore ways to digitize their existing operations or assets to keep up with new technology and client demand more convenient and accessible services.”
The report also identified three key ways in which microfinance institutions (MFIs) in Africa were utilising digitalisation to boost financial inclusion:
- Using mobile devices to digitise services and processes: Devices such as point-of-sale terminals, phones and tablets offer existing services (for example, customer registration and loan applications) at a lower cost and digitise processes to increase efficiency. Microfinance staff can also go paperless, provide new services such as savings collection and use mobile agencies (mobile branches, tablets) instead of physical branches.
- Partnering with a digital financial-services provider to digitise existing products, services and operations: This can be done to leverage an MFI’s own capital, rural outreach and branch network to act as an agent for the service provider and thus provide mobile-money transactions to those in need. Such transactions include customer registration, cash-in/cash-out, peer-to-peer transfers, electronic top-ups and bill payments. Or it can be set up to benefit from external assets and enable customers to conduct banking transactions with third-party agents instead of going to the MFI’s branch. “Clients can register (when national regulations allow), deposit savings, repay loans, withdraw from their microfinance account and get account information using bank-to-wallet and wallet-to-bank technologies,” the report noted.
- Developing an agent network to digitise existing products and services: This enables the MFI to control the delivery channel as they identify, recruit, train, brand and manage their agents, through which clients can deposit, withdraw and transfer money, repay loans and pay bills. Agency banking also helps MFIs grow their customer bases and improve overall access to financial services.
Microfinance is also undergoing digitisation in Myanmar, a country in which the sector represents a crucial component of the economic landscape. With more than 100 MFIs providing microcredit services to more than 5 million people in the country, and with significant trust having been built between institutions and local communities, the pandemic has made finding new ways to allocate credit to the unbanked population and small businesses an essential task. Thankfully, Myanmar utilises smartphones and mobile apps such as Facebook in large numbers, which, in turn, offers unique opportunities for MFIs to connect with their clients.
“Additionally, the recent build-out of cash-in/cash-out agents by mobile money service providers in rural areas has created new corridors for money transfer,” according to ModusBox, a fintech software start-up focused on accelerating universal access to reimagined financial services. “However, there are several meaningful gaps that must be addressed: consumer protection, digital/financial literacy, know-your-customer (KYC) issues, agent liquidity, and network/agent coverage in remote areas like Chin State. Thankfully for the industry, we have found Myanmar to have one of the most positive landscapes for rolling out new digital solutions. “
It is, therefore, becoming increasingly clear that technology and digitalisation are transforming the fortunes of millions of people and business owners globally who would have otherwise remained walled off from the traditional sector. Fintech firms, global policy initiatives and microfinance are all leveraging innovative solutions to ensure that the most remote and most vulnerable have opportunities to access financial services that can ultimately improve their economic wellbeing. And during the ongoing COVID-era, such opportunities can be of critical importance.