Financial Inclusion as Means to Improving Wealth Inequality
As easy as it is to take our interactions with the global financial system on a daily basis for granted, financial institutions form the infrastructure that the modern economy relies upon. Savers keep their hard-earned cash at banks, consumers use various payment methods to make purchases and individuals and businesses borrow to improve their lives and operations by achieving higher liquidity and making purchases and investments that may have been unaffordable with the current state of their cash flows.
All of this, however, is not a reality for 2.5 billion people globally according to the United Nations’ Department of Social and Economic Affairs[a]. For more than half the global working age population, their inability to access the financial system means that they are unable to store their cash securely, earn interest on their savings, remit money to their families, or perhaps most importantly, take out a loan to invest in their small businesses. Lack of access to a financial institution may be attributed to various factors but regardless, it translates to stifling growth opportunities for some of the most vulnerable demographics in the world, contributing to an ever-increasing wealth gap.
I first learned about this issue, which is often termed financial inclusion, when attending the 2017 Singapore Fintech festival, where it was described in a talk by Queen Maxima of the Netherlands (acting as the UN Secretary-General’s Special Advocate for Inclusive Finance for Development). She encouraged the use of financial technology to overcome the issue while warning of the dangers that the use of technology in finance may bring; in particular, the propensity of big data decision algorithms to discriminate against some subjects unjustly.
Other leaders and policy makers have also expressed their concern in this regard. Christine Lagarde, the chief of the IMF, emphasised a need for financial inclusiveness that embraces the unbanked and people who cannot participate in the financial ecosystem in the 2018 WEF panel discussion “The Remaking of Global Finance” after Larry Fink of BlackRock identified the lack of inclusiveness in financial markets and a fear of investing in longer-term securities by the general public as a driving force for inequality; particularly in light of the increasing stockpiles of cash held in savings accounts by the savers, uninvested in more yield bearing securities, depriving them of the benefits of compound returns.
The discourse around financial inclusion seems to be fairly entangled with the Fintech industry as Ms. Lagarde and Queen Maxima hinted; since the Fintech firms turn out to be best positioned to tap this particular market and integrate a larger portion of the population into the financial system. This is mainly due to the fact that mobile phones have become a staple for people globally and internet penetration is growing consistently [b]. Additionally, the costs of setting up a branch in the remote areas where the unbanked often live, will likely render serving such populations uneconomical for traditional banks, whereas with advancements in Fintech, brick and mortar branches will no longer be necessary.
For an institution to successfully implement a scheme for financial inclusion, it must establish a relationship based on mutual benefit with the customers. The nature of this relationship is a very important factor in the long-term sustainability of the operations. If the dealings are conducted in a spirit of mutual benefit, the relationship perpetuates. Otherwise, one party will eventually either exhaust their resources or become unwilling to sustain the relationship at personal cost. This is where the advantage of technology firms lies, since the operations can be made profitable through scalability, particularly due to the size of the potential customer base. Though at the start, serving this demographic may not yield positive returns, as the number of customers grows, economies of scale will see the cash flows follow suit. The aggregate economic output of 2.5 billion people will surely be a large market to tap into and potentially create a large sector within the financial services ecosystem in the near future.
Currently there are a number of start-ups operating in this space, a few of which presented their operations at the Fintech festival. The services on offer ranged from remittance services for farm workers in remote Indonesia to a start-up offering to streamline the lending process to small businesses using data analytics and a more effective repayment mechanism[1].
As impressive as these efforts may be, one should remember that this is still a nascent space and there is much room for innovation and disruption within regulatory guidelines. It is also essential to maintain a close relationship and engagement with regulators to assist in developing regulations that reflect the current needs of the financial ecosystem with a forward perspective as the underlying infrastructure constantly evolves. As these frameworks are developed, it is essential to be mindful of the dangers of big data analytics, to incorporate principles of interoperability of the systems that are being created to avoid monopolies and most importantly, to consider scalability without paternalistically imposing the novel approaches on those who may not need them.
[1] Examples of such startups include: ftcash and alternativecircle
References
[a] UN DESA DSPD, “Financial Inclusion,” 2015. [Online]. Available: https://www.un.org/development/desa/socialperspectiveondevelopment/issues/financial-inclusion.html. [Accessed January 2017].
[b] International Telecommunications Union (Geneva), Percentage of individuals using the internet 2000–2016, 2017.
