Digital Solutions for Financial Inclusion

Hundreds of millions of people live on the cash economy without the benefits of banking, affordable credit and other financial services.
Hundreds of millions of people live on the cash economy without the benefits of banking, affordable credit and other financial services.

By Lotte Schou-Zibell

Worldwide, there are 1.7 billion people who are outside of the formal banking and financial system. They struggle with high fees and risky systems to undertake even simple financial transactions. Digital innovations offer new ways to bring them out of financial darkness.

In Asia and the Pacific 9 out of 10 poor households have no access to financial services. Banks and other financial institutions consider them be high risk and low profit customers. As a result,  millions of people in the region cannot access the credit needed to buy a home or build assets, or buy insurance to protect them from catastrophic loss, or even maintain a simple savings account.

Despite this, most poor, disadvantaged and unbanked people are financially active. However, this financial engagement is often limited to risky and expensive “recycling” of money from one informal source to another. For example, a family might borrow from a high-interest informal lender – or loan shark – while awaiting a remittance from a relative working overseas using a high-fee money broker system. The family is hurt by the high fees and greater risk, while society overall loses the positive economic impacts of having the money coursed through the legal system.

If Asia and the Pacific—home to more than half of the 1.7 billion unbanked adults globally—is to unlock its full economic potential and improve the lives of poorest and most vulnerable, it is crucial to connect these marginalized populations with the broader economy.

New technologies like artificial intelligence, big data, and blockchain, as well as the rapid expansion of mobile-phone banking, are helping to bring financial services to unbanked communities. These digital technologies can boost financial inclusion by expanding how people financially transact, beyond traditional banking.

Efforts in several specific areas can make a big difference, including identification, internet and electricity, interoperable payment systems, customer relationships, equality of opportunity for women, and remittances, pensions, and insurance.

Globally, 1 in 7 people – about one billion people – still have no legal form of identification. Millions more have forms of identification that cannot be reliably verified or authenticated, leaving them financially and socially excluded. The majority of these under-identified people live in Africa and Asia, and more than one-third of them are under the age of 18. They are socially and financially excluded, essentially invisible to the providers of the services they need.

This is important because identity verification is crucial in complying with know-your-customer measures that financial institutions require to open an account.

Identification systems need robust identity databases and credentials in order to provide services that are trusted, integrated with other systems, and responsive to user demand. Identification systems require administrative and technical capacity, appropriate technical design choices, careful attention to user privacy and data protection. They must also be operationally, technologically, and fiscally sustainable.

  Real world solutions are bringing people out of financial darkness

Many of the financially and socially excluded live in remote and rural areas. Without access to affordable and reliable internet and electricity, financial services won’t reach them. An interim solution is to provide systems that will still work when offline and can then update later when connected to the internet.

This is being done in the Philippines, where Cantilan bank is using cloud-based technologies to bring digital financial services to unbanked individuals in remote communities. In January, Cantilan bank successfully switched off its legacy on-site system and now has a cloud-based software system as its core banking system. This enables greater operational efficiency and scalability, lower customer costs and added convenience—helping to expand the bank’s customer base among people who might never before have had access to financial services.

Interoperability enables people to make payments to anyone else in a convenient, affordable, fast, seamless, and secure way through a single transaction account and using any device. This means that a customer need only maintain one account—whether a bank or an e-money account—to be able to conveniently and affordably transact with anyone in the system. A pro-poor payment system should be built on the principles of inclusivity, interoperability, cooperation and collaboration.

Inclusivity demands that all qualified financial service providers be able to effectively participate in the system, regardless of the size and type of transaction accounts offered. This fosters greater competition and spurs innovation to better support the diverse needs of consumers. 

Interoperability requires cooperation among authorities to promote safe and efficient financial market infrastructure and international standards such as the principles for financial market infrastructures. It requires central banks, market regulators, and other relevant authorities to cooperate, both domestically and internationally.

It also requires collaboration and implementation at the industry level as complex arrangements and business rules are required to implement interoperable payment solutions. Some of the challenges to improve efficiency, safety, or security can also only be overcome by the industry as a whole.

Trust is a powerful driver of customer behavior. New digital financial products and services should therefore be designed with data protection and cybersecurity integrated from the outset. Organizations need to identify cyber risks and invest in controls. Authorities must establish clear legal and regulatory standards and guidelines to ensure consumers are adequately protected.

  Globally, women use savings accounts more than twice as much as men.

In Georgia, Finca Bank is addressing this issue with an app-based lending platform with enhanced security around customer data embedded into the design.

Lack of financial and technical literacy is a major reason for lack of access to finance in rural communities and among women. Policies to enhance financial inclusion, especially through technology, should involve more active financial literacy and education programs.

Financial services and products are only good if they are being used. Yet many financial service providers still struggle with high account dormancy, customer dropouts, and otherwise limited service usage. Services and products must meet the real needs of individual users. They should be intuitive to activate and use, deliver promised features, and be affordable.

Recent research shows that, globally, women use savings accounts more than twice as much as men. And global financial inclusion has been rising, with 69% of adults having an account with a formal banking institution or with a mobile operator, according to recent studies, women, however, remain 9 percentage points less likely than men to have a bank account.

Given the expanding access to mobile devices, mobile banking should be a key tool to closing gender gaps, particularly on financial access.

In India, YES Bank is reaching out to low income women in remote areas via mobile processing of key customer information and credit applications, as well as credit scoring.

With mobile technology, credit applications are processed within only two days and the cost of processing is reduced. So far the program has benefited 760,000 low-income women borrowers.

Discussion often stops with access to credit or opening a bank account. We need to talk more about micro savings, remittances, pensions, and insurance. Financial inclusion constitutes access, use, and quality of a range of financial products and services from multiple providers.

In all of these issues, the integration of behavioral economics can fine-tune existing services and provisions to help improve the effectiveness of financial education, ensure customer centricity, and deliver financial products and services that resonate with people, and thus make the difference in tapping into existing demand.