Financial Inclusion through Digital Inclusion
Brett King, Futurist & Bestselling Author and Richard Petty, former IFAC Board Member & Bestselling Author | November 29, 2021
It is estimated that around two billion people worldwide have no access to the types of basic financial services delivered by regulated financial institutions and banks. Historically that figure has been even higher. Up until just a decade ago, around half of the world were unbanked and considered by most financial institutions to be unbankable.
In 2005 if you lived in Kenya there was a 70 percent chance you didn’t have a bank account, nor could you store money safely and likely your savings were non-existent. Today, if you’re an adult living in Kenya there’s a 98 percent likelihood that you have used a mobile money account, and that you can transfer money instantly to any other adult in Kenya. Today, data shows that Kenyans trust their phone more than they trust cash in terms of safety and utility, with people sewing sim cards into their clothes or hiding them in their shoes so they can more safely carry their money with them. This is all possible because of a mobile money service called M-Pesa, created by the telecommunications operator Safaricom. Today at least 40 percent of Kenya’s GDP runs across the rails of their mobile money service called M-Pesa.
When it comes to financial inclusion, Kenya has done more to improve the lot of its populace in the last 10 years, than the US has in the last 50 years. Kenya today has higher financial inclusion than the United States – a mind-blowing and clearly inconvenient statistic. In the US the Federal Reserve reports that approximately 20 percent of US Households are unbanked or underbanked. Yet, the United States has one of the highest densities of bank branches in the world. How do you get the third highest density of bank branches to the general population and still have one fifth of households underbanked? The answer is identity.
One of the chief causes of financial exclusion today isn’t access to banking, but access to the identity documents that are required for opening a bank account. Since 9/11, in the United States documentary requirements to open a bank account have become stricter. However, more than half of the US population doesn’t have a passport (only 42% as of 2018), and only 76 percent of the population has a driver's license. Even if you can get to a bank branch you still might not be able to open a bank account.
In India up until 2014 less than 30 percent of the population had a bank account. The Reserve Bank of India tried increasing branch access. In fact, they put in place regulations that meant growing banks in India who wanted to deploy new branches had to put 1 in 4 of their new branches in rural areas not currently served by a bank. This policy hardly moved the needle on financial inclusion, before Nandan Nilekani (the co-founder of Infosys) explained to President Modi that the problem wasn’t just access to bank branches, but access to an acceptable form of identity that you could use to open a bank account.
This is why India’s initiative to deploy the Aadhaar card – a form of identity proof – has been such a boon for financial inclusion. As of 2017 more than 1.171 billion people have been enrolled in the Aadhaar card program. That’s 88% of the Indian population. The effect is that the number of those included in the financial system has skyrocketed. The segment of the population most excluded in the old banking system, lower income households and women, have seen 100% year-on-year growth every year since the Aadhaar card was launched. You can either lower identity requirements or create new identity structures to support inclusion, but you can’t create identity verification requirements that require drivers’ licenses or passports for a population that doesn’t drive and doesn’t travel. Bank branches are useless in these scenarios because even if you get someone that is financially excluded into a branch, they still won’t qualify for a bank account. That model is a recipe for financial exclusion as the 25% of US households that are underbanked already know.
Research by Standard Bank and Accenture back in 2016 concluded that of the approximately 1 billion unbanked in sub-Saharan Africa, 70 percent of those individuals would need to spend an entire month’s salary just to physically get to a bank branch. This statistic clearly indicates a significant structural problem in solving financial inclusion if left to traditional banking.
The benefits of financial inclusion are numerous. Kenyans are reported to be saving up to 26 percent more today than when they only used cash. 60 percent of Kenyan’s trust M-Pesa more than cash today as a result. Crime is down, savings are up, but the more interesting effects are in response to poverty, credit access and employment. Access to mobile money lifted 2% of Kenyan Households (194,000 families) out of extreme poverty, 185,000 women out of subsistence farming into business, and increased access to basic credit facilities for starting a business or dealing with emergencies, as examples.
It’s clear that financial inclusion should be a basic goal of the global economic system, but banks are deterred from this goal due to a lack of profitability in servicing lower to middle income segments of the population, and because of a lack of digital inclusion. Equality dictates that access to basic financial services is a necessity for all. However, the banking system that was created by the Medici’s of Italy in the 14th Century, hadn’t solved basic access to financial services in more than 500 years. While bankers told us bank branches were the solution to access for financial services, countries with the highest density of bank branches like the United States, Spain, and France, continue to have lower financial inclusion than that of Kenya today! Kenya and India went from less than a third of the adult population included in the classical banking system, to somewhere north of 90 percent in just a handful of years, but none of that was due to banks or bank branches.
It came down to two simple changes. The creation of national identity schemes and access to basic mobile phone technology. These two factors are responsible for the greatest ever financial mobilization that the world has ever seen.
The next stage of this revolution will be the creation of commerce that sits exclusively on top of the mobile internet. Digital inclusion should now be one the primary goals of governments the world over, recognizing that financial inclusion, commerce, and growth are closely aligned to the evolution of the smart phone and the internet. Digital inclusion looks like it will become a basic human right along with access to electricity, fresh water, education, and basic healthcare.
By 2030, it is anticipated that more than 95 percent of the world’s population will have access to the Internet through a smart phone. Smart phones are increasingly becoming cheaper and cheaper to manufacture and deploy. Today brand-new basic smartphones can be found on the streets of India, South Africa and Nigeria for under US$50. By 2030 it is expected that such devices will be available essentially for free with basic subscription services for access to the Internet. It’s likely that tech giants like Facebook, Google, Tencent, Alibaba and Amazon will move to give away smartphone access to individuals who subscribe to basic services through their infrastructure. By 2050 access to basic internet infrastructure will be ubiquitous globally, meaning everyone will participate in the digital economy and financial inclusion will be the norm.
Taken from The Rise of Technosocialism: How Inequality, AI and Climate will Usher in a New World, by Brett King & Richard Petty, Published by Marshall Cavendish Business, 2021.