Meeting the changing needs of underbanked populations

The advent of fintech and a rise in smartphone usage is narrowing the chasm in respect of financial inclusion – but to what success, and at what cost?

With many so-called ‘Western countries’ facing their own challenges right now – from high rates of inflation, riots and political unrest, to war on the continent of Europe – it’s easy to forget about the role that developed economies must play in contributing towards a fairer society.

Yet, at the same time, many developing countries are facing similar challenges – often leading to economic turmoil or the displacement of people. According to the United Nations, there is an “inequality crisis” that risks thwarting the economic progress of some of the world’s least developed countries.

A group of 46 countries, representing 14% of the world’s population, face “serious impediments directly hampering their ability to progress economically and graduate from the least developed country category”, world leaders warned in March. In fact, such is the size of the wealth gap, by the end of this decade the top 1% of the world’s richest people are expected to own two-thirds of the world’s wealth, with the bottom 50% today owning just 2%.

What effect has fintech had on financial inclusion?

Despite the obvious financial inequality that still exists, has the advent of fintech technologies made any difference on financial inclusion? Shanker Ramamurthy, Global Managing Partner for Banking at IBM, believes that it has.

He tells FinTech Magazine that the sector has “enabled access to financial services and products previously unavailable or inaccessible, reducing poverty and increasing economic growth.”

He cites the example of the Indian Government’s Digital India initiative, which aims to transform the country into a digitally enabled society. This has “significantly increased financial inclusion in India, particularly among the unbanked population,” Ramamurthy says.

“According to the World Bank, the percentage of adults with a bank account in India surged from 35% in 2011 to 80% in 2021, largely due to the Government’s efforts to promote financial inclusion. It also provided women with the autonomy to manage their finances, helping to narrow the gender gap from 17% in 2011 to insignificant in 2021 in terms of bank account ownership in India.”

But it’s not just India where fintech is making a difference; emerging fintech solutions have had a positive impact on developing economies in Africa, according to Babs Ogundeyi, CEO of Nigerian-founded finance app Kuda. In part, this is thanks to high smartphone penetration in developing countries; according to Deloitte, there is now a negligible gap in smartphone penetration between developed and developing countries.

“Countries like Kenya, Nigeria and South Africa are at the forefront of Africa’s fintech boom,” Ogundeyi says. “The continent is home to numerous fintech startups that are driving innovation and economic growth. African fintech startups are taking advantage by giving their customers a level of access that traditional banks did not offer. This has increased financial inclusion, as building this digital infrastructure for less wealthy populations is paramount.

“However, it is worth noting that such infrastructure must be stable and available throughout developing economies in order to achieve true financial inclusion.”

What more needs to be done to boost financial inclusion?

Despite the fact that fintech has accelerated progress towards greater financial inclusion in emerging markets, there is still more that needs to be done to close the gap. Indeed, even in advanced economies, the situation is critical. Two-thirds of Americans live paycheck-to-paycheck with little room to save money towards their life goals, for example.

In order to meet the needs of consumers in developing countries, service providers must first understand what those needs are. Taking Africa as an example, a portion of the diaspora has moved away in search of work or have been displaced – as is the case with volatile regions like Ethiopia, Eritrea and Sudan. This means low-cost remittances are a top priority right now, allowing African emigrants the opportunity to send money back home for family or friends.

Fintech still has the opportunity to address “financial exclusion, financial illiteracy and unequal access to education,” Shanker Ramamurthy says. “Blockchain, mobile banking and digital identity verification can help address financial exclusion by providing simple and accessible financial services to those who are currently excluded.  

“Gamification, chatbots and personal finance management apps can improve financial literacy by providing interactive and engaging tools that educate and empower people to make better financial decisions. And online educational courses and e-learning platforms help overcome barriers causing unequal access to education and provide affordable and accessible education to people worldwide.”

Do we risk leaving some vulnerable consumers behind?

Much of the progress towards greater financial inclusion has been informed by high smartphone penetration rates. So, as the world becomes increasingly digital, do we risk leaving vulnerable and disconnected consumers behind?

According to the World Bank, nearly two-thirds of the world today is connected to the internet – but those figures belie the number of people, even in rich economies, who lack access. In the United States, for example, 8% of the population don’t have internet access (a segment that accounts for over 25m people); while in the entire eurozone, which covers a population greater than the US, the correspondent percentage is 13%. This shows that connectivity is still a global problem, not just a matter of developing versus developed economies.

“Vulnerability isn’t about a minority,” explains Junaid Mujaver, Partner at Newton, writing in the company’s latest Vulnerability Void report. Newton surveyed over 3,000 UK consumers – including those with specific vulnerabilities such as poor vision or hearing, learning difficulties or Alzheimer’s disease – to find out how those consumers interact with financial services. 

“Our research has found that the majority of people in the UK have a characteristic of vulnerability and all of us will have moments of vulnerability in our lifetime,” Mujaver says. The research shows there is a “rising tide” of vulnerability, with neurodivergent diagnoses increasing and specific factors like the COVID-19 pandemic and cost-of-living crisis contributing to respondents’ physical and mental health.

Are shared banking spaces the future?

Increasing digitisation has rendered brick-and-mortar branches largely redundant, leading to mass closures, particularly in Europe. This is an issue that particularly affects rural communities. One solution has been to investigate alternative bank branch models, like shared banking hubs. In communities that are not large enough to sustain any one bank or financial institution, multiple different operators contribute to a shared space where services are provided jointly by competing institutions.

There are now calls for more of these shared spaces to slow down the discontinuation of physical banking services. Mark Aldred, retail banking expert at Auriga, says: “The call to accelerate the roll out of shared hubs is a timely reminder of the slow pace and limited ambition of those charged with protecting access to cash and other banking services. It seems that the undue haste with which branches are removed from communities is not balanced with any obvious urgency to provide an alternative.”

However, he also admits there are problems with the current scheme: “The model adopted to date is slow to roll out and limited in scope. The sponsors and stakeholders of the shared hub initiative must explore different models like those used in other countries, such as Spain, which is seeing major investment in advisors and adapted technology to help elderly customers. 

“There are proven models that could be more rapidly deployed in existing spaces to provide an even wider range of replacement services from all providers, including important face-to-face encounters for those who value them most. There is also some timidity in how these hubs work with individual bank brands providing face-to-face services on a rota.

“Banks will say face-to-face services are costly to deliver. Given rising costs, this is true, but there are imaginative alternatives like secure in-branch video and voice banking to access skilled financial advisers that can deliver personalised services while reducing operational costs.”

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