The future of finance can be brighter if it is accessible to the widest swath of society. Broad-based financial inclusion is the enabler of the Sustainable Development Goals, and achieving it is critically important today.
Digitization spreads around the world across different industries and verticals. The financial industry is no exception. We are rapidly moving into the future of cashless and digital financial operations. We used to think it was for the better. Yes, it is better if it is spoken in general, but not for everyone. Who does the existing financial system usually exclude? You may be surprised, but it is hundreds of millions around the world.
All of these people do not have checking or savings accounts. Consequently, they cannot benefit from digital financial disruptions. Lack of documentation, high costs, long distances, and widespread mistrust in a banking system are the most common obstacles to opening a bank account. While this problem feels most acute in developing and underdeveloped regions globally, it also exists in countries with higher living standards. For example, 7% of the population remains unbanked in the United States, and 4% of UK citizens they still do not have access to financial services. It negatively affects their lives and the economy in general.
These people are out of the cashless society and out of the digital economy. Who’s on the inside want to shut out hundreds of millions? Most would say no. A sustainable financial future should be for everyone, with no exceptions. Inclusive finance is a big step towards this better reality, and fintech has enormous potential to make it happen.
What is financial inclusion and why is it important?
Financial inclusion is the provision of financial services that are equally accessible to all, regardless of income level. It also means engaging underserved people, entrepreneurs, and SMEs in the formal economy, where they can thrive and integrate into a larger market. Both consumers and banks can benefit from it. Financial inclusion enables people to build their wealth and enables banks to expand their customer base. Governments also benefit from inclusive finance, as a more connected society can increase the speed of money and economic growth.
Financial inclusion is important because it enables everyone to participate in the economy and improve their well-being by incorporating digital technology into daily monetary operations. All of this creates a favorable environment for small businesses, enables people to achieve their life and financial goals, and contributes to the well-being of the country.
What about the financially excluded?
There are four basic types of financial products that have changed dramatically in recent years: credit, payments, savings, and insurance. Almost everywhere in the world, people with low incomes are unable to access them due to a variety of factors. However, we already have the expertise and digital technologies necessary to make these services affordable for broader categories of the population. Low financial inclusion leads to the following four negative causes interconnected with basic types of financial products.
Limited access to credit
Lack of access to financial services means the inability to obtain credit and loans for small business owners. It works as an obstacle for them and prevents them from investing more and scaling their businesses. Continuing to invest in small businesses could make them more profitable, improve the lives of many people, and positively affect the economy. Also, banks miss these people as potential consumers.
No means to make / receive daily payments
According to The world Banks According to recent statistics, around 150 million people live in extreme poverty, mainly in rural areas. Most do not have access to even essential financial services, such as receiving or making contactless payments. Most of these people are small-scale farmers selling animal and plant products. Among them, many artisans produce and sell items to local vendors.
Everyone is caught in a vicious cycle of the informal cash-based economy without access to credit / debit cards and online money transactions. Deprived of mobility, they are also deprived of the opportunity to build their wealth using the privileges of modern technology.
Inability to save and build financial security
Without the ability to save money on bank accounts and wallets online, people also cannot build their financial cushion and confidence in the future step by step. Savings are critical financial resources that can help people improve their long-term lives, start their own businesses, and finance children’s education.
No access to insurance services
Another negative consequence of insufficient financial inclusion is that low-income people and small businesses cannot access insurance services. All businesses face ups and downs. Taking risks is the step required by the entrepreneur, regardless of the niche. Insurance could help them feel more secure in times of vulnerability and avoid financial shock during recessions. In addition, it would allow them not to reach extreme poverty thanks to the continuity of cash flow provided by insurance.
How to achieve financial inclusion
Financial inclusion is often considered a key enabler of 17 Sustainable Development Goals and one of the ways to reduce the level of poverty in the world. Financial institutions can achieve this through these four approaches to modern finance.
Increase financial education
Financial empowerment of individuals and small business owners is impossible without financial literacy. Educating underserved clients and youth can help them understand essential financial concepts and develop the skills necessary to manage money effectively and reach their financial goals. Finances have not always been as complicated as today. While the economy has previously been cash-based, it is now actively incorporating electronic payments, credit cards, debit cards, and mobile transactions. As a result, finance becomes more diverse and understanding key modern financial concepts is critical to full participation in the economy.
Communicate in a transparent way a service offer
Transparency should be a key value in the thinking of ethical banks, fintech startups, and other financial institutions. It means providing relevant information on financial management strategy, policy, and evaluations to the public in a timely, open, and clear manner. Additionally, financial service providers must prioritize transparency in their messages to clients to build relationships based on trust and foster their trust. The language must be clear, transparent and simple enough so that all consumers can understand and trust the company.
Addressing racial, gender, and age wealth gaps
On the path to financial inclusion, organizations must start targeting segments of society that have previously been financially excluded. For example, banks can introduce programs tailored for older people to increase the accessibility of financial services for older people and help them understand how they can benefit from specific products and services.
Furthermore, we must take steps to bridge the gender gap in banking. It is still difficult for women to obtain loans or credit in many countries. It is a major barrier for many female entrepreneurs looking to obtain financing and start a small business. Racial wealth inequality also occurs in existing financial systems. Race continues to be the main dividing line when it comes to obtaining credit and loans.
Traditional banks and fintech companies can reduce racial and gender gaps by introducing new programs to stabilize consumer cash flow, generate credit, and build financial resilience. For example, overdraft-free bank accounts, payday anticipation services, and account maintenance can help smooth out income volatility. Fintech companies can help clients obtain loans and credits by using data analytics solutions enabled by artificial intelligence and machine learning. They can also help consumers increase their savings by offering savings accounts, automated savings, and microinvestment features.
Embrace fintech innovations
Emerging technologies and digital innovations shape a new vision of more inclusive finance. E-wallets and mobile fintech apps that enable online peer-to-peer payments are great examples of digital products that foster financial inclusion.
Many financial technology startups emerge today with a mission to facilitate personal financial management. As a result, we are seeing more and more startups offering fintech solutions and services that encourage more mindful spending, saving, and wealth creation. Most importantly, they are designed with inclusion in mind and aim to make financial services more accessible to different categories of society.
Establishing a new vision of the financial future
Financial inclusion is important. It is a key direction that traditional banks, financial institutions and startups must take to reinvent a current system that loses a significant segment of consumers and contributes to an overall sustainable future. Emerging technologies such as artificial intelligence, machine learning, and biometrics are our allies on the path to achieving this goal. We already have the necessary digital innovations at hand to bring financial inclusion closer to reality. Now, only steps are required towards its implementation.