Half the world is unbanked. That’s the provocative title of a 2009 research paper published by the Financial Access Initiative (FAI), a consortium of researchers from New York University, Harvard, Yale and Innovators of Poverty Action.
Their study also provided an empirical grounding that, although it is possible to serve low-income communities at scale with financial services, there are still billions left to reach. According to figures from the World Bank, as of 2015 there are still 2bn people who lacked access to any formal financial services.
Nearly six years since the 2009 FAI report, we are now better positioned to address the remaining gap by the end of 2020 – if not earlier.
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The advent of mobile technology along with increasing smartphone penetration, especially in developing countries, has opened up a new portal of possibilities.
This newfound access in countries across South East Asia and Africa has provided the perfect ecosystem to initiate financial inclusion.
For example, take the demonetisation exercise in India last November, when over 80 per cent of banking notes were taken out of circulation.
The country saw an explosion in digital payment wallets, enabling people to continue transactions. The pace and scale of adoption was truly remarkable, as India was largely a cash society.
Vendors from tea shacks to supermarkets immediately started accepting digital transactions from these wallets.
The sheer scale of the adoption following this experiment, and others like it, leads us to believe that fintech companies hold the solution to the problem of the world’s unbanked.
Interestingly, the digital FX companies that can now help ensure deeper penetration into the unbanked community were developed mostly in response to the expensive “middle-man” currency brokering by traditional financial institutions. In addition to the fluctuating exchange rates, remitters are charged monumental premiums by banks and money transfer organisations, which often amount to a considerable percentage of the transactions.
Many fintech companies set out to take on the wider foreign exchange market narrative, which continues to be dominated by banks and traditional highstreet exchange providers.
With significantly smaller overheads, bulk handling, and intelligent transferring, they are capable of offering real-time rates and negligible transaction surcharges. Challenging the status quo is a matter of social good for the benefit of consumers, considering the volume of transfers the industry undertakes.
It is this dexterity and creative thinking that makes such companies capable of tackling the unbanked problem. Technology developed to enable currency exchange can now be used to help the billions of people abandoned by traditional banking institutions.
We recognise the challenge ahead. We are still in a model of banking which is primarily based on holding traditional accounts, and there are issues around payment infrastructure and regulatory compliance.
Meanwhile, mobile banking obviously relies on mobile-based internet penetration, which is still a stumbling block to bringing financial services to the developing world.
That said, awareness and acceptance of mobile-based wallets is growing across the world – from Manchester to Mumbai. And as one single coherent working system, fintech can solve a decades-old problem and bring banking services to the world’s unbanked.