By Ismail Amla, Executive Vice President, Professional Services, NCR Corporation
The benefits of financial inclusion are well known and numerous. Households that lack access to bank accounts or relatively affordable mechanisms for receiving, paying and spending money end up spending a significantly higher percentage of their income on expensive cash-based financing options. These options, like money orders and payday loans, tend to have much higher fees and usurious interest rates. Households experiencing financial exclusion are disproportionately poor and less educated. The highest percentages of these excluded households are found in less well-off countries. But even in the United States, according to the latest FDIC surveys, 5.4% of households were unbanked. That group constitutes 7.1 million households. Excluding people from the financial system also slows economic growth; money that could have been spent on goods, services, and education is trapped in the money economy or used to pay punitive fees and interest.
I think the world is in a characteristic moment. Just as economic growth has dramatically reduced global poverty rates, ubiquitous, cheap and connected technology can dramatically reduce rates of financial exclusion. Now it’s up to companies like NCR and the broader fintech ecosystem to work collectively to make that happen. Together, we believe we can dramatically reduce financial exclusion in the next five years in the developed world and in the next decade in the developing world.
Fostering greater access to technology, greater openness in the financial system, and a stronger and fairer market for financial products will take us towards this goal. Combined, these three driving forces are already driving an accelerating revolution in fintech. This revolution is both a moral imperative to improve lives and a once-in-a-generation business opportunity that will benefit society by increasing overall economic growth.
While the digital divide still exists, technological progress and cost reduction are rapidly bridging that divide. According to Our World in Data, 640,000 new people go online every day. Smartphones and access to cheap or free data are the fundamental instrument of progress. Today, low-end smartphones cost less than $100, and forward-thinking carriers like Jio in India offer low-cost wireless data plans. While smartphone data plans vary widely by country and are often expensive, Wi-Fi access is much cheaper and often free. If these trends continue, the number of people without Internet access will continue to fall.
A whole generation of new banks, like Chime and Monzo, have built businesses entirely on mobile apps. In China, for example, where digital payments are now the dominant form of exchange, the telephone has become the predominant gateway to financial services. In the developed world, fewer people use cash, and employers are rapidly moving away from paper check payments. COVID further accelerated the transition from cash to digital payments.
Traditionally, unbanked and underbanked people use digital financial services at a much lower rate than higher demographic households. But we have clear evidence that digital financial inclusion can work in less developed economies. In Africa, more than 200 million people use mobile electronic cash systems. In Kenya, M-Pesa mobile cash systems are almost universally adopted. With smart product designs, we can change that. The M-Pesa system was designed with local culture and values in mind.
The tremendous pressure that the new fintechs are putting on traditional banking processes is leading to a welcome unbundling of financial services and competition on multiple levels. Venmo, for example, offers customers who set up direct deposit instant access to paychecks. Traditionally, banks have taken a day or two to process these deposits. For the poor and financially excluded, two days can mean the difference between paying rent on time and incurring a fine. Unbanked users who want to move money across borders in relatively small sums, as is common in remittances, can now choose from several options, including cryptocurrencies. Zelle, which is owned and managed by a consortium of major US banks, allows users with accounts to move money instantly without fees.
While the winds of technology trends may be in our favor and the rapid rise of fintech may be providing the impetus to rethink financial services, there are still a number of concrete steps the financial services industry should consider.
- Remove the usual obstacles. Minimum rate balances or service fees scare away low-income consumers. In fact, according to the World Bank, the number one reason the unbanked cite not having an account is simply a lack of money. Clearly, this is something that is doable. CapitalOne, a major US bank, has just announced that it will suspend overdraft fees and continue to offer overdraft protection.
- Encourage mobile banking. According to the World Bank, low-income consumers tend to have a mobile connection rather than Internet at home. Designing mobile banking products and financial services that appeal to the unbanked will reduce exclusion. It’s also just good universal product design. There’s a very good reason why the dominant financial platform in most of the world that are unbanked or only recently is the smartphone.
- Expand access points to advanced digital services. There’s a good reason why convenience stores, supermarkets, and other stores have ATMs. This is because ATMs attract customers and make it easy for them to pay. In the digital economy, these same access points can take on an equally important meaning for stores as digital delivery centers for financial services, which could even be co-branded between banks and stores. Physical real estate combined with smart digital hotspots bring services closer to those in the community who might not get to a bank branch on their own, and might not otherwise have easy access.
- Emphasize prepaid products. In 2017, nearly 27 percent of unbanked American households used prepaid cards according to a FDIC Household Survey. Prepaid credit or debit cards can offer a quick access path to credit histories that can open other key doors. These cards are safer than cash or checks and can be used for online purchases.
- Find new ways to analyze customers and give them access. In the US, several companies are using artificial intelligence to create alternative and more accurate credit assessment systems. Upstart, created by former Google executives, looks at more than 1,000 other indicators to assess whether someone is likely to repay their loans. Upstart is actually more accurate than legacy credit scoring products and is particularly good at identifying people who might not get credit under traditional underwriting processes but are actually pretty good risks. Similar systems can work at lower levels of financing and lending, where the unbanked might operate.
Making these kinds of changes will require all of us to walk in the shoes of those on the outside looking in, to try to imagine what it would be like to live a life of financial exclusion. The time is now. The technology is here. The opportunity is huge. Let’s make a big dent in financial exclusion, not in our lifetime, but in the next decade, or even sooner.