Financial exclusion: The end of the road
By Matt Adam, chief executive of We Are Digital, outlines four key actions we can take this year to end the impact of financial exclusion
Financial exclusion – the inability to access finance, banking and income – typically tends to affect the youngest and oldest in our society most severely, as well as our more marginalised groups. Often closely linked to digital exclusion, financially excluded citizens tend to have limited internet access, which in turn forces them to pay more for goods and services.
Financial exclusion has made it harder for millions of consumers globally to access and manage their funds as the world has taken more and more steps away from cash. For banks too, financial exclusion is a growing problem as banks raise credit standards, reduce costly low-loan-value lending and reduce relationship banking services. But there are strong developments being made to beat it worldwide – while there is even more that the financial sector can do in the future when it comes to launching products and services to lessen its impact.
Prioritise getting women and minority communities banked
Women are more likely to be unbanked than men. Indeed, they make up 55% of the world’s unbanked population. According to World Bank data (2020), 195 countries have planned or adapted over a thousand safety net payments and other social protection measures in response to Covid-19, along with a focus on shifting payments from cash to digital. The rapid digitisation of payments is likely to be challenging for groups that are typically marginalised and design, delivery and adoption support is essential. In India, near-universal ID coverage has made it possible to provide financial transfers targeted to women – more on the Indian ID system below.
Women are also 21% less likely to own a mobile phone – a tool that is critical for transferring money, community connection and networking and running a business, Mobile phone access is particularly critical to ending global female financial exclusion.
In all social groups, older women tend to be marginalised when it comes to connectivity. Data on internet use from the English Longitudinal Study of Ageing (ELSA), for example, suggests that men aged 80 plus are more than twice as likely as women to be digitally connected – of course, financial and digital exclusion are intrinsically linked. This is likely to be down to a mixture of knowledge, inclination and affordability, as retired women tend to have lower levels of income than men.
BAME communities are also more likely to have lower overall levels of financial literacy, says UK money advice hub IslamicFinanceGuru.com. The website is urging policy makers to devote more research into the factors driving financial exclusion in BAME communities. Products and services targeting these groups specifically are essential to defeating exclusion.
Open banking data sharing schemes have huge potential to improve the lives of low-income consumers globally, helping them to manage their debts and create additional income. When firms can access customer financial data held by third parties, then creating savings, credit and financial management products, more suited to those stuck in poverty, suddenly become more viable. For those on the margins of financial services, it could reduce financial exclusion levels significantly – and indeed, in some communities, is already working.
Brazil’s open banking regime reduces the high costs faced by low-income customers for customer due diligence (CDD) procedures, allowing financial service providers to share registration data. Many of these solutions require smart phone access, which, in some markets, is not necessarily a given. In 2018, for example, just 45% of phone owners had smart phone access in sub-Saharan Africa.
Fintech innovation is key to tackling the issue on a wider scale. A number of start-ups have emerged such as Auden and Credit Kudos which are developing services to assess credit risk more effectively among financially excluded customers. Companies offering alternative credit scoring to provide a more accurate view of a customer’s current and future financial position also have a part to play – fully grasping a customer’s financial inclusion issues is, after all, essential to helping them. Low adoption rates must also be tackled, in encouraging customers to feel more comfortable using the technology going forward.
A secure digital identity
Across the globe, over a billion people have problems proving who they are – another critical driver of financial exclusion. In the UK, for example, analysis by Ipsos Mori shows poor financial awareness among BAME communities – something that can be strongly linked to identification issues. For those living in shared accommodation or as part of a family unit, establishing proof of identity without proof of address or a driving licence can be challenging.
Biometrics are another solution. In India, the Aadhaar electronic ID system assigns a unique 12-digit ID number to every person, based on biometric and geographic data. In Norway and Sweden, programs set up by banking consortiums have been successfully integrated into financial and government services.
The UK’s Digital Identity Strategy Board believes that the digital identity market could add 3% to the UK’s GDP by 2030, provided delivery policy is strengthened to combat fraud and distrust. Biometric data is classed as personally identifiable data and must be protected in accordance with data protection laws such as the EU’s GDPR.
Lack of official identification documentation affects 18% of financially excluded adults, says the World Bank, which has a goal to resolve this issue by 2030. Equally, 90% of customer onboarding costs could be reduced by resolving this issue. (McKinsey Global Institute, 2019). Close future collaboration between financial services and governments is essential going forward to resolving this worldwide issue.
Community investment must be at the heart of any financial training or fintech programme. The US community investment industry has a long history of successfully channelling financial capital into low-income, financially excluded areas – a success rate the UK is keen to emulate. In the UK, the community investment sector reaches roughly a sixth of the financially underserved who need more access to affordable finance, whether individuals or small businesses.
To allow it to flourish further, improved financial reporting and social impact evaluation must follow. Access to in-depth data on financial services to disadvantaged communities is also key to developing a more localised understanding of how financial exclusion is impacting the unbanked and underserved.
We Are Digital is a social impact business which has helped thousands of people access essential online services and manage their debts during the pandemic through its training work with housing associations, local authorities, banks and corporates.