Coming from a developed country it may seem like everyone has a bank account, to make payments and store deposits. However, globally only 69% of the adult population has a bank account, (62% in 2014 and 51% in 2011) which translates to 1.7 billion people lacking access to the most basic means of banking.
By Thomas Maas of Olympus Advisory Services
Financial inclusion, i.e. participating in the financial services industry, is an important driver for socio-economic welfare. As Queen Maxima of the Netherlands, UN Special Advocate for Inclusive Finance for Development (UNSGSA), puts it: “Financial inclusion is not an end in itself, it is a means to an end”.
The United Nations have flagged financial inclusion as a top priority. Of the seventeen Sustainable Development Goals for 2030, financial inclusion is featured as a target in seven of these. These goals include eradicating poverty (SDG 1), ending hunger and achieving food security (SDG 2), ensuring healthy lives (SDG 3) and achieving gender equality and economic empowerment of women (SDG 5).
To drive financial inclusion, the World Bank launched a global vision for financial access in 2013 to enable adults worldwide access to a transaction account (The World Bank). Since 2011 it keeps track of financial inclusion numbers through the Global Findex database.
Research from the McKinsey Global Institute (2016) confirms that financial inclusion can support overall economic growth and also the achievement of broader development goals. It reports that digital finance alone could benefit billions of people by spurring inclusive growth that adds $3.7 trillion to the GDP of emerging economies within a decade, which translates to a 6% point increase against a business-as-usual scenario.
Most of this potential benefit results from increased productivity because of mobile payments, with the rest coming from additional investments from financial inclusion of individuals and both small and medium-sized enterprises. Additionally, time savings by individuals could result in more hours of productive work. All in all, this additional GDP could lead to the creation of 95 million jobs across all sectors.
So how then does access to financial services exactly increase social welfare?
With access to a financial account, people no longer need to rely on and transact solely in cash, or store their cash savings in their homes. Financial access connects people into the formal financial system, making day-to-day living easier and allowing them to build assets, mitigate shocks related to emergencies, illness or injury, and make productive investments (The World Bank).
For example, as more women gain access to financial accounts, they have been shown to spend more on nutrition, education and healthcare. In addition, by having a financial account people are more likely to start saving and being able to spend part of their income on non-daily expenses improving their health and productivity. Moreover, regular digitally paid wages for teachers and healthcare workers has been shown to reduce absenteeism. In India, for example, one study found that attendance rate of teachers is 90% in states with reliable digital salary payments, but only 60 to 80% in other states.
And it is not only consumers who would benefit from access to financial services, but also businesses. I’ve experienced first-hand in Mongolia and Cambodia how credit to small businesses fosters productivity and as a result, economic growth. I’ve seen that small business loans enabled a tailor to buy a sewing machine, a chimney manufacturer to improve their production process, and a hairdresser to buy razors and chairs, while they often used part of the loan granted to also send their children to school.
Despite my personal experiences, the impact of microcredit is still a subject for discussion. Proponents claim microcredit reduces poverty through higher employment rates and higher incomes, which in turn lead to improved health and education. Critics on the other hand argue microcredit has driven poor households into debt traps and that most loans are being used for private consumption rather than productive investments.
Nevertheless, access to financial services through technological innovations, such as mobile phones, provides a clear benefit to society. As a consequence mobile banking is commonly recognized as a powerful tool to provide people with access to financial services.
McKinsey Global Institute (2016), United Nations (2017), The World Bank, GSMA
Olympus Advisory Services is a management consulting firm specialized in the financial services sector. It helps clients with insights, market research and strategy consulting, tailoring assistance to clients’ needs and circumstances. The organisation has in-depth knowledge of both the traditional banking sector and new innovative players in the market, and is therefore well positioned to help bridge the gap between incumbents and new entrants.