The good news: in 2011, there were 2.7 billion people lacking access to any financial services – the unbanked. Today, that number is 1.7 billion, according to the World Bank’s Global Findex Database.
Fintech deserves the credit for moving 1 billion people into the financial system in just seven years, not to mention enabling small businesses to get access to finance. Mobile money has been the primary driver, particularly in sub-Saharan Africa, home to Kenya’s pioneering M-Pesa mobile wallet operator.
The bad news: we may have reached the end to easy wins by fintech when it comes to inclusion.
We could be at “peak FinClusion”.
Of course, there still remain a huge number of people who need access – more than 50% of working-age adults worldwide still lack a bank account or mobile money account. There are countless small entrepreneurs who could join the data-driven Internet economy. Most banks are just warming up to fintech.
But mobile payments have plucked the low-hanging fruit. There remain significant barriers for that final 1.7 billion of unbanked:
- Lack of formal identity for many poor people;
- Fintech reached those with smartphones but can’t do much for those with feature phones or who lack broadband;
- Banks are phasing out branches and firing small-business customers faster than they’re going digital;
- The hardest to reach are viewed as riskier by bank compliance rules, making customer acquisition painful for all parties;
- Regulation is catching up with Big Tech, and fintech won’t be immune – think of how China is now licensing its peer-to-peer markets.
Is there a next billion?
Let’s consider the addressable market of unbanked. Of the 1.7 billion lacking a mobile or bank account, 400 million are refugees. They lack documents, and have no money anyway. Another several hundred million subsistence farmers will be equally unattractive to fintechs or banks.
Now we get to the first of two problems with the idea of FinClusion expanding at the same rate. First is that a lot of people are simply unviable customers for even the most broadminded fintechs.
There could be another billion of unbanked, probably fewer, that can enter the system. But to make them economic, even to micropayment companies, will require infrastructure and regulatory upgrades beyond the scope of private enterprise.
Not even AliPay and Tencent’s WeChat Pay will accommodate all of the estimated 300 million Chinese still unbanked, given that their growth was founded on the back of debit card account holders – technically, the banked.
The positive trend favoring the next wave of FinClusion is digital identity and verification. Electronic know-your-customer capabilities and biometrics (fingerprints, facial recognition) are already making a huge difference to how people can access services. These also allow providers to cut costs. Fintechs and banks alike recognize eKYC as a game-changer.
But the starting point for these services remains a government-issued document, such as a passport. And services using facial recognition, for example, to access loans, insurance or other services are not really for the unbanked, but for lower- and middle-class people with smartphones, good mobile connections, and existing accounts.
This means the real work of getting the remaining unbanked into the financial system requires government action. India’s Aadhaar digital-identity system has issued over 1 billion people with a biometric card. This is likely to yield results over the next few years. But this is more about government infrastructure spending than it is about, say, the likes of Paytm.
Access versus understanding
There is also the separate, but important, question of to what extent fintech is making a material difference to the recently banked. Faster and cheaper remittances are fine, but do they help poor people improve their situation in life, or just help them spend their meager savings more easily?
This is the second reason to suspect that we’ve hit “peak FinClusion”: the quality of people’s interaction with fintech needs to improve along with greater access. And that’s not something that banks or tech companies are prepared to address. Education is costly, distracts providers from earning fees today, and may not reap any rewards if effort is poured into schooling up migrant workers who end up spending their savings in another country.
The point is not to disparage fintech’s role in financial inclusion. Clearly, Kenya-style mobile operators and Chinese-style internet ecosystems have given hundreds of millions of people options they never had before.
But governments will now be in the driver’s seat when it comes to that next billion. In an ideal world, they would match building Aadhaar-like platforms with a commitment to financial literacy, but this seems unlikely. What governments can do, however, is to make better use of existing financial services.
Public-sector wages, pensions, unemployment benefits and other transfers are increasingly being paid into mobile or bank accounts. The World Bank says about one in four adults in emerging markets receives such payments. This will be the most important vehicle now for expanding account access, taking over from remittances (except in some sub-Sahara African countries).
The moral case for fintech, as not just an alternative to banks but as a means of lifting people’s circumstances, is strongest catering to micro enterprises. Data-driven fintechs measure user behavior and collect information about a business. The more a payments channel gets used, the more attractive the terms a tech company can offer.
But this is a benefit for those already with an account, not for the poorest 40% of households in developing countries. For the final billion of unbanked, look more to “GovClusion” than fintech to get them onto the grid.