Financial Inclusion

DEFINITION of 'Financial Inclusion'

The pursuit of making financial services accessible at affordable costs to all individuals and businesses, irrespective of net worth and size respectively. Financial inclusion strives to address and proffer solutions to the constraints that exclude people from participating in the financial sector.

Also called Inclusive Financing.

BREAKING DOWN 'Financial Inclusion'

The financial sector is continuously coming up with new and seamless ways to provide services to the global population. The increase in the use of technology in the financial industry (fintech) seems to have filled the void of inaccessibility to financial services. The advent of fintech has created a way for all entities to have access to all financial tools and services at reasonable costs. Examples of fintech developments that have increasingly been embraced by financial users include crowdfunding, robo-advisors, digital payments, peer-to-peer (P2P) or social lending, and insurance telematics. While these innovative services have disrupted the financial world by including more participants in the money sector, there is still an untapped portion of the world population that remain unbanked or underbanked.

In 2016, the World Bank stated that around 2 billion people worldwide don’t use formal financial services and more than 50% of adults in the poorest households are unbanked. The unbanked population consists of adults who have no easy access to banks in their regions or who have developed a deep mistrust of the financial system. An initiative by the World Bank Group called Universal Financial Access 2020 is taking measures to ensure that the aforementioned unbanked community has access to traditional platforms like checking accounts by the year 2020. People who have basic transaction accounts are classified as the underbanked. The underbanked are adults that have secured the traditional tools for conducting transactions (such as a bank account), but are not privy to the digital incorporation of these transactions (such as digital payments). Because having a basic bank account is the foundation on which disruptive innovations are built, fintech offers the underbanked a ticket to financial digital inclusiveness.

With little access to banks, especially in rural geographies, underbanked users mostly carry out transactions in cash or checks making them vulnerable to theft and street frauds. Even access to bank locations for conducting transactions like cash deposit, check cashing, money order, and funds transfer may come at high costs in terms of banking fees. Fintech, telecommunication, and banking institutions are working hand-in-hand to create mobile payment and micro lending facilities for financially underbanked users. Numerous online payment and commerce systems incorporated with cell phones have been built to facilitate the ease with which this underserved population can immerse themselves in the digital economy. Examples of popular apps that have been created to foster financial inclusiveness include China’s AliPay and India’s Paytm Wallet serving 450 million and 122 million users in 2016, respectively.

There is a sizeable global market opportunity for Fintech. However, access to a lot of markets is impeded by the unbanked group who have a deep mistrust of financial institutions and choose to conduct all-cash transactions. To alleviate this challenge, Fintech companies have come up with innovations that promote transparency in their dealings with customers. Examples of these innovations include telematics insurance technologies that provide policy owners with premium rates based on number of miles used; digital currency transactions that use blockchain ledgers to reveal nature of dealings and identities of players in the online sphere; roboadvisors that openly disclose and offer low fees for customers who have limited access to traditional financial advisors due to high costs; and peer-to-peer (P2P) lending sites that promote financial transactions where individuals lend and borrow from each other. P2P lending is particularly beneficial to emerging market participants who have no way of getting loans from financial institutions due to a lack of financial history and credit record for each individual.

With the rise and rise of fintech, financial inclusion seeks to promote the betterment of the world's population through the use of financial services and tools available in an increasingly digital-based economy.