Financial inclusion: How to attract the unbanked population to your financial product.

According to the World Bank’s Global Findex latest report, 1.7 billion adults are left unbanked

The pursue of financial inclusion is a growing concern for central banks and other policymakers. Financial inclusion bestows financial stability and economic growth, showing a connection between financial integration and economic development as established by the World Bank. Consequently, there appears to be a nexus between financial exclusion and poverty. Accenture Banking sees a $380 billion annual revenue opportunity for banks to attract more people into the formal sector from an economic standpoint.

Technology has become an essential instrument to achieve financial inclusion because of its potential to reduce and effectivize the cost of financial transactions allowing financial intermediaries to provide products and services to sectors of the population where the establishment of traditional channels presents very high operating costs. According to the World Bank Global Findex database, approximately 3.8 billion people now account for a bank or mobile money provider.

The growing demand for mobile access to financial services is not exclusive to individuals, but small and medium-sized businesses are also looking to acquire more banking flexibility. Nonetheless, despite the growing numbers in mobile banks and money providers’ adoption, there is still room for improvement. For example, around 95 million unbanked adults in the Sub-Saharan region still receive cash payments for agricultural products.

Financial inclusion is also relevant in developed countries

Many people believe that the need for financial inclusion is only relevant in developing countries. Nevertheless, according to the World Bank data, the United States is the developed country with the most excluded people. In a nutshell, according to a report from 2019 of the Federal Deposit Insurance Corporation (FDIC), 5.4 percent of U.S. households (approximately 7.1 million households) were unbanked.

Around $89 billion a year goes to fees and interest for using alternative financial services in the U.S, such as pawnshops, check cashing services and using payday loans to meet basic financial needs. Replacing the services of a bank on your own takes up lots of time and resources. For example, mundane actions such as performing automatic payments to cover utility bills are replaced by driving many miles on the road to pay such utility bills in person instead. For people in this situation, not having a credit history also disqualifies them from applying for bank low-interest loans, forcing them to fall prey to payday lenders whose services cost way more than the intended loan itself.

The poorer you are, the higher the costs of cash.

Cost of Cash Study, 2017, commissioned by Mastercard and conducted by Genesis Analytics

According to the Department of Work & Pensions’ latest report, there are nearly two million unbanked adults in the UK alone. The less advantaged sectors of society are vulnerable to being denied financial services and products. However, even when some people manage to open a bank account, many continue to use the informal sector for most of their transactions. In fact, one in five account holders worldwide has stopped using their bank account. Therefore, the goal for financial inclusion is framed under how bona fide actors and regulated providers can better compete with the informal sector. But what does it take to beat the informal sector? What other characteristics should suppliers consider when developing, creating, or promoting new products and services?

Taking our point of departure on the facts exposed in the study commissioned by Mastercard, “Unravelling the web of inclusion,” we will examine the following factors that might hinder a full embracement of the formal economy and explore the five success factors to outperform the informal sector.

Transactional accountsthere are few obvious reasons for someone on low incomes to open an account, especially in a predominantly cash-based economy
Payments75 % of the world’s population live in countries where cash accounts for more than 95% of payments
Remittanceinformal transfers account for 30 to 70 % of the total market
SavingsAccording to the World Bank, about one-third of adults save without a bank. Even if you have a formal banking relationship, many consumers in developing countries will still go into the informal sector to make savings
BorrowingIn developing countries, people are most likely to turn to the informal sector for their credit needs, whether or not they have a bank account with significant fluctuations worldwide.
CostThe cost structures of traditional banks often prevent them from reaching or serving low-income people and small businesses
Complexitytwo-thirds of the unbanked adults have a mobile phone but the capacity and capability of networks can be very low and not enough available bandwidth
ConveniencePeople without a bank account travel far expensive distances to pay bills. Financial institutions are too far away, mobile solutions have to be created
Cultural relevanceAccording to the World Bank’s Global Findex Database 2017, 6% (equivalent to 102 million consumers) of unbanked adults worldwide say it is contrary to their religious principles
Problems to assimilate from the informal to the formal financial sector take root in the following challenges :

The crisis of identity

1 billion people globally face challenges in proving who they are caused by a lack of official proof for their identity

The lack of literacy

773 million adults globally are thought to be illiterate

The issue of access

22% of adults without an account say that distance to a financial institution is a barrier; a third of unbanked adults have no mobile phone

ARYZE tackles the identity crisis and the challenges posed by the lack of official documents with a smart B2B2C business model. This approach focuses on building synergies between developing and consuming parties on the platform. ARYZE offers the needed tools to expand its payment ecosystem and bring these services to various end-consumers. For example, cross-border payments present many implications, such as high costs and delayed transfers that limit an organization’s ability to perform/scale. ARYZE has understood the organizational needs for enhanced internal payment processes by developing long-term relationships with NGOs and corporations. Based on this, customized and tailored solutions are built for organizations that fulfill their requirements and support their operations.

When we look at who could benefit from a solution like ours, we see that it’s the Filipino sailor working for a large shipping company, it’s the guy on the scooter bringing masks to Red Cross somewhere in the world, it is people all around the world. We reach them through global organizations and companies that help or know these people.

Jack Nikogosian, CEO ARYZE

Illiteracy is still a problem that affects many around the globe. In its latest report, UNESCO points to an astonishing number of 773 million illiterate adults worldwide. It is important to note, though, that there are two types of illiteracy, the aforementioned type affecting those who cannot read or write and the kind that implies lack of knowledge in a particular subject, leading to, for example, financial illiteracy. ARYZE is aware of the importance of overall literacy. Thus, it contributes to enhancing business and technological literacy through its Academy with relevant courses drawing on topics such as Programming, Entrepreneurship, and Management. Financial illiteracy has a direct impact on the advancement of financial inclusion.

Physical access also presents a barrier to financial inclusion. Geographical distances pose challenges to 22% of adults globally that live in rural areas and thus do not have access to physical bank branches. ARYZE will provide a border-free solution at the reach of their hands through the delivery of services outside the usual brick-and-mortar bank set-up on their mobile phones and by reducing the costs of international money transfers to near-zero. That saved money will boost local economies in low-income regions around the world, diminish global income inequality, and help solve the imperative objectives of the UN SDG goal #9.

Programmable money vs. “dumb money.”

Tokenization allows for programmable characteristics to be built into assets. Essentially, the software allows for terms and conditions to be ingrained into money and actions — this software is commonly referred to as a smart contract. The tokenization of things will also become more common. For example, it can provide us with the ability to tokenize our properties in the future by the use of smart contracts, enabling consumers to circumvent traditional banks because there is no need for a trusted third party or middleman, increasing trust and reducing risk in transactions that use blockchain.

At ARYZE, we attempt to make “dumb money” smart with digital cash, thus enabling interoperability to the blockchain and make bank IOUS fully programmable.

ARYZE´s digital cash ecosystem

This digital cash ecosystem aims to tackle money laundering, financial exclusion, and high costs in international remittances. Promoting inclusion and economic growth worldwide.

Five success factors to tackle the informal sector

Informality remains a contemporary challenge for policymakers in many jurisdictions around the world. Technology is essential for the development of any healthy society, and the potential of fintech to make banking more inclusive is very real, but technology meets barriers with regulations. This is why regulators and the fintech ecosystem should collaborate in reaching common goals for the good of the overall population, especially the underbanked and the unbanked. But what should regulators and fintechs alike keep in mind when improving regulations and products, respectively?
  1. Design, design, design: Make products that are better. In every way.
  2. Re-write the rules: Create a more flexible regulatory framework
  3. Find new roads: Identify new ways to enable access that drive usage
  4. Create win-win scenarios: Pursue shared goals, seek collective gains
  5. Tackle the cash economy: Inspire ‘digital drift’

This article was partially based on the facts of the Mastercard paper “Unravelling the web of inclusion” 2019. For more informative articles, have a look at our other blog posts and website.

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