Financial Inclusion – The Last Mile

50 years ago, the conventional wisdom was that branches were the primary vehicle for financial inclusion.

However, by 2008 and after more than 100 years of continuous growth of bank branches, financial inclusion was still absent half the planet. By 2011, just 51 percent of the world’s population held a bank account. In countries with some of the highest branch density in the world like Spain, France, and the United States, financial inclusion had stalled decades ago and wasn’t improving.

In developing economies like sub-Saharan Africa, branching as a mechanism for financial inclusion had never really started. Research in 2016 from Accenture and Standard Bank showed that 70 percent of the currently unbanked on the African continent would be required to spend more than an entire month’s salary just to physically get to an available bank branch. This is not an argument for more branches, because in most cases these same individuals still wouldn’t qualify for a bank account once they got there.

India's Inclusion Revolution Wasn't Due to Branches

In India, from the early 2000s, the Reserve Bank forced growing Indian bank brands to deploy 25 percent or one-fourth of their new branches in rural locations where financial inclusion remained an issue. The assumption simply was that if India wanted inclusion, it needed more branches. In a speech given on the 10th of December 2009, by Shri P. Vijaya Bhaskar, Executive Director, Reserve Bank of India, he reinforced that belief:

"Banks are directed to allocate at least 25 percent of the total number of branches to be opened during the year in unbanked (Tier 5 and Tier 6) rural centers."

But in that same year, India had also independently formed the Unique Identification Authority of India (UIDAI), with the intention of having a more significant impact on inclusion. Even after a decade of a policy intended to boost branches in rural, unbanked areas, the needle had hardly moved at all. Why? When lower-income citizens entered newly established branches in these rural locations, they simply didn’t qualify to open an account - they lacked the required identity documents.

Starting in 2014, with support from incoming President Modi, the national identity card known as Aadhaar was finally launched. The Aadhaar card was a boon for financial inclusion—it changed the game. By 2018, more than 1.2 billion citizens were already enrolled in the Aadhaar card program and included in that was access to a basic bank account. 88 percent of the Indian population got their first identity document, including more than 800 million who became banked for the first time in India’s history. Not because of branches, but because of identity reform.

The segment of the Indian population most excluded in the old banking system—lower-income households and women—saw 100 percent year-on-year growth every year since the Aadhaar card initiative was launched. By 2015 more than 358 million Indian women (61 percent) had their first bank account, up from 281 million (48 percent) in 2014. This is the biggest single jump for “banked” women among eight South Asian and African countries in recorded history.

Financial Inclusion is Not Just about Access to an Account

In 2020, with both identity reform and access to mobile devices, the landscape for financial inclusion has rapidly evolved. Today, more than 4 billion people, or a little over 65 percent of adults, have access to a bank account or mobile money account. While that still leaves close to one-third of adults, about 1.7 billion people unbanked (world bank and Global Findex Database statistics), we’ve seen the number of total unbanked almost halved in just a decade.

To bank the remaining unbanked, however, we’re going to need to focus on three of simultaneous problems – identity system reform, access to mobile devices, and digital inclusion.

While about half of the unbanked in the world today have a basic mobile phone, there is still limited identity infrastructure and limited mobile internet access in the areas with the highest levels of unbanked citizens. How might we fix those issues in areas like sub-Saharan Africa and across the developing economies of Asia?

In the summer of 2016, the United Nations declared Internet access a basic human right, but if you live in the wilds of Ghana or remote deserts of Mongolia, this might sound a ridiculous, far-fetched proposition. While telecommunications infrastructure is improving, it’s not enough to get us to near-ubiquitous internet access. However, companies like Elon Musk’s SpaceX Starlink project, are working on making low latency internet access available from anywhere on the earth’s surface. Using technologies like Starlink’s satellite constellation, Google’s high-altitude Internet beaming weather balloons known as “Loon”, Amazon’s Kuiper satellite network, and even on-the-ground mesh networking, ubiquitous global internet access could be possible by 2030 or even sooner.

On the identity problem, this remains complex. While some governments may have the resources and political will to mandate a new national identity program, others like established western democracies may rely on commercial efforts initially. It is possible that commercial mobile wallet infrastructure could provide a basic secure identity mechanism as part of its broader roll-out across the planet. Given wallets generally will require strong security built into the handset, the combination of access to high-quality cameras, 3d mapping sensors, and fingerprint and voice biometrics capability, smartphones are purposely built for creating robust, workable identity frameworks for day-to-day use. But co-opting such technology also requires governments to accept identity standards being built by technology platforms instead of those built by the government.

Ultimately, some form of consensus-driven identity frameworks where government departments, banks, healthcare providers, transport networks, and technology giants may be the compromise that’s required. An open system with trusted identity handlers linked to a shared, trusted infrastructure. 

China’s Low-Friction Approach to Inclusion

Today close to 80 percent of the Chinese population use one or both of the two leading mobile wallet players – Ant Group’s Alipay and Tencent WeChat Pay – on a daily basis.

Alipay led to the creation of Yu’e Bao, a mobile money market fund, with nearly USD $300 Billion in deposits at its peak. Savings and credit access have demonstrably changed under Chinese mobile wallet schemes.

One key goal of inclusion is not only access to payments but also credit. Credit access has been shown to mobilize the poorest, financially excluded citizens out of poverty quicker than any other measure.

According to Lending Club Statistics, between 2013-2020, the US-based Lending Club has issued almost $60 Billion in loans. Ant Group, as of June 30, 2020, was holding more than RMB ¥1.7 Trillion in consumer credit or the equivalent of $250 Billion in loans. About 500 million customers took out loans through Alipay in the last 12 months. Clearly, mobile wallets have been vital in extending low-friction credit to Chinese citizens who previously may not have had access to the same.

Over one billion people in Asia already use digital wallets to pay for goods and services, both online and offline. Increasingly, they don’t need to carry cash. In China, 80 million small and micro SME businesses in both urban and rural areas now have better opportunities to access credit, enabling them to gain financial support to develop their businesses and in turn create more jobs.

Digital technology has made the vast ocean of unbanked and lower-income individuals and businesses, attractive assets for the emerging digital finance infrastructure in China and more broadly, with the growth of digital banks such as MYbank and WeBank. Hangzhou-based MYbank has served over 20 million SMEs as of 2019, while WeBank (based in Shenzhen, China) today has over 200 million retail customers, all acquired in just the last 6 years. The vast majority of these challenger banks' customer base comes from those previously unbanked and underbanked, and the average loan size for WeBank is under USD $50, making such a customer unattractive for most of the world’s traditional banks.

China’s fintech ecosystem is maturing also. While Shenzhen and Hangzhou are huge fintech hubs in their own right, Shanghai is now consistently seen as the key city where fintech developments merge with more traditional elements of Chinese business. The Global Financial Centre Index survey conducted in late 2019 showed Shanghai beating out Guangzhou and Shenzhen in the top global fintech cities ranking. Shanghai is increasingly where China’s tech giants, leading banks, and the growing army of fintech players work out the commercial elements of success, while Beijing works out the policy and legal aspects of Fintech’s rapid rise in China.

During September 24-26 Shanghai hosted one of the world’s largest fintech events focused on Financial Inclusion in the INCLUSION Fintech Conference with the theme “Envision Tomorrow”. I had hoped to speak at this one in China myself, but COVID-19 obviously disrupted those plans. However, I was able to join remotely with the likes of Kevin Kelly (the founder of Wired magazine), Nick Cook (Head of Innovation for the UK’s FCA), and players from Ant Group, etc. You can tune in online and watch the sessions at your leisure.