There’s no denying that progress on financial inclusion has been made over the last couple of decades. And yet today, about 25% of the world’s adult population remains unbanked, according to the World Bank. Another 50% are “underbanked,” meaning they lack access to credit and rely heavily on cash.
These stubbornly high figures represent both a major societal challenge and a compelling opportunity for financial players. Those that develop smart strategies for expanding financial inclusion stand to reach new customers and expand their market share. In our work with banks, payment providers, and other financial players, expanding financial access and increasing responsible usage has strengthened financial results—expanding the deposit base and increasing the use of additional offerings, among other benefits.
The real question is how to seize this opportunity. Several priority areas have emerged in recent years—areas where action can both help expand financial inclusion and enhance value creation for financial players:
Players across the financial ecosystem—including banks, fintechs, payment providers, governments, and NGOs—can take action in each of these areas. In many successful efforts, leveraging powerful new technologies and innovative approaches strengthened by a clear business case resulted in powerful and scalable results.
Financial inclusion is often discussed mostly in terms of giving people access to financial accounts and services. Such conversations miss the fact that the real magic happens when people move from access toward financial health.
A recent study took a closer look at this challenge in the Brazilian market served by the neobank Nubank and global payments services company Mastercard. The study, supported by BCG, included an analysis of three years of aggregated and pseudonymized transactional and behavioral data from over 3.6 million Nubank customers. Among the findings:
The study also found that supporting consumers along their journey can yield robust business returns: customers who moved from access to usage of financial services had a roughly three-times average increase in the gross dollar volume of their transactions, regardless of their income level.
The traditional underwriting methods and standards used by financial institutions to assess creditworthiness can inadvertently exclude certain demographic groups, such as individuals with limited credit histories or undocumented immigrants. This can perpetuate financial exclusion.
Certainly, financial institutions cannot expand access to financial services in a way that increases the risk of losses down the road. But they can adopt more inclusive underwriting practices.
For example, newer technologies can draw on alternative data points like rent payments, utility bills, or consistent income to evaluate creditworthiness more holistically. Collaboration by government and financial institutions to drive open banking policies and capabilities, wherein consumer financial information is securely shared among banks and other financial providers, can help provide the data needed under such alternative credit-evaluation processes.
Financial players, meanwhile, have developed approaches that support borrowers in ways that reduce default risk. Grameen Bank’s microlending business operation, which uses a group-lending model to provide capital to low-income women with poor or no credit histories, has a low nonperforming loan rate. A randomized, controlled study of the Grameen program’s impact on women entrepreneurs in the US in the late 2010s found that it reduced the likelihood of material hardship (such as not being able to pay mortgage or utility payments) and increased monthly business earnings.
Ultimately, lending to small businesses can also yield significant downstream benefits—including job creation, economic growth, and expanded tax revenues for governments.
Mobile-phone infrastructure was the foundation for the rapid expansion of M-Pesa in Kenya back in the late 2000s. That success story underscores the critical role infrastructure plays in expanding financial inclusion.
There are broadly two types of infrastructure required to bring people into the financial system. The first is the physical infrastructure—including roads, transit and postal systems, mobile phone towers, and internet access—that influences a citizen’s ability to access services. The second type is technical infrastructure, comprised of the networks and technologies—including payment rails, network security, and credit bureaus—that enable the provision and exchange of financial products and services.
The Indian government has pushed to enhance the country’s technical infrastructure in recent years, issuing a 12-digit unique identification number to 1.3 billion people and supporting the development of an interoperable mobile-first payment system. Such actions have laid a strong foundation for what is now a booming fintech sector.
Financial institutions have typically been viewed as less trustworthy than other industries, according to BCG research. And trust is often cited as a reason for people being unbanked and underbanked, as individuals may have concerns over whether banks will protect their assets and charge them fairly. That lack of trust can lead unbanked consumers to do business with informal lenders, even if rates and transaction costs are high.
Trust is a function of four factors:
Robust fraud protection and cyber security can help here, of course. But financial players can also leverage new technology to strengthen trust with customers who are just entering the financial system. Strong customer service to build positive relationships, providing benefits proactively to customers who are using credit responsibly, and creating games that incentivize responsible financial behavior can be powerful tools in this area as well.
The insights outlined above point the way toward successful strategies for expanding financial inclusion. The financial system is an ecosystem, with important actions required of all players:
Technology and new approaches are important levers for expanding financial inclusion. Banks, fintechs, and other players should seize the opportunity to harness these innovations to deliver both social impact and sustainable business value.
Principal
Boston
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