At the time the developed countries are talking about the rise of smartphone addiction, for millions (or even billions) of people around the world it might be the only way of getting online. Internet access via smartphones is also closely intertwined with the topic of financial inclusion. Financial inclusion - or lack thereof - is seen as a critical development challenge and it’s an enabler for 7 of the 17 UN’s Sustainable Development Goals.
Who keeps money under the mattress
Today more than half of the world’s total adult population do not have a bank account. Even though it’s more common in developing countries, it might even be a bigger isolator in developed countries because the level of unbanked people isn’t perceived as a pressing problem. For example, in the US there are around 7% of unbanked people compared to around 40% in India. This means that there might be more efforts to close that gap in India than in the US.
Not having access to financial services leaves people operating in what is known as the informal economy. Meanwhile they still live their day-to-day lives. Imagine having all your money in cash - would you put it under a mattress or carry it with you? Whatever the case, it leaves a person very vulnerable to crime and accidents - you might get robbed, lose it or your house (with your mattress) just burns down. It also keeps people in the poverty trap because they don’t have access to credit to improve their lives themselves. If you don’t have family or friends with sufficient resources, you might get exploited by moneylenders at very high interest rates (as high as 50-60%).
Private sector steps in
Until recently, the efforts to relieve people from financial exclusion have been mainly shouldered by different governmental and non-profit organizations. For example platforms like Kiva that offer P&P lending to people with the help of local field partner organisations. Now it’s been realized that all this excluded population is also huge and largely unharnessed market potential. There has been a rise of collaborative approaches either between public and private sector or in the private sector segments. The business which was mainly lead by charitable development work, is now becoming a playfield for tech giants.
It’s hard to overrate the role of technology as an enabler in the process. Digital financial technology and particularly the global spread of mobile phones, has helped give a growing number of people access to financial services. For example the new Juniper Research report, Mobile Financial Services in Emerging Markets: Mobile Money, Loans, Savings & Insurance 2018-2023, shows that mobile merchant transactions by unbanked individuals alone will grow from 1,8B per year in 2018 to 3,8B by 2023. Kenya and India will be core incubator markets for merchant services.
Financial institutions and fintech can leverage mobile operators to reach the unbanked audience. Direct carrier billing is the best way to engage mobile subscribers who lack access to the basic financial services. The mobile phone penetration rate is remarkably higher in many developing countries than it is for debit or credit cards. Mobile-based financial services are hoped to be the most beneficial to remote areas. In countries like India already more people have access to mobile networks than they do to electricity.
Furthermore, telcos have one of the closest relationships to consumers in emerging markets: they know who the user is, give them access to digital services and collect money for it. This way the telcos are a natural gateway to establish financial identities to yet unbanked part of the population. So far these capabilities have mainly focused on telco services and digital entertainment, but the potential for direct carrier billing is tremendous.
For telcos it’s an opportunity to step up and fill the gap in a vital and necessary field, while harnessing their existing client base and infrastructure. Telcos should establish themselves as the main digital infrastructure for services - this can include financial services, which until recently have been mainly operated by the banks. If telcos can offer a comprehensive solution package of everyday services, it enhances the client loyalty and their position as the digital enablers.
How to make the best of it
It is important to build the suitable and affordable infrastructure for all the users. Open application programming interfaces (APIs) help make integrating to the system efficient and competitive. When infrastructure providers like banks or telcos open up their APIs, it removes technical and cost barriers for small companies and helps them get started with digital transactions.
The challenges of digital financial services include converting digital money to cash, when needed. While digital payments become more common, cash is still not going anywhere. Even in Norway, where digital payments have a bigger share than anywhere else, 17% of all payments are still in cash. These “cash in, cash out” services must be easily accessible, trusted, and available at low-cost for consumers in order to work well and enable digital financial service use by more people. Also unfavorable taxation and government policy regimes tend to be the biggest barrier for the spread of direct carrier billing within specific territories.
Financial inclusion is undoubtedly a hot topic for both public policymakers and private sector fintech players. Digital financial service providers can capture aforementioned opportunities while benefiting underserved people.
Fortumo has the platform that can help you become a provider of full stack digital services, including financial services. We can support you with anything from user acquisition to customer lifecycle management and retention. Want to hear more? Get in touch.