How do you receive your salary? By a transfer to your bank account?
If your answer is “yes, of course,” then quite likely you’re from a high-income OECD country. But what about the other regions of the world where people often don’t have a bank account or lack access to financial services?
In this article, which is the 5th of our Payment Megatrends series (here are #1, #2, #3, #4 and #6 – find the complete overview below), we will take a closer look at Financial Inclusion, at how smartphones have helped the unbanked to gain access to financial services and why offering financial services in those developing markets is a great opportunity for companies in the financial sector.
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Definition: What is Financial Inclusion?
An estimated 2 billion working-age adults worldwide are financially excluded.
This means they do not have access to financial services that are delivered through a regulated financial institution, i.e., a bank or central bank. However, the term is broadly used across areas like savings and deposit services, payment services, money transfer services, credit and loans as well as insurance. In this article we’ll focus particularly on account ownership and payments.
There has been a lot of progress in the last five to eight years, as numbers from the World Bank’s most recent available Findex report from 2014 show: In only three years, there has been a reduction from 2.5bn unbanked to 2bn unbanked – a 20% increase of financial inclusion.
Furthermore, according to the World Bank, this is not only a phenomenon in a few countries. Increased access to account ownership is a trend that can be found in nearly every developing country. There is little doubt that account ownership and, consequently, electronic money is the basis for financial inclusion.
But why did this trend particularly accelerate in the last few years?
Key to financial inclusion: Mobile Money
Mobile cell phone coverage has exploded in recent years in most developing countries. Let’s take the example of sub-Saharan Africa. According to AfroBarometer, in in Africa far more people have access to cell phone service than to piped water or sewage facilities:
Mobile phone coverage is also the area with the largest growth in recent years – a 23% increase from 2005 to 2015, whereas access to other essential facilities only amounts to a low 2-digit growth.
A big technological leap, thanks to mobile phone networks
Obviously, there are still huge differences among individual single countries, but overall it can be stated that the biggest technological leap in most developing countries – also outside Africa – has been mobile and broadband coverage.
In 2017, 253mn Africans had access to mobile broadband coverage – that’s an 18-fold increase from 2010! Compare it to Europe: Since 2010, the number of mobile broadband accounts “only” increased three-fold, from 188mn to 537mn.
This means, now more than one out of three Africans above the age of 15 has access to mobile broadband, which is required for services such as mobile banking, mobile money transfer and social media.
It is not surprising to see that mobile money accounts (for example the services offered by M-Pesa, developed by Safaricom in cooperation with Vodafone) are the growth driver of account ownership and financial inclusion. In some countries in Africa, more adults own a mobile money account than an account at a financial institution:
Whereas in Europe and the high-Income OECD States, mobile money accounts virtually didnot been existent back in 2014, sub-Saharan Africa was already leading in this respect.
Certainly, these numbers are from 2014 and since then, there has been a lot of growth of mobile money, especially in Asia and China (just look at WeChat Pay and Alipay), but when we look at Europe, there has been by far no comparable growth in pure-play mobile money.
This is certainly going to change, and I think developing countries are in many ways showing how a financial ecosystem could look if designed without boundaries – or after fintechs have disrupted the market.
For wages and utility bills, cash is still king – but the throne is shaking
Whereas for citizens of developed countries it is pretty normal to just wire funds or use their bank account to pay for school tuition or utility bills, this still is not the case for many developing nations.
It starts with how wages are earned. If you exclude the high-income OECDs, on average, nearly 50% of the world’s population still receive their wages in cash:
And where there is cash, people will obviously use it to pay for their living expenses, such as paying utility bills (e.g., gas, water, electricity). In the Middle East and Africa, in 2014 nearly 100% of all utility bill payments were still paid in cash:
This means mobile money is not only a phenomenon of consumer-to-consumer money sending, as we might perceive it in Europe when we think of peer-to-peer payments. Mobile money, for most people, means the first ever opportunity to electronically pay for their living, thus becoming more independent from cash.
Needless to say, based on these electronic money accounts, many more services can be rendered to the people: Small credits, payday loans, small business financing, cash2e-money services, selling of insurance or micro insurance – all becomes possible just from a smartphone.
Conclusion: This is why financial inclusion is a megatrend
To finish this article with a picture – just imagine the example of a farmer in a developing country. He needs to make a small investment and requires a credit to buy seeds or wants to get insurance for a newly bought tool: Without a proper financial infrastructure, these services cannot be rendered cost-effectively. Yet, with mobile money accounts and a smartphone infrastructure, the game totally changes, opening up access to millions of individuals and SMEs. And this radical change is what we’re witnessing at the moment and what we’ll experience in the years to come.
And that’s why this megatrend is so important for the payment industry: It’s not only about huge business opportunities, it’s also about how a progressive financial ecosystem could look if designed from scratch and tailored to the needs of the customer.
These are the other articles of the Payment Megatrends series:
- Payment Megatrend #1: A Cashless World
- Payment Megatrend #2: Artificial Intelligence
- Payment Megatrend #3: Internet Technology and IoT
- Payment Megatrend #4: Borderless Payment
- Payment Megatrend #6: The Frictionless Customer Experience