Democratising Finance: Why the Poor Matter to Economic Growth
Cynics argue that nothing can be done to help the poor. There has always been inequality in society and will remain an unfortunate fact of life. But can new financial technology help to address the imbalance and ultimately democratise finance for the masses?
Two billion people have limited access to financial services around the world –in both developed and developing nations. It’s a problem faced in Africa, South America and Asia, as well as western countries too. 28 percent of the US population –nearly 90 million people, are unbanked . The UK has two million citizens living without access to bank accounts, despite being home to the world’s biggest financial services hub. Millions of refugees making their way across Europe are also becoming part of the unbanked crisis.
Women share the brunt of the struggle. They make up one billion of the world’s unbanked – which means that 40% of the global female population is excluded from conventional financial services. There are many reasons for this great imbalance. They include lack of education and readily available banking infrastructure as well as cultural barriers that prevent women from accessing financial services – even when they are the main breadwinners of the family. This is a reality that not only sets women back in life but also the societies they live in.
But in an age where banks value profit before people and regulators make it difficult for them to take risks when dealing with new customers, is there any reason to extend financial services to billions of people?
According to a recent panel discussion on financial exclusion at SIBOS – the world’s biggest finance conference, Kosta Peric from the Gates Foundation argued that yes, there is a need to address the big finance gap. Not merely for humanitarian reasons but for the strong economic and business prospects that such a large population presents.
The untapped market opportunity of the unbanked is notable. Business models aimed at the poor can lift millions out of poverty and generate revenues that can help businesses scale up. A one percent increase in financial inclusion adds 3.6 percent in GDP. What if we could bank 85% of the world’s population by connecting them to a digital world?
Peric, whose Deputy Director of Financial Services for the Poor at the Gates Foundation, urged bankers and entrepreneurs at SIBOS to make a proactive effort to tap into the digital economy to reach people excluded from financial services. His groundwork shows that by working and integrating with existing infrastructure providers, new innovators can create efficient delivery channels to access the unbanked and make a profit too.
The Gates Level One Project provides a framework for building interconnected digital systems to bring the poor into the global financial system. According to Peric, establishing a local sandbox for digital innovation is key to making this project work. The global financial services sector must now come together to research and test as many FinTech solutions as possible to reach the poor and ‘to not leave any stone unturned.’
But what are the solutions that are making an impact to unbanked populations? Mobile payment systems – the most popular form of FinTech innovation- is becoming the greatest enabler of financial services around the world. M-Pesa, for example, is transforming the lives of East Africans with its mobile phone based money transfer and microfinancing service. Launched eight years ago by Vodafone, it is now the largest mobile network operator in Kenya and Tanzania. The success for the platform has been extended to other nations around the world and last month became a platform to enable unbanked Kenyans to trade government bonds from their phones. Other successful mobile platforms in the developing world include bKash in Bangladesh and Nettcash in Zimbabwe, which also provide a lifeline to millions of people.
Other FinTech innovations that have the power to solve the unbanked problem include virtual currencies like Bitcoin, which has made headlines for aiming to address the growing Syrian refugee crisis. Members of a decentralised organisation listed on the Bitcoin blockchain, Bitnation, have developed a Humanitarian Aid programme that provides emergency ID (BE-ID) and Bitcoin Visacards for those that have fled their homes and no longer have no access to traditional forms of finance.
BE-ID is a basic identification card, based on blockchain technology that can be accessed to anyone without any form of ID. Governments don’t issue the card. Instead, refugees apply online and the digital IDs are provided as soon as the application form is completed.
Bitnation’s Visa debit cards are another vital lifeline for displaced people. The card can be loaded using bitcoins and used through the traditional Visa card network and is available to anyone – even those without a bank account.
Using bitcoin technology to load the card electronically allows anyone, anywhere in the world, to help the holder with financial support, and facilitates the channel to enable private donations if a bitcoin address is posted online somewhere. Once loaded, the cards can be used the same way as any Visa card to withdraw cash or pay for things without needing a bank.
The blockchain technology underpinning bitcoin has the potential to become a great enabler of financial inclusion too. By providing an open source visible ledger for transactions, it disintermediates banks and allows people to transfer money between settlement systems, thereby cutting the cost and the time of the transaction.
Indeed this is an innovation that creates a money-transfer system built on secure, paperless, currencies and which can reach the poor in communities where the cost of rolling out traditional banking infrastructure makes it cost prohibitive for the money men to consider as a viable business opportunity.
The aforementioned solutions rely on mobile platforms to reach the poor, which chimes with the Gates Foundation’s belief that innovation for financial inclusion can be expedited and delivered by effective channels through existing telecoms infrastructure.
Other FinTech innovations taking advantage of mobile communications is DoPay, which targets the two billion unbanked that hold down jobs. The firm is a graduate of Barclay’s Techstar Accelerator programme and has created a payroll software platform for employers to enable them to pay workers with prepaid debit cards instead of envelopes stuffed with cash. Employees use the DoPay app to find nearby cash machines, check their balance, and view recent transactions.
Crowdfunding platforms offer an alternative form of finance for those with access to the Internet. Fund Dreams India, Wishberry, Catapoolt and Ketto are all crowdfunding sites that are making significant inroads in shaping the future of India by enabling people to raise funds for personal and social causes without having to go to a bank to ask for money or to even possess a savings account.
FinTech’s potential to disrupt the economic divide is as vast as the size of the world’s unbanked population. But will new technology ever realise its full potential to lift people out of economic despair?
Nelson Mandela famously said that poverty was a man-made construct that could be ‘overcome and eradicated by the actions of human beings. Sometimes it falls on a generation to be great.’ We’ve already dropped the number of unbanked by 700 million people in five years, thanks to a collaborative approach among banks, mobile money firms and alternative finance providers. Perhaps the latest crop of FinTech innovators will be the great leaders we need to close the poverty gap even further by using technology to reach the unbanked and to create a better financial future for everyone.