There are plenty of financial products, like loans, mortgages and credit cards, that can help us achieve big goals. Unfortunately, financial services can also be incredibly restrictive, shutting those who could benefit the most from using them out.
Since the early 2000’s, the idea of combating poverty and leveling the playing field through financial inclusion has gained more popularity. But what does financial inclusion really mean, and is it really possible to achieve?
What Is Financial Inclusion?
In the simplest terms, financial inclusion is the process of allowing more individuals and businesses to access affordable and useful financial products like banking, loans, insurance products and equity. The hope is to help those who are financially excluded build wealth and security, like the unbanked (those who don’t have bank accounts or a mobile money provider) and underbanked (those who don’t have sufficient access to services like credit cards or loans).
According to the World Bank’s Global Findex database, about 1.7 billion adults worldwide are unbanked. Here in the U.S., we aren’t immune to the problem — about 7% of our population is unbanked.
Who’s Unbanked?
Unbanked and underbanked individuals live all over the world, but some demographics are affected more than others.
Barriers to Banking
If you’re fortunate enough to have access to things like checking and savings accounts, loans and mortgages, you likely understand how helpful they can be. Unfortunately, many are unable to access these same services because they have irregular or low incomes, low social statuses or limited education. Language barriers, lack of funding and distance from brick-and-mortar institutions also prevent individuals here in the U.S. and around the world from receiving their fair share of services.
Some people around the globe don’t want banking access of their own. In some cases, they don’t see a need for these services, or they may have the ability to rely on a family member’s account for their needs.
However, many unbanked and underbanked people who want access are blocked by major obstacles. According to the Global Findex survey, one in five unbanked adults reported not having enough money to use an account. Other common barriers include the following:
Why Is Financial Inclusion Important?
Exclusive financial systems prevent the poor from building wealth. Not being able to conduct transactions or store funds in a safe place prevents the impoverished from accessing basic needs, like food, water, education, housing and healthcare. It can also be incredibly difficult to plan for long-term goals, work their way out of poverty and prepare for emergencies.
Having access to financial services is also crucial for hopeful entrepreneurs. Without the ability to access credit, make investments and manage cash flow, creating a thriving small business is nearly impossible.
Benefits of Inclusivity
Including underserved individuals in the formal economy comes with many advantages. For example, bank account access allows families to keep their hard-earned money safe, manage recurring payments and save for emergencies. Financial inclusion also helps small businesses and entrepreneurs thrive. Affordable banking services and products make it easier to make transactions, get credit, insure assets and make smart investments.
Digital access can be especially beneficial; the Center for Financial Inclusion reported that providing financial services through mobile devices saved recipients an average of 20 hours in wait times and commutes.
Financial inclusion benefits society as a whole as well. Studies have shown that financial inclusion reduces poverty and income inequality in developing countries, giving them a better chance at participating in the global economy.
How Do We Make the World More Financially Inclusive?
Governments, international agencies and private companies have all made efforts to increase access to financial services, and their work is paying off. In the U.S. alone, the number of unbanked American households dropped to 5.4% in 2019, which was the lowest rate reported by the FDIC since 2009.
Financial technology (fintech) organizations also have helped spread access to the underserved while driving service costs down. Companies like CNote, Gig Wage, Lemonade and Chime are helping increase financial literacy while providing more people with money management and investment opportunities.
While much progress has been made, there is still more to be done. World Bank highlighted eight approaches that can be taken to speed up financial inclusion:
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