What is financial inclusion?
An estimated 2 billion adults worldwide do not have access to basic financial services. A number of them cite lack of sufficient money to open and maintain accounts. This implies that these services are not designed for low income users. In developing countries, more than 200 million micro, small and medium-sized businesses do not have access to formal financing mechanism.i A primary reason for businesses to not have an account is lack of collateral or adequate credit history.
Financial inclusion is the ability to deliver basic financial services such as savings, payments, credit, and insurance to individuals and businesses in a manner that is affordable to them through policies, procedures, and tools that are sustainable to the services provider. The benefits of financial inclusion are many – it enables people and businesses to streamline cash flows, ride over income shocks, invest in skills, and address future opportunities.
With more than 2 billion adults and 200 million businesses as prospective customers, why are financial services providers not going after them aggressively?
Issues and challenges in serving this segment
Financial literacy: A lack of financial education prevents people from using products and services that are appropriate for their needs. This lack of awareness also results in instances of fraud and malpractices.
Valid identification documents: In a number of developing countries, several identification documents are needed to open accounts. This leads to a complex and cost-intensive onboarding process. In most instances, people and businesses don’t have relevant identification documents. A single identification document will simplify the onboarding process. Having a valid document will also help transmitting essential financial services such as benefit payments and wages to the correct beneficiary. For instance, the Indian government is aggressively expanding enrollment of people into Aadhaar, the national unique identification scheme. A number of financial services are being developed with Aadhaar as the fulcrum.
A single identification document will simplify the onboarding process.
Consumer protection and regulation: Secure and reliable platforms and associated regulations are required to establish robust safety and reliability standards. These measures are necessary to ensure that people and businesses develop confidence in these services. Otherwise they will continue to rely on the informal economy in times of need. A number of countries, including Peru, Mexico, Philippines and Malaysia have implemented consumer protection regulations specifically for this segment.
Usefulness of the product or service: The products and services offered to these segments will need to be relevant for the end users. Opening a transaction account must be treated as the first step in providing a broader set of financial services such as deposits, loans, and insurance. Even with transaction accounts, a majority of the transactions end up being cash based, instead of being electronic. Governments and other private institutions can take a lead in changing the mindset by developing solutions for transferring benefit payments and wages electronically.
What digital technology developments are relevant for financial inclusion?
|Technology Developments||What it means?||Opportunities for HCL|
|Disaggregation of the Value Chain||New players, including non-banks and non-MNOs (mobile network operators), increasingly offer financial products and services directly to customers or offer services such as data analytics, credit scoring, and payment mechanisms to financial service providers.||Identify and partner with Fintechs to offer solutions in areas such as e-KYC, P2P payments – a “mode 3” type solution|
|Open Platforms and Open APIs||APIs enable new applications to be built on top of pre-existing products, thereby capitalizing on the product’s existing customer base. Open platforms and open APIs hold the potential to facilitate access to a broad range of products and services, and thus enhance financial inclusion.||Leverage capabilities in the areas of API management, modern application development or Platform as a Service – a “mode 2” type solution|
|Use of Alternative Information||Digitally collected data, including e-commerce and mobile transaction histories, can complement or substitute traditional methods of client identification and credit risk assessment. Biometric data, such as fingerprints and iris scans, allows providers to meet due diligence requirements for customers with insufficient traditional forms of identification.||Identify and partner with Fintechs to offer solutions in the areas such as e-KYC, Big Data & Analytics – a “mode 3” type solution|
|Customization||Better data collection and analytics inform more accurate customer segmentation and human-centered product design, such as clearer user interfaces or targeted alerts and notices to consumers.||Develop propositions leveraging digital solutions via BEYONDigital; Big Data & Analytics solutions|
A view into the future
We are in the midst of what is being termed as the age of “digital revolution”, which started with the development of microprocessors and computers and accelerated with the advent of the Internet and mobile devices. While digital technologies have rapidly spread throughout the world, the broader development benefits of these technologies have not been even.
In its “World Development Report 2016 – Digital Dividends”, the World Bank Group makes a compelling argument on what is needed for the digital revolution to work for everyone everywhere. The closing out of the digital divide – making Internet access ubiquitous – is necessary but not enough. To make the most out of the digital revolution, countries also need to work on the “analog complements” – by having strong regulations that ensure competition among businesses, developing skills needed for the demands of the new economy, and ensuring that institutions are accountable.