With opportunities all over the world, prioritizing those that can deliver the highest social impact and/or financial returns is a sensible first step. The markets where financial inclusion offers the greatest benefits will be those that embrace technology-led innovation and have a clear and supportive policy framework for financial stability. Banks should look for the following markers when prioritizing their investments in financial inclusion.
11 markers for assessing the inclusive growth opportunity in emerging markets
1. High levels of mobile adoption and e-payments: more mobile adoption, coupled with government action to digitalize payments, could be a catalyst for low-income communities to adopt financial services. In Kenya, m-Pesa has transformed access to financial services by providing an entry-level e-payment platform for the majority of the population, while the Bolsa Família program in Brazil delivers financial assistance to one-third of the population via digital payments into a card or bank account.
2. National digital identity (ID) systems: banks could leverage biometric ID programs to verify customers at ATMs or service counters as they seek to widen access to financial services. India’s Aadhaar system, for example, provides real-time verification of identities using a fingerprint scan, iris scan or digital face print to enable the direct transfer of government subsidies and unemployment benefits.
3. Credit data infrastructure: some countries have formed MSME credit registries for the collation of reliable and transparent data that potential lenders can use to facilitate loan applications. Banks seeking to boost lending to underserved segments could use MSME credit registries to address information asymmetry and reduce their overall cost to serve.
4. Open access to digital data: open application programing interfaces (APIs) allow financial institutions to collaborate with FinTechs, governments and external partners on innovative mobile applications and digital payment solutions. This collaboration – particularly in areas such as security, authentication and e-signatures – can lower the cost of customer acquisition and foster financial inclusion.
5. Currency digitization: digital currencies would lower transaction costs and drive financial inclusion, but also would require tight regulation, including linkage to fiat money (state issued paper money or coins not related to a physical commodity like gold or silver), and an innovative response from banks that wish to remain relevant.
6. Strong customer safeguards: because low-income consumers are particularly susceptible to aggressive and predatory sales and collection practices, stringent consumer protection laws with strong transparency and disclosure, financial integrity and effective recourse mechanisms for grievances are necessary. Simpler legal documents would also foster financial inclusion.
7. Responsible financial literacy programs: basic education on financial offerings can help individuals and MSMEs understand the value of having access to the financial system. Banks should consider supporting state programs, such as the Central Bank’s move to establish a dedicated advocacy unit to promote financial awareness in the Philippines, as a means to build relationships and strengthen loyalty.
8. Bankruptcy regimes: countries that regulate the wind-down of failed companies and ventures, support creditor rights and help to resolve claims in an orderly and unbiased manner facilitate financial inclusion.
9. Regulatory incentives for banks: recognizing that onerous regulations can be a barrier to financial inclusion, some governments have moved to ease selected rules. Examples include the Reserve Bank of India’s simplification of onboarding requirements for no-frills accounts, and measures in Brazil, Peru, Colombia and Mexico that reduce know-your-customer (KYC) documentation for small balance accounts.
10. Diverse financial ecosystems: increased provision of financial services by nongovernmental organizations (NGOs), e-commerce firms, FinTechs, retailers and telecommunication providers has a direct impact on expanding financial inclusion. Consequently, a vibrant start-up community with access to diverse sources of capital is an important enabler. Digital finance can dramatically increase sales revenues and access to capital for small merchants, while large financial platforms make investments more accessible for lower-income communities.
11. Interoperable financial systems: interoperability allows for a collaborative financial system, enabling users on multiple digital networks to transact across platforms. For example, Peru’s Government, its financial sector and four main telecommunications providers launched Modelo Peru in 2016 to establish an interoperable mobile payment platform for customers to transact across mobile networks and financial providers.