In the United States, more than 9 million households are unbanked and roughly 20% of all US households are underbanked. The fintech and money service business industries are helping bridge the gap with alternative financial services, but progress is slow. Across the world, Kenya is making huge positive strides in financial inclusion. Kenya experienced a 50% increase in financial inclusion between 2006 and 2016. Their unique approach to solving the financial inclusion crisis is an example for countries across the globe struggling to foster an inclusive financial system.
Financial inclusion refers to access to financial products and services. Furthermore, the principles of financial inclusion state that these products and services should be useful, affordable, responsible, and sustainable. Financial inclusion is important because it promotes the economic mobility of low income households.
The opposite of financial inclusion, naturally, is financial exclusion. This occurs when the barrier of entry to the traditional financial system is too high for people to join. This can also happen when banks redline low income neighborhoods, pulling their bank branches out and leaving individuals “financially stranded.” For low income households without a car, it is difficult (if not impossible) to make it to the bank during business hours using public transportation (without missing time at an hourly job that the family relies on). When physical access is possible, hidden fees and account requirements present another hurdle.
Alternative financial services are often vilified as predatory or expensive. In reality, the individuals who rely on these services are smart consumers who prefer the upfront pricing and simple transaction to the unexpected fees levied by big banks. Check cashers, money service businesses, and fintech companies are filling a void in the banking landscape. Delivering financial products and services to low income households promotes financial inclusion and benefits society as a whole.
In the US, financial exclusion is the result of strict regulation and the mitigation of risk and cost by banks. In Kenya, financial exclusion is the product of an unstable government and unreliable central banking system. Their fintech solution, however, shows that the power of innovation can change the financial landscape for an entire population.
In 2007, Kenya’s presidential elections unleashed a surge of violence that left more than 1,300 people dead. As faith faltered in the government and the banking system remained scarce, an innovation saved the day. M-PESA was launched in March of 2007 and it revolutionized the way Kenyans transfer money. Prior to M-PESA, Kenyans relied on shady and insecure methods to move their money, including sending it with taxi drivers to neighboring towns. Lacking a reliable central banking system, they were in desperate need of a secure way to store and transfer funds.
M-PESA was launched by Vodafone’s Kenyan counterpart, Safaricom. The “M” stands for money and the “PESA” represents that Swahili word for money. M-PESA is an electronic payment and store of value system that operates using a mobile phone network. Customers register at an authorized M-PESA outlet, where they are assigned an individual electronic account. This accounts is linked to their mobile phone number and accessed through a mobile app. A network of money service agents, or retail stores, allow Kenyans to deposit or withdraw cash from their M-PESA accounts.
Once funds are in an M-PESA account, they can be easily transferred to other M-PESA users or non-registered individuals, used to pay bills, and traded for mobile airtime credits. Every transaction is authorized and recorded in real time. The only limitation to M-PESA is that transactions are capped at $500. Despite the inherent differences, these accounts fill a similar gap that check cashers and money service businesses fill in the United States. The difference is the sheer percentage of the population relying on M-PESA for financial inclusion and the lack of a trustworthy central banking system.
While the total percent of adults with a bank account in Kenya hovers around 75%, the statistics reflect that over 71% of adult women and over 73% of people living in rural areas have bank accounts. These numbers show that people across demographics are enjoying financial inclusion. Of the poorest 40% of individuals in Kenya, only 63% have access to a bank account. While this number is trails higher income statistics, Kenya is closing the financial inclusion gap.
M-PESA is one of the primary drivers of Kenya’s increased financial inclusion. Between 2013 and 2016, the number of Kenyans not using any for of financial service dropped to 17.4% (down from 25.1%). Over 71% of adults are using mobile money services and almost one third of Kenyans have a mobile money account by the time they turn 18.
One thing that’s still holding Kenya back is the lack of transparency in the costs associated with bank accounts in Kenya. The average consumer struggles to compare accounts and understand the true cost associated with doing business at different banks. Mobile banking and additional fintech solutions will hopefully bring more transparency. Finally, sending money in Africa is more expensive than anywhere else in the world with an average transaction cost of 10%.
The US has a greater overall rate of financial inclusion than Kenya, but they can still learn from the African country’s success. M-PESA delivered value and innovation to customers by removing the primary barriers of access and creating an intuitive process. Kenyans sign up for M-PESA at conveniently located authorized dealers and use something they already have, a mobile phone, to conduct transactions. The M-PESA system uses retail locations throughout Kenya as a service network.
In the US, check cashers are also using retail locations to expand operations and reach customers where they are already shopping. Retail check cashing provides convenience by allowing customers to bundle errands together: fill up the tank with gas and cash your paycheck, pay bills, and load a prepaid debit card all in one stop. By continuing to offer services in convenient locations and expanding mobile money services, check cashers can support financial inclusion and expand their reach.
NCC supports retail check cashers with reliable check cashing business bank accounts, supported check cashing services, and advanced POS check cashing technology. In addition, our team of check cashing compliance experts are on hand 24/7 to resolve problems and help you scale your business....
MSB technology and innovative banking services are promising to bolster financial inclusion around the world. As social media connects people across the world, the financial technology sector is catching up with their own solutions. Peer-to-peer payment applications, the adoption of cryptocurrencies, and the rise of alternative financial services are bringing much-needed solutions to the under and unbanked populations of the world.
Financial inclusion is the ability of financial services to meet the needs of their users without discrimination or limitation. Across the world, over 2 billion working age adults do not have access to the financial services they need on a daily basis. Among the poorest households, over 50% are unbanked. In the US alone, roughly 20% of households are underbanked. This points to widespread financial exclusion, a phenomenon that is closely linked to poverty and economic immobility.
The pillars of financial inclusion are:
For those who are banked, these pillars are taken for granted. A reliable bank account affords you the opportunity to deposit your paycheck, transfer money to different accounts or people, pay your bills, save for the future, and request a line of credit. Financial inclusion requires participation and prioritization from the entire financial industry. When financial inclusion is achieved, individuals and households have the tools they need to improve their situation. In communities where financial inclusion remains elusive, households are often trapped in a low income cycle.
Financial inclusion is categorized as an enabler for 7 of the 17 sustainable development goals outlined by the United Nations. In 2015, UN countries adopted these goals as a part of their mission to end poverty, protect the planet, and ensure prosperity for all as part of a new sustainable development agenda. The World Bank Group also places a high value on financial inclusion and pinpoints the phenomenon as a key to reducing extreme poverty while boosting shared prosperity.
On a micro level, financial inclusion enables upward mobility, which has a direct and positive impact on both individual households and their community at large. Financial inclusion promotes financial stability, independence, and economic empowerment. In addition to increasing savings, reducing income inequality, increasing employment, and reducing poverty, financial inclusion is also beneficial for financial institutions.
Recent studies show that there is a strong association between financial inclusion and bank stability. In fact, greater financial inclusion has a positive effect on risk management for banks. How can this be? When banks use technology to provide a wider range of services to a wider range of people, they are increasing the scope of their business. More business across a wider range of economic agents works to improve operational efficiency while reducing risk and costs.
The top threats to financial inclusion are banking services that exclude low income households from participating and discriminatory banking practices. The act of redlining, when banks close or refuse to open bank branches in low income neighborhoods, directly impacts access to banking services. Households with adults working more than one job and without a designated family car are unable to use public transportation to reach a bank branch during business hours. This severely limits their physical access to financial services. Assuming they do have physical access to a bank branch, account limits may still keep them from banking services.
Low income households who can secure a traditional checking account may still encounter trouble. Hidden account fees and overdraft charges can quickly eat away at an account balance and even plunge it into the red. The unexpected nature of these fees turns many households off of traditional banking entirely. In fact, over 59% of unbanked households globally cite not having enough money as the reason they don’t have an account. Financial products that aren’t designed to meet the needs of low income households and those that are designed specifically to exclude them are a clear threat to financial inclusion.
Money service businesses often bridge this banking gap with alternative financial services. Due to the threat of derisking by their depository financial institutions, which they rely on to provide their services, MSBs are often forced to close down operations. When an MSB closes, it further shuts off access to financial services within the community it serves.
Luckily, the widespread adoption of mobile phones and the blossoming digital technology (fintech) industry are helping support financial inclusion across the globe. Fintech is specifically supporting financial inclusion through these trends and their associated benefits:
In addition to mobile money and digital apps, cryptocurrencies are offering a new way to bring financial inclusion to underserved communities around the world. Digital currencies like Bitcoin eliminate reliance on third-party centralized authorities. Instead, financial transactions occur on a decentralized digital ledger. In developing countries, Bitcoin is currently being used as a means of exchange and stored value. In Nigeria, Paxful is helping individuals leverage Bitcoin to access the global financial system and protect their money.
MSBs and alternative financial services help bridge the gap for households who do not enjoy access to traditional banking services. While fintech continues to develop new solutions, MSBs will be on the front lines, directly serving the unbanked. Households rely on MSBs for payroll check cashing, convenient bill pay, prepaid debit cards, money transfer, and more.
NCC supports MSBs with real MSB bank accounts, advanced POS technology, MSB compliance expertise, and 24/hr customer service. NCC keeps your MSB up and running with redundant financial partners to protect you against derisking and enable you to serve your community....
Check cashing businesses spend a great deal of energy complying with Anti-Money Laundering (AML) policies and procedures. The goal of these efforts is to prevent money laundering and other financial crime from entering the check cashing outlet. At the same time, the check cashers maintains meticulous records and sends reports that help the industry at large ward off fraud. As fintech blossoms and financial criminals change their tactics, the action of money laundering is no longer as straightforward as running dirty money through a financial institution to clean it.
Money laundering uses secrecy and fraud to turn illegal funds into seemingly legal tender. Criminals engage in an illegal process to hide the source of their financial gains so that they can use their funds in the financial system without repercussion. Money laundering is also used as a means to move money around or hide money from the state in order to skirt rules and regulations.
Money laundering as we know it in the United States began in the 1920s as a means to bring illegal gains from alcohol production, distribution, and sales into the legal financial system. Fast forward nearly one hundred years and criminals are still using money laundering to bring their dirty money into the financial system. Why is money laundering so bad? The action of laundering money disrupts financial systems by undermining the integrity of financial institutions. When money launderers move money through illegitimate businesses, they are competing directly with legitimate business owners.
When money launderers invest their money in markets where detection is unlikely, they falsely inflate these markets. Currencies and global financial markets can be affected by money laundering activity. Additionally, money laundering makes it difficult for law enforcement agencies to track criminals, stop dangerous and illegal behavior, and seize fraudulent funds.
Today’s financial criminals are well-funded, skilled, and equipped with the latest technology. This makes staying ahead of them harder than ever before for financial institutions, law enforcement agencies, and regulators. Money launderers use modern accounting and financial tools to trick the financial systems into accepting dirty money. Criminals employ complex networks and covers to defraud both the traditional and alternative financial industries.
Access to computers and programming enables criminals to use new tactics to hide their identity and spread out illegal transactions. Both of these tactics present huge challenges for financial institutions and law enforcement agents. As a result, the financial sector and regulators are taking increasingly complex and robust steps to prevent money laundering.
In 2017, the increasing threat of terrorism is fueling new AML efforts and regulation for check cashers and beyond. In recent years, the Financial Crimes Enforcement Network (FinCEN) has strengthened its AML program requirements and imposed new Know Your Customer (KYC) rules. In fact, FinCEN has added a fifth pillar to their Bank Secrecy Act (BSA) program requirements. Previously, a financial institution’s BSA program was built on four pillars: 1) internal AML policies, procedures, and controls, 2) the employment of a designated BSA Officer, 3) ongoing AML training for employees, and 4) annual independent audits. The new fifth pillar is enhanced customer due diligence.
Enhanced customer due diligence and KYC rules are aimed at identifying new customers before they start using your financial services. If the customer is an individual, their identity must be confirmed as well as their purpose for opening an account through your institution at that time. If the customer is an entity rather than an individual, the beneficial owners who are in control of the entity must be properly identified at the time of the account opening. After the account is opened, financial institutions are responsible for continuing to monitor and update their customer due diligence efforts.
The best defense against money laundering is transparency and accountability. Using a robust strategy across the front, middle, and back-end can help protect your check cashing business from fraudulent activity. On the front-end, train your customer-facing employees to spot red flags and provide a strong first line defense. As the middle step, maintain customer due diligence and meet KYC standards for all customers while supporting a strong compliance program. On the back-end, keep proper records, send necessary reports, and stay up to date with your external audits. Finally, use customer data and new tools for communication to strengthen your efforts.
On a global scale, cyber-security and terrorism are two of the largest threats facing the financial sector today. And the threat extends beyond individuals to countries that are using technology to spy on and influence their global competitors. In some cases, like in North Korea, countries are even using money laundering tactics to avoid regulation and sanctions. From small scale crime to global heavy weights, regulators are working feverishly to secure financial systems.
Financial regulators must balance many complex and ever-changing threats to protect themselves, their customers, and the financial system from criminals. Luckily, data is helping regulators and institutions spot trends and identify anomalies. Every transaction and customer touch point generates massive amounts of data. While this data holds the key to uncovering trends and identifying fraud before it becomes a full scale problem, processing the data is a huge undertaking.
Data management is now the name of the game for financial compliance. The massive amount of data generated by financial transactions can be used to uncover the true identities of customers and track the source and journey of funds. When coupled with transparent and efficient communication, this data can empower check cashers and banks to detect, prevent, and aid in the prosecution of financial crime.
As the threat of money laundering evolves, compliant check cashers must use data, technology, and robust compliance to stay ahead of criminals. The first step in preventing fraud is to identify customers and run their data through national databases. Advanced POS technology allows check cashers to capture data including fingerprints, ID scans, check images, and transaction details. This data can be quickly communicated to large databases and the check casher’s financial institution. This instantaneous communication allows the check casher to confirm the identity of the customer and refuse to open an account if there are any discrepancies or warning signs.
National Check and Currency supports your check cashing AML efforts with cutting-edge technology, a staff of compliance experts, access to check cashing friendly banks and real check cashing business bank accounts, plus a lineup of supporting services. NCC’s ancillary services include cash logistics, extended deposit times, and 24/7 customer service. In a world where AML regulations and challenges change daily, NCC is on your team to help you stay compliant and prevent fraud from entering your check cashing business....