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.