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.
The Struggle for Financial Inclusion
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.
Kenya’s Innovative Response
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%.
What the US Can Learn from Kenya
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.
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