The Time is Now: How to Build an Inclusive Financial System For All
Global finance leaders meet at this year’s World Bank and IMF meetings against a backdrop of existential crises. There is little doubt we face a historic moment without modern parallel as the COVID-19 pandemic rages, climate change grows in its intensity, and the global economy experiences a dual-track recovery – enriching some but widening inequalities overall.
When we were last in crisis in 2008-2009, global finance leaders then sought to shore up and rescue our financial system. In the decade since, new digital technologies have led to an explosion of new financial providers, over 20,000 fintechs in total, driving gains in inclusion globally. This time, there is a growing consensus that a return to business-as-usual would be both impossible and undesirable in the aftermath of the current crisis. Instead, there is an emerging consensus that our economies, and by extension our financial systems, must shift and focus on inclusion and sustainability alongside growth if we are to ensure a healthy, prosperous planet for generations to come.
To that end, new frameworks are being developed, as explored in publications like Built for All, reimagining what an inclusive economy would look like. Similarly, new research and analysis, like the recent paper Building an Inclusive Financial System, are highlighting the changes that need to be made in the way financial services operate.
Financial systems can play a leading role, both in facilitating sustainable, inclusive economic growth and in lessening inequality. Research from the IMF shows there is a 2-3% GDP growth difference between financially inclusive countries and their less inclusive peers over the long term. Further, this research finds a strong connection between increasing financial access, particularly via bank accounts, and reducing income inequality. This is particularly true when historically excluded populations gain access. For example, the IMF found inclusion gains among women lead to the largest reductions in income inequality.
The Social and Economic Value of Inclusive Finance
There is clear value to society and households in pursuing an inclusive financial system. All individuals and small businesses directly benefit from access and usage of affordable financial products that facilitate financial stability and wealth-building – which in turn drive growth for the broader economy. An inclusive financial system also facilitates access to other key economic and social support systems crucial to household financial security. This has been demonstrated by the COVID-19 pandemic, during which governments in over 200 countries or territories have relied on the financial system to distribute social support benefits. In some places, the financial system facilitated rapid, incredibly effective responses; in others, it was only able to provide severely limited options, as remaining gaps in financial access exacerbated existing inequities. And looking beyond the current crisis, inclusive financial services will be key to many aspects of human development – in fact, according to the United Nations and World Bank, they’ll be integral to achieving 13 of the 17 Sustainable Development Goals.
For public and private financial leaders everywhere, the call is clear – now is the time to build an inclusive financial system for all. Such a system will enable all people and small businesses to access and utilize a full suite of financial products and services, and to reap their benefits – including financial stability, resilience, and long-term security and mobility.
To answer the question of how to create a truly inclusive financial system, the Global Inclusive Growth Partnership, led by the Aspen Institute and Mastercard Center for Inclusive Growth, convened a cross-sector global coalition of leaders and thinkers. Our work sought to build on existing frameworks, including the Alliance for Financial Inclusion’s Maya Commitments, the G20 High-Level Principles for Digital Financial Inclusion, and emerging outcome-based frameworks from public sector actors like the Consultative Group to Assist the Poor and the U.S. Consumer Financial Protection Bureau, and from social sector actors like the Financial Health Network. Given the breadth of systems and actors involved in inclusive finance, our focus started with the core elements of the financial system, such as payments, credit, savings and insurance. This focus expanded to include the financial system’s intersection with enabling systems, specifically identity and digital connectivity – and with other systems, including commerce and social support programs, directly involved in supporting household financial health.
Four Principles for Building an Inclusive Financial System
Through our work, we identified four principles all leaders must adopt to build an inclusive financial system. We’ll summarize those principles below.
1. Prioritize historically excluded and underserved populations: While an inclusive financial system will provide services for all members of society, it will also recognize that certain populations face higher barriers to participating and benefiting from the system. Genuine inclusion requires a system to be able to serve the needs of all people across the income and wealth spectrum, including women as well as men, ethnic or racial minorities, individuals living in deep poverty, rural communities, and other “last mile” households. Key to this principle is the inclusive design of financial products, and the inclusive flow of capital directed to vulnerable or traditionally underserved communities. In the U.S., the government’s recent $12 billion direct investment in the nation’s network of community development financial institutions acknowledges the ability of these financial providers to design services that successfully serve historically excluded populations, including people of color and rural communities.
2. Measure success by outcomes: An inclusive financial system will move beyond simply measuring access as an indicator of impact, recognizing that as a baseline necessity. Instead, it will focus on whether that access is meaningfully contributing to people’s financial security and health. Groundbreaking studies like “Portfolios of the Poor” reveal the often-yawning gap between access to, use of, and benefit from formal financial services. Key to this principle is the introduction of outcome-based frameworks and measurement. In Kenya for example, household financial health has begun to be measured alongside financial access. Studies show that despite gains in financial access, Kenyans’ household financial health has actually declined – revealing that gains in access do not automatically translate into gains in financial outcomes.
3. Establish and enforce a strong regulatory regime: An inclusive financial system will require authorities to facilitate a competitive, safe and fair system that fosters growth, trust and responsible products, while protecting consumers from fraudulent, deceptive or abusive practices. Globally, there is a strong association between greater usage of financial products, particularly savings products, and strong consumer protection frameworks.
4. Promote growth and integrity: As with any financial system, an inclusive system must encourage growth and employment on the one hand, and stability, integrity and resiliency on the other. All of these goals are simultaneously attainable. Research from the IMF shows that an inclusive financial system supports higher economic growth without increasing financial instability, so long as there is a strong regulatory regime. An inclusive financial system will focus on growing and deepening productive financial applications within an economy.
Inclusive Finance for All: A Group Effort
Everyone – national economic policymakers, financial services providers, community groups and NGOs, and academia – has a crucial role to play in adopting these principles to build an inclusive financial system for all.
National economic policymakers must enter and champion conversations on increasing inclusion in financial systems. In doing so, all governments should work towards a next-generation financial inclusion strategy with a system-wide focus. Governments with an existing national strategy should review and update it using these principles. To date, over 50 countries have implemented explicit national financial inclusion strategies or commissions to help coordinate national action, such as the United Kingdom’s Financial Inclusion Commission and Mexico’s National Council for Financial Inclusion.
Financial services providers must lead with inclusive design practices for their products. The EDISON Alliance’s Shared Principles for an Inclusive Financial System is one recent example of private sector commitment to inclusive design, which also provides a foundation for public-private collaboration to create an inclusive financial system.
Community groups and NGOs must help governments and financial services providers to share data and insights that can inform smarter policy and product choices to serve the vulnerable and historically excluded. For example, the Aspen Institute’s Consumer Insights Collaborative partners with nine nonprofits to disseminate data on the financial experience of low- and moderate-income households for the public good.
Finally, academia has a key role to play in supporting the development of more outcome-based frameworks and interventions. The Common Cents Lab at Duke University is among the emerging data-driven behavioral science research hubs dedicated to improving the financial wellbeing of low-to-moderate-income people.
It is clear that we all have a part to play in building an inclusive financial system, and for us to achieve this vision, we must act together, urgently. As the world moves toward recovery from the economic carnage of the pandemic and shifts to a broader focus on addressing the challenges of sustainability and equity, reshaping our financial systems will play a critical role in ensuring that the next decade – and better still, the next century – will look different from anything that’s come before.
Dan Barker is Vice President for Research at Mastercard’s Center for Inclusive Growth. Mackenzie “Mack” Wallace is a Fellow and Senior Policy Advisor at the Aspen Institute’s Financial Security Program.
Photo courtesy of WorldFish.