What The U.S. Can Learn About Financial Inclusion From The Developing World

Tuesday, May 26, 2015

Financial inclusion — expanding access to financial services to those on the margins — is often advocated as a priority for the developing world. And rightly so: It can increase economic security for the people who need it most and promote economic development where those people live.

But financial inclusion isn’t just a developing-world issue. To be sure, the challenge in developing countries dwarfs this challenge at home. Despite significant recent progress, the World Bank’s recently updated Global Findex Database indicates that 46 percent of adults in developing countries are “unbanked” or still do not have an account with a financial institution or mobile money provider.

Compare this to the Federal Deposit Insurance Corporation’s (FDIC) estimate that just 7.7 percent of U.S. households don’t have an account at an insured depository institution. But when the U.S. numbers are broken out by population segments, the domestic challenge becomes more clear. As the FDIC’s surveys of U.S. households have shown, approximately 20 percent of black households and 18 percent of Hispanic households are unbanked.

Among households earning less than $15,000 per year, over 27 percent are unbanked. Financial exclusion imposes significant costs on these households, including high fees and interest paid to alternative providers.

Banks everywhere, from Ghana or India to the United States, find it difficult to profitably serve the poor. It requires rethinking existing business and service-delivery models, and mobile phones are seen across the board as a way to dramatically reduce the cost of expanding financial inclusion. Research from the Gates Foundationindicates that digital payment systems can reduce transaction costs to financial service providers in developing countries by up to 90 percent. In the U.S, Diebold has estimated that a transaction that typically costs a bank $4.25 in its branch would cost just $0.20 online.

Source: Tech Crunch (link opens in a new window)

financial inclusion, mobile finance