The availability and equality of access to financial services is defined as financial inclusion. It’s a method for individuals and businesses to receive relevant, low-cost, and fast economic goods and services. These include banking, loan, equity, and insurance products, to name a few. Unbanked and underbanked people are often targeted through financial inclusion efforts to connect them to long-term financial services. It is well acknowledged that financial inclusion entails more than merely opening a bank account. Individuals who have already been banked may be denied financial services. Financial inclusion has been linked to more substantial and more sustainable economic growth and development. As a result, many governments worldwide have made it a top goal to achieve financial inclusion.
Around 1.7 billion adults were predicted to be without a bank account in 2018 according to forbes. Women and poor individuals in rural areas were among the unbanked. Those who are excluded from financial institutions generally face prejudice and belong to vulnerable or marginalized communities.
Although it is acknowledged that not everyone requires or desires financial services, financial inclusion aims to eliminate all barriers, both supply and demand. Financial institutions are the source of supply-side obstacles. They frequently signal a lack of financial infrastructures, such as nearby financial institutions, exorbitant account opening expenses, or verification requirements. Poor financial knowledge, a lack of financial capabilities, or cultural or religious views that influence economic decisions are examples of demand-side hurdles.
Financial inclusion is viewed by banks as a charity endeavor because they have no notion how to profit from it. The problem is that businesses profit from it. M-Pesa in Kenya exemplifies this, and WeBank in China is achieving incredible things. They’re both profiting from financial inclusion because you can do it if you know how to utilize technology.
Banks are unable to provide Mpesa-like services. They don’t think in this manner. When it comes to digital banking for the poor, their perspectives are fundamentally different because banks were founded to provide physical banking for the wealthy. Banks were founded centuries ago for the industrial revolution and the global rise of cross-border trade and finance. Their business concept is based on cash, cheques, receivables, and payables being handled over a counter by a human. The person records the transactions, and you’re on your way.
These massive old institutions are now finding it extremely difficult to manage the global spread of data via software and servers if you have the correct software, a $0.50 transaction costs the same as a $1,000,000 transaction in a digital business model.
It’s the polar opposite in a physical business model. To cover the overhead of those facilities and employees, the bank had to set the transaction size threshold relatively high in the old business model. There is no limit to the digital business model.
This is why, in an analog environment, we worked with annuity products for those who could afford them. It was pointless to meet more than once a year because it would be too expensive. That’s why you have 25-year mortgages, annual vehicle insurance, and an annual percentage rate (APR) (annual percentage rates).
We can work in real-time all the time in a digital environment. We can provide short-term insurance (Trov), short-term investment products (Ant Financial), and flexible home loan alternatives. Oh, and there’s the issue of financial inclusion.
This approach is difficult for banks because they deal with more significant concerns, such as the transition from analog to digital. It’s a different story for technology-first companies like M-Pesa and WeBank, created on the internet. Technology-first businesses are making inroads into the financial sector, although they begin at the bottom, providing basic mobile money messaging and banking services. They work their way up from there. Any of the technology-first, born-on-the-internet new financial companies, such as the ones I’ve listed, start small and gradually expand their capabilities.
When you look at a bank, you understand they are at the pinnacle of the financial world. They are pushing their way down the financial ladder, offering everything from savings to loans to investments to payments to wealth management and commercial banking. They’re attempting to streamline, become more agile and lean, reduce the company, and go digital.
Financial inclusion is such a problematic issue for big banks. Big banks were not designed to provide low-cost, unrestricted, scalable fundamental banking services to the poor. That is why new internet-based businesses are doing so well and so quickly in this arena. However, this does not rule out the possibility of giant banks focusing on digital banking for the poor. After all, if a big bank saw a market and thought they could bank the unbanked utilizing a technology-first strategy in a market they know, that’s a good sign.
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Ken is a Quantitative Trader with experience in investments, quantitative finance, financial modelling and algorithmic trading in Global Investable Markets (GIM). He enjoys using Bayesian Statistics, Time Series and Machine Learning in developing Robust consistent Alphas in Equities Market, FX, ETPs and Derivatives instruments. He enjoys deep dives in understanding High Frequency Trading infrastructures and improving how the African financial markets work. He holds a Bachelor's in Actuarial Science from Strathmore Institute of Mathematical Sciences : An Executive Program in Algorithmic Trading (EPAT) certificate in Algo Trading from QuantInsti : A current MSc student in Financial Engineering at World Quant University.