WHAT ABOUT THE UNBANKED?
Nearly one-third of the U.S. population, or 106 million people, are either unbanked or underbanked, according to the Federal Deposit Insurance Corporation (FDIC). In other words, these individuals either make very few bank transactions or may not have a bank account at all. About 25 percent of those also do not have credit score and are invisible to the mainstream U.S. financial system.
Why is this exceptionally important? Because a credit score is required to have access to crucial financial services such as lending – which is an essential part of any economic ecosystem.
The problem with the banks, however, is that they show very little interest in serving the under/unbanked population. As a result, these borrowers are often forced to take out high risk/cost loans from unconventional sources, which can often be predatory lenders.
The way we define it: various financial and commercial services distributed over digital channels – with the intention to substitute the use of cash transactions. To make these transactions on mobile phones, computers or the use of credit/debit cards are self-evident to most of us, it is still strange to many.
THE 2 BILLION
Around the world, the situation is much more severe. There are 2 billion people that are disconnected from the global economy. There are also 200 million businesses of various sizes in growth markets that are denied from accessing to saving and lending services, and those that somehow manage to access financial services tend to pay outrageous fees.
According to McKinsey & Company’s report in 2016: “Financial exclusion affects the middle class, not only the poor. In emerging economies as a whole today, 45 percent of adults-or two billion individuals-do not have a financial account at a bank or another financial institution or with a mobile-money service.
The share is higher in Africa, the Middle East, Southeast Asia, and South Asia, and is particularly high among poor people, women, and those living in rural areas-but many middle class people are also affected. Even those people who do have basic financial accounts lack access to the broad range of financial services that are taken for granted in developed countries, such as different types of savings accounts, loans and insurance products.
As a result, the majority of people in emerging economies rely on informal financial solutions that are often less flexible and more expensive than formal alternatives-and frequently fail to deliver when needed the most. These include savings in the form of livestock, gold or through informal savings groups and borrowing from family, employers, or money lenders.”
So while banks are either not interested or unable to provide such services to developing economies in particular, will be hindered from economic growth and reducing poverty.
HOW EXACTLY FINANCIAL SERVICES CONTRIBUTE TO GROWTH?
Financial products have the potential to transform even small businesses for the better in miraculous ways. Imagine a sock manufacturing workshop with a steady production rate. They operate without any loans, selling what they produce, and most of their income must be reinvested to buy raw materials, pay wages, cover rent, machines, maintenance, utility bills etc. This business may operate for many years but this situation is very fragile and margins are thin.
They are exposed to numerous threats:
For example, a machine breaks down – without it they are unable to continue production.
Some natural disaster hits the manufacture, nothing serious, but the roof is gone.
A key ingredient like cloth disappears and now they must source it from somewhere 200 km away.
Even small disruptions like could become unsolvable without a rainy day fund. But if they indeed have some backup funds, they are likely to be stored and managed in an ineffective way. Remember they do not have banking access, so they often just store cash under a mattress. That is not only an insecure way to store value, but it also prohibits from realizing interest gains as with a typical savings account, not to mention the value depreciation from inflation over time.
Also, the rainy day– if it even exists – may not even be fully cover the unexpected costs. Nor can it be used to innovate or grow the business because that would require a separate fund.
In any developed country, this sock manufacture would be able to sign a low-cost insurance policy to cover an unforeseeable event. They can take out a loan to buy more efficient machinery. Furthermore, the business would likely get a discount if it can purchase key raw materials in greater quantities at once!
What’s more, without the flexibility that financial services can provide, the business is constrained, unable to meet a sudden increase in demand if it occurs.
Today, a smartphone or even a regular mobile phone with Internet access is all that is needed to bridge the unbanked populations of the world with the global economy. With digital finance, banks no longer have an excuse that the infrastructure prevents them from serving these unbanked regions. Moreover, cryptocurrencies and blockchain technology can reconnect the unbanked with the global economy. As technology improve, accessing modern financial services is becoming easier with each passing day. And if the banks won’t do it, cryptocurrencies and fintech companies will rush in to fill in the gap as the business potential for this new market is simply huge.