Econ_May_05

The Economist

May 5th 2018

SPECIAL REPORT

FINANCIAL INCLUSION

inclusion index, an ambitious attempt to

measure the scale of the problem and

trackefforts to tackle it.

This special report will look at some

of the fruits of those efforts. It appears at a

relatively optimistic time, when the ranks

of the financially excluded are thinning

fast and there are strong hopes that the

process will accelerate further. One rea-

son is the growth inmobile-phone and in-

ternet penetration, making finance acces-

sible even to those living a longway from

physical bank branches or

ATM

s. Accord-

ing to the Findex, 78% of the world’s un-

banked adults receiving wages in cash

have a mobile phone. Moreover, the “un-

banked” are seen as an increasingly at-

tractive commercial market. Firms as di-

verse as Ant Financial, an affiliate of

Alibaba, China’s e-commerce behemoth,

and PayPal, a Silicon Valley payments

firm, make much of their role in expanding financial inclusion.

Daniel Schulman, PayPal’s chief executive, says his company’s

mission is “to democratise financial services”.

The report will consider whether non-profit organisations

and businesses are right to be so upbeat about the prospects for

more financial inclusion. On the commercial side, tensions have

arisen between the different sorts of businesses engaged in this

market: commercial banks jealous of their traditional quasi-mo-

nopoly on formal finance and yet wary of further risky adven-

tures in “subprime” markets; mobile-network operators that

nowprovide the infrastructure for payment, the most basic of fi-

nancially inclusive services; the “fintechs”, aggressive financial-

technology startups fizzingwithbright ideas, idealismand some-

times greed; and, increasingly, the “platforms”, big internet firms

that have a lock on how people spend their time online. The re-

port will askwhether the winners from all this competition will

be consumers, and “especially the relatively excluded”, asOlivia

White ofMcKinsey, a consultancy, believes.

Making poverty profitable

Although it will look at rich countries, it will focus mainly

on the developing world, where the problem is most acute. One

example of a country where financial exclusion is extreme but

prospects for greatly reducing it seembright is Pakistan. Only 24%

of the adult population there have bank accounts, a further 7%

use other formal financial services and 24% are served informal-

ly. But the country has a huge population (about 210m), much of

it young; a high level of mobile-phone penetration (146m ac-

counts) and mobile-signal coverage; a decent regulatory frame-

work; and a vibrant ecosystemofnon-profits and foreign anddo-

mestic businesses committed to the market. Kosta Peric of the

Gates Foundation believes that Pakistan is on its way to becom-

ing “the first fully connected and inclusive economy”.

The latest “Findex”, its third iteration, based on 150,000 in-

terviews and covering data for 2017, was published last month.

The headline findings are striking: although the problem re-

mains vast, progress has been spectacular. At 1.7bn worldwide,

the number of the “unbanked” in 2017 was down from 2bn in

2014 and 2.5bn in 2011 (see map). The proportion of adults with a

bankormobile-moneyaccountwas up to 69% last year, from62%

in 2014 and 51% in 2011. In the three years since the previous Fin-

dex, 515mpeople had acquired an account.

Notional access to an account is not the same as “inclu-

sion”. The Findex report finds that a quarter of all accounts

worldwide are inactive, with no deposits or withdrawals in the

past 12 months. India’s numbers are especially misleading. Fol-

lowing the launch of a bold financial-inclusion plan in 2014,

which promised that every Indian would have access to a basic

bank account, some 240m accounts were opened over the next

two years. But it soon became clear that up to a quarter of them

were “zero-balance accounts”, a euphemism for “unused”. So

banks made sure most had at least some money in them, per-

haps by depositing tiny sums, often out of the bank staff’s own

pockets. “Zero-balance” made way for “one-rupee” (1.5 cents) ac-

counts, but financial inclusion improved only on paper.

Even if the accounts are in use, some in the field argue that

in itself this does little to enhance inclusion. It does not allow the

holder to borrow, save or buy insurance. If financial exclusion is

defined more broadly, it also covers many unbanked or under-

banked people in the rich world, where the issue is attracting at-

tention frompolicymakers.

Inboth rich andpoor countries, financial technology, or fin-

tech, is already seen as the dominant force behind the big ad-

vances of recent years recorded in the Findex. Leaving aside the

relentless advance ofthemobile phone, the optimism is inspired

by progress in two areas. One is the development of cheap bio-

metric systems allowing even the illiterate with no papers to es-

tablish a unique digital identity that a financial institution can

use. In India, for example, 99% of the adult population nowhave

a 12-digit universal identity number, known as Aadhaar. Such

systems are not foolproof. A surprising number of people lack a

distinct fingerprint, and iris recognition needs high-quality cam-

eras. Biometric-based algorithms always involve a trade-off be-

tween precision and ease of use. But when other means of iden-

tification are added, security can be far tighter than it everwas in

a paper-based regime.

Second, cloud computing allows ever greater numbers offi-

nancial transactions to be automated and unimaginable quanti-

ties of data to be analysed by artificial intelligence (

). Ant Fi-

nancial boasts a 3-1-0 model: three seconds to reach a credit

decision; one second to transfer the money; no human interven-

tion. Automation also reduces the cost of providing finance and

makes it profitable to deal in smaller amounts ofmoney. Instead

of being a bad banking risk, the poor have become the business

opportunity at the bottom of the pyramid. And new sorts of

data, along with more sophisticated ways of using them, may

compensate for the lackofa credit historyandgive theunbanked

access to finance for the first time.

Source: World Bank

100

PAK.

RUSSIA

AF.

KENYA

YEMEN

NIGER

DRC

NIGERIA

MADAGASCAR

MALAWI

GUINEA

EGYPT

TURKMENISTAN

BURUNDI

MYANMAR

CAM.

VIETNAM

BANGL.

INDONESIA

INDIA

UKRAINE

BRAZIL

BRITAIN

FRANCE

MEXICO

CHINA

JAPAN

PH.

AUS.

Redrawing the map

Adults with no bank account

2014 or latest, as % of population*

*Countries scaled to population

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