Financial Inclusion: A brief overview

What is financial inclusion?

 Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – and that are delivered in a responsible and sustainable way.1

 

Financial inclusion has been broadly recognised as critical in reducing poverty and achieving inclusive economic growth. A growing body of research is demonstrating the impact of country-level financial inclusion advances on a range of significant priorities such as reducing poverty, hunger, and gender inequality. Today, member states at the United Nations are using global financial inclusion data to track progress toward the Sustainable Development Goals. Put simply, financial inclusion makes it easier, quicker, safer and cheaper to help the poorest in the world participate in economic growth.

Digitalisation is key

By far the most important driver of financial inclusion is the adoption of digital technology. There are five key reasons why digitalisation is at the core of enabling financial inclusion and providing basic financial services:2

 

  1. Cost savings through increased efficiency and speed. When Mexico digitised and centralised payments, the cost to distribute wages, pensions, and social welfare dropped by 3.3% – or nearly US $1.27 billion.
  2. Better transparency and security through increasing accountability and tracking, which reduces corruption and theft as a result. When Indian government officials made social security pension payments through digital smart cards instead of manual cash pay-outs at the village level, there was a 47% reduction in bribe demands.
  3. Advancing access to a much wider range of financial services, including savings accounts and insurance products. In Malawi, farmers who were offered digital direct deposits for cash crops invested 13% more in their farm inputs than those who received their crop sale proceeds in cash.
  4. Women’s economic empowerment is raised by giving women more control over their financial lives and improving opportunities. The IMF recently released a study that showed increased female participation in the global economy for the bottom half of countries in their sample in terms of gender inequality, could increase GDP by an average of 35%.3 If economic inclusion means having access to financial services, then 35% of women worldwide – approximately 980 million – remain excluded from the formal financial system.4 Even as digital account ownership continues to grow, inequalities persist. Globally, 80 million women without bank accounts still receive government wages or transfers in cash; 210 million women without bank accounts receive cash payments for the sale of agricultural goods; 585 million women pay for utilities in cash; and 225 million women pay school fees in cash. All of these are sources of personal risk.
  5. Socially inclusive growth is enabled through building a more accessible, cost effective, transparent digitalised platform. This is critical in reducing poverty and achieving inclusive economic growth.

However, progress towards digital financial inclusion is not as rapid as the statistics indicate, and there is a long way to go.

 

To illustrate how statistics can paint an overly rosy picture, 515 million adults globally opened an account at a financial institution or through a mobile money service between 2014 and 2017. This undoubtedly is a huge number, but 55% (or 282 million) of these accounts were in India due to the Jan Dhan Yojana scheme, developed by the government to increase account ownership. Launched in August 2014, the program had brought an additional 310 million Indians into the formal banking system by March 2018.5 Compare this with China, where 57% of account owners are using mobile phones or the internet to make purchases or pay bills – roughly twice the share in 2014.

 

However, in China there are still around 200 million rural adults that remain outside the formal financial system. More broadly, women in developing economies remain 9% less likely than men to have a bank account. In Bangladesh, Pakistan, and Turkey, for example, the gender gap for bank account ownership is nearly 30%. This perpetuates a huge personal safety issue, as improved safety from theft is a key advantage of digitalisation.6 Pakistan is ranked one of the most dangerous countries for women by the Thomson Reuters Foundation.7 National safety improvements are perhaps one of the lesser known benefits of the move to digitalisation.

Figure 1: The gender gap in bank account ownership persists in developing economies

The gender pay gap

Source: Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution.

 

By extension, if we look at collective safety as a structural driver, we can cite the catalogue of terror-related tragedies across the globe, with France’s Finance Minister, Michel Sapin, suggesting that prohibiting cash payments of more than €1,000 would be necessary to prevent cash sheltering anonymity or in his words “fight against anonymity.”

 

There remains a significant amount of financial exclusion and cash use in developed countries. It’s not just in emerging markets where financial inclusion is a potential growth driver. In Europe, cash still represents 78.8% of all transactions in volume and 53.8% in value, a total of $3.5 trillion cash expenditure in 2016.8

Figure 2: Globally, 1.7 billion adults lack a bank account

Globally 1.7 billion adults lack a bank account

Source: Demirgüç-Kunt, Asli, Leora Klapper, Dorothe Singer, Saniya Ansar, and Jake Hess. 2018. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. 

 

Note: Data are not displayed for economies where the share of adults without an account is 5 percent or less.

Why is progress to digitalisation so slow? Because digital infrastructure takes time to roll out and ultimately, people are familiar with cash: it’s free to use and readily available for consumers, it’s confidential, it can’t be hacked, and it doesn’t run out of battery power. These unique qualities continue to hold value to many people living on all continents, despite the extra costs, inconvenience and security implications of holding onto cash.

 

Developed countries such as the UK need digitalisation more than ever, as bank branches shut at an increasing rate.

 

This is particularly acute in rural and economically deprived urban areas. Research by PayPal has indicated that lower income regions in the UK have experienced disproportionate declines in retail bank branches. Of the 70 postcode areas in the UK with below average incomes, 51 lost bank branches between 2013-2017.9 This has been accompanied by the growth of ‘predatory lending’ institutions, as traditional door-to-door money lenders have been joined by a new cohort of unsustainable payday loans companies that offer short‐term loans at very high rates of interest.

Financial inclusion in Jupiter’s Global Sustainable Equities strategy

Mastercard and Visa: Digitalising cashflow around the world

Mastercard and Visa, both of which we hold in the portfolio, provide the main global payment processing networks (apart from in China, which has developed Union Pay).

 

Both Mastercard and Visa view converting global cash and cheque payments to digital as a huge opportunity in all parts of the world. It is worth noting that neither company generate any revenue from the value of the transactions they facilitate, nor from the credit interest that is charged by the issuing banks who use their services. This is an important point in the context of financial inclusion: Mastercard and Visa are only paid to facilitate transactions.

 

Their secular position is to digitalise cashflow, which has strong momentum behind it. Even in the US (the largest market for Mastercard and Visa, representing around 35% and 45% of their 2018 respective revenues), cash still represents 39% of all transactions by volume, a total of $3.2 trillion cash expenditure in 2016.10

 

Digital payment infrastructure in the US is perhaps surprisingly under-developed. After the global financial crisis, the UK wanted to increase competition in banking and therefore simplified regulations for issuing banking licences. Due to the already highly fragmented US market, the US chose a different path, and the regulators stopped issuing licences. In the US, there is a 13% gap in account ownership between adults in the richest 60% of households and those in the poorest 40%.11 To illustrate how these companies are growing their businesses while helping solve these issues, through the Direct Express programme, 5 million Americans receive government social security payments on a Mastercard prepaid card.12

PayPal: Rapid access to funding for small businesses

PayPal, another portfolio holding, has an extensive global financial inclusion programme. PayPal Working Capital (PPWC) provides eligible small businesses rapid access to funding. Since its launch in 2013, more than 181,000 small businesses have received over $7 billion in funding. PayPal’s analysis of PPWC’s £400 million cash advances in the UK over 2014 to 2017 revealed that one-third went to businesses in areas that have lost 50 or more bank branches in the last four years, and 64% went to low-income areas.13 In 2018, PayPal expanded its product offerings for the financially underserved, and launched Small Business Month to support, learn from, and advocate for women- and minority-owned small businesses.

Itaú Unibanco: A well-developed financial inclusion programme

Itaú Unibanco is a Brazilian bank held in the portfolio. Part of its well-developed financial inclusion programme is the Itaú Women Entrepreneurs Programme. The programme aims to support female entrepreneurs in Brazil through in-person and online solutions to train, inspire and connect them, as well as provide finance. The number of participants in the programme rose from 3,393 in 2015 to 8,056 in 2017, with a target of 11,200 by the end of 2018.14

Safaricom: A standout digital financial inclusion success story in Kenya

Safaricom, a telecom company in the portfolio, demonstrates that digital financial inclusion can ignite faster progress toward social inclusion. Today, Kenya stands out as the success story in mobile money penetration, with over 70% of adults having used mobile money in 2017, a figure larger than those who hold traditional bank accounts (only about 55% of adults).

Percent of people with bank account vs. percent of people using mobile money

 

Source: Citi GPS Global Perspectives & Solutions report, “Bank X: The New New Banks”, March 2019.

 

The widespread use of digital financial services in Kenya helped lift around 1 million people out of extreme poverty between 2008 and 2014. Farmers are managing risks and making investments that result in higher yields and incomes, supporting increased food supply; addressing limited access to food, an issue faced acutely by many in the region. Women are gaining more control over their finances, leading to less dependency and ultimately greater economic opportunities; thus, supporting gender equality and more broadly reducing inequalities. There is also the overarching job creation, facilitated by a modernised payment system, which acts as a social impact multiplier.

 

Interestingly, the digital and telecom infrastructure that Safaricom developed was leveraged by the United Nations refugee camp Kakuma, in the North West of Kenya, to support a safer and more reliable food distribution programme, as well as delivering educational services to hundreds of thousands of refugees under the Instant Network School Programme.15

In Conclusion: Financial inclusion is a long-term structural growth opportunity with wide social benefits

Financial inclusion is critical in reducing poverty and achieving inclusive economic growth. There are five key fundamental benefits which we believe should ultimately support the long-term trajectory of this investment opportunity: lower costs, greater transparency, more products, greater female economic empowerment and proven poverty reduction impact.

 

Jupiter’s Global Sustainable Equities strategy has approximately 15% of the portfolio directly exposed to companies that supply products or services addressing this broader social issue. We view financial inclusion as a long-term structural growth opportunity that has the potential to create a global, inclusive platform that underpins social mobility and greater wealth equality.

1 https://www.worldbank.org/en/topic/financialinclusion/overview 
2 https://www.betterthancash.org/why-digital-payments 
3 https://www.imf.org/external/pubs/ft/fandd/2019/03/empowering-women-critical-for-global-economy-lagarde.htm 
4 The Global Findex Database Measuring Financial Inclusion and the Fintech Revolution 2017
5 The Global Findex Database Measuring Financial Inclusion and the Fintech Revolution 2017
6 The Global Findex Database Measuring Financial Inclusion and the Fintech Revolution 2017
7 http://poll2018.trust.org/ 
8 G4S cash report, 2016
9 ‘Helping Underserved UK Small Businesses Grow: How PayPal Working Capital is providing access to finance in pockets of Great Britain
that need it most’
10 G4S cash report, 2016
11 The Global Findex Database Measuring Financial Inclusion and the Fintech Revolution 2017
12 Mastercard Corporate Sustainability Report 2017
13 PayPal Global Impact Report 2018
14 Itaú Unibanco Sustainability Management, December 2017
15 https://www.unhcr.org/ke/innovations

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