Mar 28, 2016
Much has been made in recent years of strategies aimed at driving financial inclusion around the globe. So what is financial inclusion? Broadly speaking, financial inclusion is the delivery of financial services to disadvantaged or low-income segments of a society, often referred to as the “unbanked” and “underbanked.”
The “unbanked” demographic is around two billion people globally. That’s two BILLION people who have no relationship with a financial institution. Add in the number of “underbanked” individuals (people who have limited interaction with a bank), and you’re looking at an even larger segment of the global population.
As people progress to “banked,” they experience positive changes that impact not only the individual and their immediate family, but their villages, communities and society as a whole. As increased financial literacy is gained, these people begin to find ways to save money, engage more fully in society and create more opportunities for themselves. Having worked in financial services since the early 00’s (the majority of that time focused on global emerging markets), I have had the opportunity to see firsthand the impact of financial inclusion. From the slums of Mumbai and Mexico City to the outskirts of Manila, I have witnessed situations in which simply having an “agent” banking service in a corner store, or an ATM available to a community, served as a way to not only allow simple access to funds, but also to financially connect and enable workers to protect their money.
Villagers in Africa, for example, through the availability of co-op micro loans, can begin to build small businesses and create income separate from their subsistence farming. Through small savings accounts, a family can avoid the financial devastation of a life-changing event like a funeral. In the macro sense, developing greater financial literacy and inclusion among even a fraction of the two billion affected people can have huge impacts on GDP and national-level economics.
So how can we better reach the unbanked and underbanked populations? Many believe the answer is through digital financial services (DFS). DFS taps a nearly ubiquitous platform of cellphone communication (as well as Internet services) to offer financial services. For example, through companies such as Kiva and Zidisha access to loans has become easier. Through Peer-to-Peer (P2P) money transfer apps such as M-Pesa and WeChat SA, the ability to send remittances and make payments without ever touching physical cash has skyrocketed in under-developed nations.
The DFS use case seems logical. In the absence of brick-and-mortar bank locations that provide for the needs of the communities, individuals have found ways to connect and transact — through mobile communications. Sending and accessing money digitally has become the de facto standard in the last decade in many African countries due to the sheer prevalence of cellphones.
Some people in the financial services industry saw the success of DFS as a warning cry of the death of cash. One can see the arguments — automated transactions are more cost-effective than cash, in many locations these services are more readily available, and there isn’t a necessary reliance on a network of cash access points, such as ATMs or bank branches. In these emerging mobile-focused environments, is there a place for physical currency?
Let’s take a step back, and look at the historical picture of one of the most successful DFS solutions in the past 20 years: M-Pesa. I won’t go into the case study of M-Pesa as it has been done ad nauseum over the last decade. Suffice it to say that between the beginning of M-Pesa as a P2P remittance and bill pay service in 2003 and roughly 2006, over 75% of the Kenyan population had used the service.
Innovative? Without a doubt.
The death of cash in Kenya? Not so fast… Take a look at the charts below.
In the midst of arguably the largest technological innovation Kenya has ever seen, with the express purpose of moving payments and remittances to digital services, the ATM installed base grew from 324 units in 2004 to 2,613 in 2014.
Now, one could argue that just because the ATMs are placed doesn’t mean consumers will use them. So let’s look at the next chart.
Here you can see that the volume of cash withdrawals since 2009 has actually grown steadily year over year and is forecasted to continue growing well into the future.
Let’s look at what’s happening in the United States:
According to the 2013 Federal Reserve Study, the U.S. is seeing a similar rise in cash usage, despite an increase in non-cash payments over the same time period.
We’ve looked at two very diverse scenarios – an emerging market and a highly developed market. In both situations, we’re seeing new technology enter the ecosystem:
Kenya adopted P2P mobile payment technology
The United States is undergoing a major shift upwards in the use of non-cash payments
Yet both countries are still experiencing growth in currency, both in circulation and in utilization.
Clearly, financial inclusion strategies, in whatever form they take, have the intended (or unintended) consequence of creating a need for cash. Improving financial services literacy and access can increase new banking accounts, jobs, small business ownership – all opportunities that go hand in hand with cash availability and use. And as long as there is a need for cash, the ATM industry will find new and innovative ways to assist. As they say, a high tide raises all boats.
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