The Pinch of Financial Exclusion
Written by Lynn Hamerlinck on 18 August 2021
How many times a day do you pay with the swipe of a card? On average, probably 2 or 3 times. Of credit card transactions only, 1.01 billion transactions occur around the world every single day1.
It's hard to imagine not having a bank account anymore when you think of everything you buy and manage with it. Digital payments have become such a habit that we might not even notice that some businesses no longer accept cash (often despite legal obligations). McKinsey found that the COVID-19 pandemic especially has accelerated our journey to a cashless society.
The fear of contracting COVID through high-traffic ATMs and the refusal of merchants to accept cash consumers has pushed us toward electronic payment options to complete purchases. The downside of this is that it discriminates against vulnerable customers who lack access to credit and debit. Cities such as New York have already taken measures to prevent further discrimination by approving bills obliging retailers to accept cash.
When mapping the location of the unbanked worldwide, it shows that most people who don’t own a bank account live in developing countries and emerging markets. Lendahand’s goal is to fight poverty by investing in entrepreneurs in emerging markets, hopefully in turn boosting financial inclusion for these people as well. This blog post briefly touches on what financial exclusion means and how financial inclusion can help entrepreneurship thrive.
The Solution for Financial Inclusion
1.7 billion people worldwide are still unbanked, meaning they have no basic bank account and thus no access to financial services. It forces them to fully rely on a cash economy. Mastercard Vice Chairman, Mike Froman, told USA TODAY: “There are still over a billion people all over the world who are unbanked, who have no formal relationship to the financial system. They operate in gray areas and an informal economy, which makes it very difficult for them to access the kind of tools that they need to achieve greater productivity and to put themselves on a path to greater prosperity.”
Would getting all these people a bank account be the solution? India tried out this approach in 2015. They even made the Guinness World Record with a new record for the most bank accounts opened in one week. A total of 18,096,130 were confirmed in the country’s financial inclusion campaign. Unfortunately, resulting in a record amount of dormant and inactive accounts…
So, alas, simply banking the unbanked doesn’t solve the problem. Financial inclusion studies show that being unbanked is not the problem. It is the effect of a problem. So why is it that close to one-third of adults in the world are still unbanked? The main reason unbanked people provide for not having a bank account is not having enough money to use one2.
The key is giving poorer people access to financial services and helping them generate the income needed to improve their financial situation. This would allow people at the base of the pyramid to achieve more financial security. Previously, we shed light on the informal economy and how formal labor can also mean a way out of poverty. You can also extend this to financial inclusion since those active in the labor force are less likely to be unbanked.
Financial inclusion promises to provide people with more options and tools to manage their day-to-day funds, respond to emergencies, and seize opportunities.
Thriving Entrepreneurship through Financial Inclusion
Financial inclusion is also essential for the growth for entrepreneurs at the Bottom of the Pyramid in emerging markets. A good financial situation protects people in times of crisis and enables them to build for the future. According to the United Nations, more than 200 million small and medium-sized enterprises lack access to finance in emerging markets alone. This problem limits their ability to thrive.
When small entrepreneurs are not registered at a financial institution and operate in cash, they cannot present formal records of their transactions and revenues. Banks deny their loans, making them turn to loan sharks who charge them annual interest rates of up to 180%. Access to financial services and better financial literacy empower entrepreneurs and business owners to make better business decisions. It helps them invest capital and grow their businesses. This results in more income, job creation, and economic prosperity, and hopefully, will enable them to work their way out of poverty.
Our Lendahand crowd recently crowdfunded €1 million for BWISE, an Ecuadorian company offering mobile payment solutions to SMEs in Latin America. Their services allow SMEs to have digital track records of their transactions, enabling them to apply for formal loans to grow their business. Through Lendahand, you can also support the work of several microfinance institutions. We made an overview of all MFIs in our portfolio, covering four continents. Learn more about their work here.
For the past 10 years, Her Majesty Queen Máxima of the Netherlands has worked hard on financial development and inclusion in emerging markets as the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development. As a Dutch crowdfunding platform, we feel proud to share this passion for financial development with Her Majesty.
As Her Majesty stated at the United Nations General Assembly on Financial Inclusion for Development: “Financial inclusion is not an end in itself, but it is a means to increase family income, improve nutrition, increase access to health, improve education, empower, especially women. It allows affordable energy, as well as water and sanitation, and it creates jobs. Basically, it is about including people in the economy. And it is giving them a tool to have a better future.”
Looking for a tool yourself to help build towards economic inclusion for all? Learn more about how investing through Lendahand works here and have a look at our projects here. You can make your free account today by signing up. Happy crowdfunding!
2 Global Findex