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Financial access is just the first step toward inclusion

If universal financial inclusion is to really make a difference then it is vitally important that existing financial services are not simply made available but that new products and services are designed with the world's low-income population in mind.
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Financial access is just the first step toward inclusion

One year ago, World Bank president Dr Jim Yong Kim made a ground-breaking commitment to achieve universal financial access by the year 2020. As we reach the tail-end of 2014, it seems appropriate to reflect on where we are now, and the progress that still needs to be made. The World Bank’s commitment to access showed exemplary leadership and was an important first step. That said, there is still much that must be done to ensure long-term financial inclusion in the developing world.

Mr Kim said: “Universal access to financial services is within reach – thanks to new technologies, transformative business models and ambitious reforms. As early as 2020, such instruments as e-money accounts, along with debit cards and low-cost regular bank accounts, can significantly increase financial access for those who are now excluded.”

When he made that statement, at the Bill & Melinda Gates Foundation we were encouraged. We also believe that new technologies, business models and commitments to financial inclusion make the goal of access to financial services within reach, in a way it has not been so far.

These technologies enable many new players to contribute toward solving the previously intractable economics of providing financial services for poor and low-income people. And I would like to push us even further by saying that financial access alone does not equal financial inclusion: access is an important first step. But the transformative power of financial services comes through buffering low-income families from shocks, and empowering them to take advantage of opportunities as active participants in the formal economy. This requires more than the availability of accounts. It requires real products and services that drive usage.

A digital approach

The good news is that we are making tangible progress on achieving this necessary step. The Global Financial Inclusion Database (also known as the Global Findex), an initiative funded by the Bill & Melinda Gates Foundation and which is hosted at the World Bank development research group, measures how adults in 148 countries save, borrow, make payments and manage risk. It tracks not only access, but actual usage and preference among the recipients accessing these critical financial services. In a recent exciting development, the Global Findex released a new module for tracking digital payments – which is the path we must pursue to achieve full digital financial inclusion.

Just as new innovations brought financial services to the middle class, it will take a digital approach to financial services in order to bring inclusion to the more than 2.5 billion people currently excluded from economic participation. Wealthy households live their financial lives embedded in a digital financial system that makes it cheap and easy for them to conduct transactions. Their money sits in a virtual account as ones and zeroes on a server, where it can be transferred with the click of a button.

In contrast, most poor households live in a physical cash economy, where they store and transfer value through tangible assets, such as cash, jewellery or livestock. Mobile technology makes possible new, flexible, low-cost digital financial models, creating a major opportunity to deliver value to the poor. Under traditional financial models, in-person services and cash transactions account for the majority of routine banking expenses. But digital transactions can be essentially free; and, according to the World Bank, mobile signals now cover some 90% of the world’s poor. There is an average of more than 72 mobile phone accounts for every 100 people living in a developing country.

Also, banks and other providers can use the copious amounts of data generated by mobile communications to develop more profitable services, and even to substitute for traditional credit scores (which can be hard for those without formal records or financial histories to obtain).

Finally, mobile platforms link banks to clients in real time. This allows clients to sign up for services quickly on their own – and enables banks to instantly relay account information or send reminders.

Breaking down barriers

Market development that ensures financial inclusion requires the right regulations, the right infrastructure and the catalytic use of technologies and services by the people for whom they are designed. We see this clearly when looking at the opportunities and challenges of financial inclusion through the lens of Global Findex data.

That said, we have many complex barriers to address first before we can achieve financial inclusion through digitising financial services. These include regulatory concerns, building infrastructure that can reach rural areas, developing interoperability and competition among providers, and increasing financial capability among citizens, to name but a few.

Thankfully, we are seeing a growing momentum in meeting these challenges among governments, the private sector, multilateral development banks and development partners. However, with more than 2 billion people still outside the formal financial system, governments in particular must make these issues more prominent in their agenda.

Key technical assistance by the Consultative Group to Assist the Poor, the International Finance Corporation and the World Bank financial inclusion practice will help the more than 50 countries that have made Maya Declaration commitments to achieving financial inclusion through the Alliance for Financial Inclusion. These countries have national strategies for financial inclusion that are upheld across their governments. Strong action on digitising government-to-person payments and pension and salary accounts – supported by the Better than Cash Alliance, World Bank financial inclusion practice and other key stakeholders – can spur broader and stronger economic growth, increase life opportunities and economic benefits for migrant and diaspora communities, and increase women’s economic participation.

Gender divide

Closing the gender gap in financial inclusion is critical. As economic agents in their households, men and women often generate, allocate, control, and spend income in different ways. This inequality matters because evidence shows that under the right conditions, improving a woman’s access to and control over financial assets strengthens her position in the household and leads to better outcomes. Yet, relative to men, women are less likely to participate in formal financial systems.

In developing countries, women are 20% less likely to have a formal account than men. And among the adults living below the $2-per-day poverty line, women are 28% less likely to have a formal account.

The Global Findex has very good gender-disaggregated data, and we look forward to April 2015, when a new payments module will release further findings that might provide insight into how digitisation addresses some of the gender gap issues I described. However, much more data is needed to determine how to effectively increase usage of financial services by women and girls, bring them into the workforce, and thereby help the World Bank and G20 countries address their economic objectives of increasing labour-force participation and overall economic growth.

Bluntly, this data gap must be closed if we are to succeed in our goals. The opportunity is there. We need better data and research to discover how to seize that opportunity.

Bridging the gap

The World Bank has done admirable work to help eliminate global poverty. Both Mr Kim and International Monetary Fund (IMF) managing director Christine Lagarde have stressed the importance of financial access as it relates to women’s economic empowerment.

Speaking at the CARE Conference on Gender Equality earlier this year, Mr Kim said: “We need to draw more attention to the major constraints for women and girls that are right in front of us.” Ms Lagarde, during her recent keynote speech at the World Assembly for Women in Tokyo, was direct and unambiguous about the benefits: “[When] we boost the participation of women, we boost the growth potential of a country.”

This is why the IMF and World Bank group are such essential partners in this project. Governments need well-researched data to fully understand and address the issues that prevent women and girls from using the financial services they need in order to improve their lives and the well-being of their communities. The World Bank is uniquely positioned to focus more on researching what will bridge the gap between access and usage.

We know from experience how critical women’s economic participation is to eliminating global poverty; this data gap must be closed if we are to achieve the G20 goals, and the development goals we all share. By investing in gathering more data about women’s and the rural poor’s usage of, and preference for, financial services, we can take a major step forward in improving the quality of life of many millions of people around the world.

Rodger Voorhies is director of the Financial Services for the Poor initiative at the Bill & Melinda Gates Foundation.

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