Financial Inclusion Targets and Transformational Change

Financial Inclusion Commitments through the Maya Declaration, the G20 Peer Learning Program, and the Better Than Cash Alliance.
 

Today at 2 o’clock in the Preston Auditorium, Jim Kim, the President of the World Bank Group – along with Queen Máxima of the Netherlands, the U.N. Secretary General’s Special Advocate for Inclusive Finance for Development – will challenge the global community to focus on transformational change in the level and quality of financial inclusion.

Why financial inclusion? Because it is an enabler for poverty reduction and shared prosperity, as has been recognized by the U.N. Secretary General’s High-Level Panel on the Post-2015 Development Agenda.

Progress in tackling financial exclusion can be accelerated through the current global wave of nation-by-nation financial inclusion targets and commitments; through improved data availability; and through transformative business models for providing financial services.

More than 50 countries have now made commitments and/or set targets for financial inclusion – including 45 countries through the Alliance for Financial Inclusion (AFI) Maya Declaration.  An increasing number of countries are putting in place financial inclusion strategies and action plans to accelerate policy and legal reforms. 
 

• Reforms can lower the costs and risks of reaching the unbanked and the underserved, and can raise consumer uptake of new products through consumer financial protection and awareness.
• Government actions – such as shifting payments from cash to electronic methods, and depositing payments directly into accounts – can help kickstart the design and rollout of new business models and products.

While there is impressive energy and commitment from regulators and policymakers to tackle financial exclusion, there is also an increasing recognition that this transformational change will require engaging the private sector – and that such an active engagement will not happen unless there are a profitable business opportunities. It is primarily the private sector that will deliver financial services to low-income households and smaller firms, and that will expand access in underserved rural areas.  

Transformative business models are emerging, harnessing the potential of electronic payments, “big data,” low-cost and convenient delivery mechanisms and access points, technology, and existing networks (from supply chains to post offices). Alibaba in China and Nafin in Mexico are examples of that trend.
Data is increasingly available to assess and develop the business case for serving low-income clients.  This includes information on price and fee sensitivity, available cash flows, and the relative viability of delivery models. Such data have been developed by the World Bank, the World Savings Bank Institute, the Bill & Melinda Gates Foundation and others.

Yet if banks and other financial-services providers see reforms and other public-sector actions as out of step with their market realities – or if they view targets and strategies as a top-down imposition to be avoided or managed – then the potential impact of public-sector actions will be diluted, and the opportunity for huge advances in financial inclusion will be lost.  

In many cases, the private sector is not in the room during the discussions to set financial inclusion targets: Firms are only consulted at a late stage in the process of developing financial inclusion strategies.

We are already seeing well-intended initiatives by policymakers to shift government-to-persons (“G2P”) payments into new accounts. However, these efforts are not yet having the desired positive transformational impact – in many cases, due to low levels of usage of those accounts.  Only about 1 in 5 accounts in low- and middle-income countries are used frequently – that is, more than three times a month, according to the Global Findex. 

Low levels of usage and uptake by consumers are linked to the fact that financial institutions are often not recognizing that serving new, lower-income consumers is an attractive business proposition – and the institutions are therefore not developing sufficiently attractive and tailored products for them.  Moreover, low uptake is often due to the fact that account design parameters are too strict and inflexible, if regulators have intervened to set them.  

Financial institutions may be doing the minimum required to keep their clients – often government ministries that pay fees to banks for G2P benefits and other payments into recipient accounts – happy, or to meet regulatory requirements linked to financial inclusion targets.

Therefore, for financial inclusion targets to lead to transformational change:

• Targets and strategies need to be in line with market opportunities and should not be divorced from market realities.
• Firms in the private sector – such as banks and telecom companies – need to be directly involved in setting targets and strategic priorities.
• The pressure to quickly draft and launch financial inclusion strategies may need to be relaxed, and processes may even need to be re-started, if the prize for doing so is private sector buy-in and a better likelihood that targets will be achieved and surpassed.

Achieving a balance – between involving the private sector in target-setting and identifying high-priority reforms, while at the same time ensuring that financial service providers are stretched beyond their initial comfort zone and truly rethink business models – will be central to success.

The multi-year technical assistance programs that the World Bank Group will provide through the new Financial Inclusion Support Framework will include actions to more effectively engage the private sector in setting and achieving financial inclusion targets, in order to ensure transformational change.

by Douglas Pearce, Gaiv Tata and Sarah Fathallah of the World Bank's Financial Inclusion and Consumer Protection Service Line.