Financial Inclusion
Jul 4, 2023
2023 Expert Guide: The Importance of Financial Inclusion Strategies and Policies
Explore this introduction to financial inclusion with a focus on LATAM and APAC, the initiatives implemented and the overall challenges of financial inclusion.
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The concept of financial inclusion refers to the provision of affordable and accessible financial services to all individuals and businesses regardless of their financial situation or geographical location. With financial inclusion, individuals, even those underserved or excluded from the traditional banking system, can access affordable and reliable financial products and services. These include responsible and sustainably delivered financial products such as savings accounts, credit, insurance, and payment solutions.
Why is financial inclusion important?
The importance of financial inclusion, as CFI addresses for individuals and businesses, stems from the need to:
- Overcome crippling financial problems caused by lack of access to basic financial services
- Provide a means of monetary storage, cash flow and payment management, savings accumulation, credit access and investments.
- Increase job opportunities and quality of life caused by the financial exclusion of small businesses or underserved individuals
In the 2030 Agenda, financial inclusion is meant to facilitate eight Sustainable Development Goals, for instance, in the fields of health, education and mobility. It plays a crucial role in offering individuals, especially those from marginalised groups, the opportunity to avoid extreme poverty, boost shared prosperity, and improve their lives. After all, financial inclusion is imperative for increasing financial access and growth sustainability, promoting economic development worldwide. Nevertheless, despite the opportunities presented and efforts made to foster financial inclusion, developing countries still face significant challenges, especially in terms of financial access.
This article explores the state of financial inclusion in two regions, Latin America (LATAM) and Asia-Pacific (APAC) and their initiatives to increase financial inclusion. Additionally, discover how to navigate the overarching challenges of financial inclusion.
State of financial inclusion: LATAM vs APAC
Financial inclusion has become a key topic in many regions, including LATAM and APAC. Various reasons contribute to the importance of promoting financial inclusion in both regions, including high smartphone penetration but low access to traditional financial services or no bank accounts. There are, however, significant differences between the two regions.
Financial inclusion in LATAM
In LATAM, the initiatives to increase financial inclusion include:
1. Digital Financial Services
In both LATAM and APAC, digital financial services have become increasingly popular as it provides opportunities and access to financial services for underbanked or unbanked populations. In Colombia, initiatives have been launched to promote usage of digital financial services, including e-wallets and mobile money or wallets. These initiatives increase access to financial services even in the absence of a traditional bank account.
The Colombian government created Ingreso Solidario in response to the COVID-19 pandemic. It is a non-conditional emergency transfer program that assists vulnerable households without social program coverage. Ingreso Solidario promotes digitalisation using digital financial services such as digital accounts and mobile wallets. It focuses on enhancing financial inclusion and transitioning from regular money or cash transfers to digital channels, especially for first-time users of mobile-based accounts. Furthermore, it leverages recent regulatory modernisation for non-bank payment services and provision and incorporates tiered and remote customer onboarding protocols.
2. Microfinance:
Microfinance, or microcredit, is a banking service for low-income businesses or individuals with limited or zero financial access. It includes a wide coverage of services or products, including savings, credit, insurance and even non-financial services like employee training for all low-income individuals.
In Brazil, the government launched various initiatives specifically to support microfinance institutions (MFIs) and thereby promote financial inclusion. A news release from the International Finance Corporation (IFC) reports that it has invested in four Brazilian institutions providing microfinance and advisory services to six microfinance companies. This investment aims to ensure institutional sustainability, maximise development impact, and increase access to high-quality financial services for underserved populations. To address the issue of gender inequality still present in Brazil, the largest Brazilian regional development bank, Banco do Nordeste, created Cedriamigo Delas, a microcredit line for women, especially for female entrepreneurs. Through Crediamigo Delas, more than 300K women received over 500K loans between 2021 and July 2022.
Although financial inclusion is lower in Brazil, the country is reported to have the largest population of adults receiving government payments into financial accounts or cards. These numbers can be traced back to the success of Brazil’s conditional cash transfer program, Bolsa Familia, which has national coverage and aims to support families in (extreme) poverty while improving access to education and health services. Furthermore, Brazil was one of the first to adopt a formal financial inclusion strategy dating as early as 2011, giving them a headstart in fostering financial inclusion.
3. Financial education:
Financial education plays a crucial role in promoting financial inclusion, and many countries in LATAM and APAC have launched initiatives or programs to improve financial literacy.
Financial education, especially building up individual financial literacy, has a prominent role in fostering financial inclusion. Countries in LATAM and APAC have launched their own initiatives or educational programs to improve their population’s financial literacy. In Mexico, financial education programs were launched by the government, specifically with the Nacional Financiera (NAFIN), which is in charge of financing productive units and small to medium-sized businesses as well as fostering the financial literacy of entrepreneurs. The Ministry of Labour and NAFIN collaborate to supply financial education programs and training to beneficiaries of social programs, especially for young adults, to build up their financial knowledge and literacy rates.
According to the IMF, the Ministry of Finance has also taken other measures to promote financial literacy, including:
- A financial literacy and skills curriculum was developed for children from kindergarten to grade 12.
- A financial education training course was implemented for teachers in vulnerable municipalities. As a result, it is estimated that 7,000 teachers have received training as of August 2021.
With financial literacy, individuals gain more control and are empowered to make better financial decisions to maintain or improve their livelihoods. Furthermore, gaining financial knowledge is always beneficial in understanding financial services better and, thus, increasing accessibility to traditional and alternative or digital financial services.
Financial inclusion in APAC
About 1.4 billion people remain unbanked today, even with fintech and its emerging technologies contributing to fostering financial inclusion. To be precise, about 70% of Southeast Asia (SEA) contributes to this figure, with the majority belonging to Indonesia and the Philippines, as well as up to 63% of adults in Thailand classified as unbanked or underbanked. Yet, in recent years, APAC, specifically the Association of Southeast Asian Nations (ASEAN) countries, has experienced rapid growth, with many countries becoming global economic powerhouses.
Despite the progress, financial inclusion remains challenging for many regional individuals. Below are some initiatives to increase financial inclusion:
1. Digital financial services:
Adopting digital financial services in ASEAN countries is seen as a significant financial inclusion initiative. Digital financial service revenues in SEA are predicted to increase by 22% until 2025, reaching about $38 billion (US Dollars). Furthermore, it is recommended that financial companies invest in building a robust infrastructure to support digital financial services to meet their future customer demands.
In Thailand, for instance, the Monetary Policy Group, Bank of Thailand has identified two types of digital financial services: present and potential. The former includes electronic payments (e-Payment) through financial and non-financial institutions, encompassing three present retail e-Payments - card payments, internet and mobile banking, and e-money. Since government policy and technological access have increased, Thai people have become more familiar with these retail e-payments. The latter includes digital currencies such as the potential use of Central Bank Digital Currency (CBDC) and cryptocurrencies issued by the central bank in Thailand. Although the CBDC is not currently issuing cryptocurrencies in Thailand, private cryptocurrencies are gaining popularity and finding greater usage.
2. Peer-to-peer (P2P) lending:
Another initiative that has gained popularity in SEA is P2P lending platforms, especially in Indonesia, where their unbanked individuals exceed more than half of their total population. As P2P or customer-to-customer is prevalent in Indonesian communities, eliminating intermediaries like financial institutions and implementing directly exchanging loans with each other was made possible with P2P lending. However, small businesses and individuals were excluded from traditional banking services to gain credit access.
“With over 51% of the population unbanked in Indonesia, it is no surprise that the opportunity for P2P lending has increased significantly. Today we see the emergence of at least 30 new P2P lenders in Indonesia, representing nearly 43% of the Fintechs in Indonesia. This is a huge opportunity for the country but also for companies that can bring a new form of digital experience to these people who have no bank account or credit card.” - Par Svalas, Managing Director of Global Sales
3. Financial education:
In the Philippines, the government has launched several initiatives to improve financial literacy among its population. For example, the National Strategy for Financial Inclusion by Bangko Sentral ng Pilipinas (BSP) planned to strengthen financial education and consumer protection by using a common framework to develop and implement financial literacy programs focusing on a few key areas, including emerging digital finance products, effective and safe use of digital financial services and financial consumer rights and consumer assistance mechanisms.
Apart from these financial literacy programs, other initiatives were also planned out, such as:
- Establishing an annual financial education stakeholder conference to maintain consistency in the adoption
- Developing innovative methods for delivering financial literacy training, including online and alternative methods
Financial education empowers individuals to gain adequate financial knowledge. Having this knowledge, in turn, assists in more informed decision-making, especially for financial decisions. This increases accessibility to financial services, leading to better managing finances, increasing monetary savings and ensuring better financial stability.
Challenges to financial inclusion and how to navigate them
A financially inclusive society provides access to essential financial services and products for individuals and businesses. Individuals and businesses can manage their finances, invest in their futures, and participate in the economy through these services. Despite the importance of financial inclusion, many individuals and businesses face significant barriers to accessing these financial services. These include a lack of access to financial services, low levels of financial literacy and financial instability.
1. Lack of access to financial services
A significant challenge of financial inclusion is individuals lacking access to any financial services. This challenge also represents the increasing need for digital financial services to foster financial inclusion in regions such as LATAM and APAC.
According to World Bank’s Global Findex Database 2021, around 1.4 billion adults globally remain unbanked and do not have a bank account. Furthermore, 1.7 billion adults do not have access to financial services. This lack of access can be attributed to numerous factors, including the high cost of financial services, the physical distance from financial service providers, and a lack of proper identification documents to secure traditional financial services.
To navigate this challenge, digital financial services have emerged as a solution to increase financial inclusion. Some examples of digital financial services include:
- Mobile banking
- Digital payment systems like e-wallets and mobile money. The use of digital payments can help businesses regulate cash flow, assess creditworthiness, and bring in new customers while providing access to credit products that can fund growth and risk mitigation insurance.
- Financial technologies (Fintechs), MFI and P2P lending products and services
2. Low financial education and literacy
A lack of financial literacy and education is another challenge to financial inclusion. This reinforces the importance of financial literacy and education programs aimed at various demographic groups, including students, young adults, and adults. These individuals must build up their financial knowledge and literacy through financial education to make informed financial decisions. In their absence, individuals lack the necessary knowledge and, therefore, skills to benefit fully from financial services and products - both traditional and alternative.
To navigate this challenge, financial education programs are but one aspect that needs to be implemented. Furthermore, these programs should be aimed at different demographic groups and breach various topics such as how to utilise smartphone and web metadata to help financial inclusion, how alternative data and embedded finance work and understanding consumer protection laws. Other ways to navigate this challenge include:
- Collaborations with financial institutions, governments, and community organisations (e.g., non-profits and schools) can also help improve financial education and literacy.
- A creative approach like gamification can boost financial education engagement and effectiveness.
3. Lack of financial instability policies
Financial instability can affect access to affordable financial services. It can also make accessing financial services challenging for those without traditional banking. Hence, there is a need for Microfinance and P2P lending to provide access to affordable financial services and credit for small businesses and individuals who are excluded from traditional banking services.
Diving into Microfinance and focusing on Microinsurance is imperative to navigate this challenge. Microinsurance is also an innovative financial product that can help mitigate the impact of financial instability. Designed specifically for lower-value assets and compensation for illnesses, injuries, or deaths, this low-cost insurance product offers coverage to low-income individuals and small businesses.
Other ways to mitigate financial instability include:
- Innovative financial products and services for small businesses like credolab’s solutions for assessing risk, detecting fraud and optimising marketing, all in a single API
- Government interventions with a focus on a public-private partnership to bring together government agencies, non-profits and private-sector organisations
4. Lack of data
The lack of traditional credit data, such as credit scores or credit history, often excludes individuals and businesses from accessing financial services. This is particularly true for those in emerging markets or underserved communities who lack access to formal financial systems. This data gap creates barriers to obtaining credit, insurance, and other essential financial services, perpetuating financial exclusion and limiting economic opportunities.
To navigate this, financial institutions can leverage on alternative data to close the gap.
By leveraging alternative data sources, such as mobile device data, digital footprint, and online behavioural patterns, credolab is building the future of behavioural analytics and providing businesses with powerful insights for credit scoring and risk assessment. This innovative approach enables lenders to make informed decisions and extend credit even to individuals and businesses who were previously overlooked by traditional credit scoring models, unlocking access to financial services and driving financial inclusion.
In addition to leveraging alternative data, other possible solutions to overcome the lack of traditional credit data include:
- Advanced technologies like Artificial Intelligence (AI) and Machine Learning can generate predictive creditworthiness models by analysing vast amounts of data that can supplement the risk assessment in the absence of traditional credit data or complement it when such data is available.
- Collaborating with stakeholders like telecom operators, e-commerce platforms, and utility companies can provide supplementary data points, especially valid for affordability assessments.
How can credolab help drive financial inclusion
With credolab's all-in-one solution, businesses can empower their risk, fraud and marketing teams to make better decisions with an advanced behavioural data analytics platform. Credolab's solutions leverage proprietary ML algorithms from smartphone and web metadata to identify behavioural patterns and calculate insights. It analyses over 10 million behavioural features to generate rich and real-time insights, which are available in multiple modules to assess risky applicants, enrich fraud detection at onboarding, optimise the results of marketing strategies and deepen customer understanding. With these modules, businesses can increasingly mitigate risk, detect fraud, and optimise marketing segmentation and spending.
In order to drive financial inclusion sustainably, credolab, which is also the leading provider of bank-grade digital scorecards and data enrichment solutions, has joined forces with TransUnion to provide a comprehensive solution that modernises fraud prevention and credit risk assessment. As a trusted partner with a unique source of smartphone behavioural metadata, TransUnion has integrated the credoSDK into the TransUnion Digital Onboarding solution, providing a smooth, seamless, end-to-end credit risk, fraud assessments, and ID verification that leverages, among others, the power of device data.
"Credolab believes that traditional lending processes exclude many people because they target applicants with pre-existing credit history, typically in the middle- and high-income groups. Our aim is to make credit available to all by giving lenders access to a previously untapped, highly predictive source of behavioural data".
By Peter Barcak, CEO and Founder of credolab
Conclusion
Financial inclusion is not just a matter of economic or financial development but also a matter of moral obligation. A key goal of environmental, social, and corporate governance (ESG) is to empower everyone to access financial services and products, no matter their socio-economic status. It is essential to empowering marginalised communities, fostering entrepreneurship, and achieving sustainable growth. Promoting financial inclusion is essential in many regions, and we have dived into LATAM and APAC as a focus in this article.
In both LATAM and APAC, the need for digital financial services and financial education are the major initiatives implemented to increase financial inclusion. In particular, digitalising financial services can enhance financial inclusion by extending financial access to traditionally underserved and unserved consumers. In addition to these major initiatives, Microfinance focuses on Brazil in LATAM, and P2P lending focuses on Indonesia in APAC.
Furthermore, according to the Asia-Pacific Economic Cooperation (APEC) 2022 report, financial institutions, government agencies and financial authorities play an important role in leveraging technological advances for financial inclusion. Therefore, they must continue establishing partnerships, providing greater access to digital financial services, and investing more in financial education in both regions to keep financial inclusion growing. After all, to achieve financial inclusion, all stakeholders need to collaborate, including policymakers, financial institutions, and fintechs.
The first step to improving financial inclusion starts within communities. Therefore, educating, empowering and raising awareness amongst underserved, unbanked or underbanked individuals in society is imperative.
In order to close the financial divide, every individual must possess equal access to financial services. Only then can we improve millions of lives around the world.
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