Financial inclusion, measured by the access, usage and quality of financial services, is vital to be able to reduce global poverty. Many people in rural and impoverished regions have few financial service providers and do not have the time or money that would be required to access these services. As of 2017, there are 1.7 billion adults who do not have bank accounts and nearly all of them live in developing countries. Digital financial services are a focus of global poverty reduction efforts and progress has been accelerated in response to the COVID-19 pandemic. The COVID-19 pandemic has presented an opportunity for financial inclusion of impoverished people in developing countries.
Inaccessibility of Financial Services
Though the number of banks per adult in low and middle-income countries increased by 19% in the decade preceding 2019, it still remains a challenge for many to access financial services. Only 63% of adults in developing countries are bank account owners. Factors preventing account ownership include affordability and framework, distance from financial service providers, lack of trust in financial service providers and lack of documentation.
People without bank accounts have to rely solely on cash for transactions. This complicates sending or receiving money as well as saving money securely. Savings in many households take the form of livestock, jewelry or property. Money transfers, such as those to family, become much less secure when done in cash. These transfers also cost time, effort and money that many of those in extreme poverty cannot spare.
Efforts in Digitalization
Institutions addressing global poverty, including the Bill & Melinda Gates Foundation and the World Bank, have made expanding digital financial services for those in extreme poverty a priority in working toward financial inclusion. The World Bank identifies that the countries that have made the most progress in financial inclusion have been welcoming of new business models and embraced e-commerce and mobile financial services. Digital financial services can help reduce poverty, especially for women, by improving methods for saving, which enables business development and fosters ease of transactions that can mitigate financial risk. Another noted outcome of expanding the use of digital payments is improved efficiency of transactions and fewer associated crimes.
Adults around the world have already been increasing their use of digital payments. In developing countries, 44% of adults made or received at least one digital payment during 2017 — an increase of 12% since 2014. High-income economies saw a similar increase of 11%, reaching a total of 91% of adults making or receiving at least a single digital payment. This demonstrates the contrast in banking environments alongside the synchronous growth in account ownership and use.
Opportunity for Financial Inclusion Amid COVID-19
Digital financing was helpful to those with limited access to financial services prior to the pandemic, and since then, its prevalence has grown. Following the outbreak of COVID-19, digital financial services have been found to facilitate financial activity amid lockdowns and sheltering. The pandemic has extended the obstacles to financial inclusion that are predominantly experienced by those in poverty to a greater population and many parts of the world have responded with digitalization. Development of financial technology is advantageous for governments, businesses and citizens alike and this realization is driving progress that can extend to low-income countries.
It is a fact that two in three adults, where greater than 5% of the population are without an account, own a mobile phone. This would provide them access to an online banking system. True financial inclusion will require well-developed systems, infrastructure and regulations to go hand-in-hand with digital technology. Financial digitalization shows promise for widespread adoption and advancement and subsequent inclusion of those in poverty. COVID-19 has presented an opportunity for financial inclusion efforts.
– Payton Unger