Does digitalization of banking enhance financial inclusion?This is one of the most common questions I get asked by bankers all around the world. And my answer is: yes.
I train bankers about Financial Technology, so I regularly sit with 20 – 30 bankers for two intensive days and we talk about FinTech in-depth. I am asked to visit countries with sharply different levels of development and financial inclusion: from super developed Nordic banking markets to countries with below 25 percent of financial inclusion. Yet, one thing is the same across all these markets: when bankers get to understand how powerfully digitalization enhances financial inclusion they become very enthusiastic and start to look at the FinTech revolution as a potential wider social good.
I want to share with you how bankers I train and I myself see the 7 ‘T’s of Digital Financial Inclusion:
TRANSPARENCY: Digital flows of money through the formal banking system are more traceable, documented, clear and transparent than any other forms of movement of value. Accordingly an entire economy becomes more transparent when informal flows of cash are channeled into documented and institutionalized flows of account-money. Transparency is a key value from AML, KYC and CTF point of view.
TAXABILITY: Transparency leads to clear taxability. Account-money is magnitudes better taxable than any flow of cash. Collecting taxes in a fair and automatic manner is extremely hard in many intransparent economies. Moving more and more people and MSMEs (Micro- Small and Midsize Enterprises) into the formal financial system considerably helps with this. It also helps lowering tax rates (deprived economies often have higher tax rates than highly developed and socially responsible ones – it is just that very few players truly keep those rates) and thereby cleaning the economy.
TRANSFERABILITY: As transparency and taxability are established it becomes fairly clear which individuals and other entities are entitled to social transfers. Governments and local as well as international organizations have much better chance to systematically and rightfully pinpoint the targets of automatic monetized aid, once the vast majority of people and money-flows are included in the digitalized financial system. Impacts of social and economic policies can much better be calculated and forecast both on an ‘a priori’ as well as an ‘a posteriori’ basis.
TOTAL INCLUSION: Digital solutions eventually lower the fixed as well as the variable costs related to transactions in specific and to holding an account in general. This opens up the potential for profitable inclusion of people with tiny financial footprints. As retail bankers usually layer their portfolios into five target segments – mass, premium, private, HNW, UHNW – the digitalization of banking opens up the profitable validity of a sixth one: micro. These are people and companies with total spot sums of financial assets and liabilities included in the digitalized formal banking system of below USD 100. If such segments can be banked profitably – through entirely digitalized infrastructure and processes – that leads to near total inclusion, regardless of: age, gender, occupation, level of education, status of urbanization as well as other socioeconomic factors.
TIME-ACCESS AGNOSTICISM: Digital channels are typically available in a 24/7/365 manner. This is highly unusual for channels involving human workforce. Time-access agnosticism practically means that one can transfer money through M-Pesa and PayPal even at night on a weekend; it means that a roboadvisory algorithm or a chat-bot is available 24/7. Financial inclusion in a wider sense refers to this time-access agnosticism, beyond socioeconomic inclusion. Because digital financial inclusion opens up the route in front of transactions that otherwise – due to the lack of sufficient business hours – would not materialize.
TRANSACTIONAL FREEDOM: As the variable cost of transactions – due to successful digitalization of processes – decreases, opens up the freedom to transact whenever it is convenient. Besides supporting financial inclusion – the profitable service of individuals moving tiny sums of money – this opens up the world and concept of “micropayments”. The term “micropayments” refers to paying car insurance on a daily basis, instead of a monthly, quarterly or annual basis. It refers to receiving interest daily, or even hourly on our savings, it refers to paying mortgage on a daily incremental basis, etc. Transactional freedom is the idealistic theoretic end-result of efficient clearing and truly digitalized processes.
TIME-VALUE CENTRICITY: The time-value of money is the interest-rate. The traditional model of banking has always been making profit through the margin between the level of interest paid on deposits and the level of interest received for loans. Due to the significant reduction of the cost-basis of transactional banking in a digital world FinTech experts – including me – expect the reduction of fees and commissions. This time-value centricity – the primacy of interest-income over fees and commissions – is paradoxically very beneficial for incumbent large banks. It is beneficial for banks over FinTechs due to the fact that full margin can only be earned if a service provider owns both sides of the balance-sheet (accepts savings as well as issues loans). Yet, FinTech companies are often serving as mere platforms (don’t own any sides of the balance sheet) or are specialized (only focus on one side of the balance sheet) as opposed to full scale banks servicing both sides of the balance sheet. Time-value centricity is also highly beneficial for large financial organizations, it carries strong traits of economy of scale.
The 7 ‘T’s of Digital Financial Inclusion are getting step by step fulfilled by several processes brewing within the FinTech revolution. Such processes include:
- REMITTANCE: Growth of global competition among digital remittance services. TransferWise, CurrencyFair, Azimo and several other large digital remittance services are competing with hundreds of regional players and some incumbent ones with physical networks.
- BLOCKCHAIN: Advancements in clearing systems, including experiments and research into non-central-counterparty clearing systems (for example Blockchain based solutions).
- WALLETS: The serious success and quick local and global spread of digital wallets such as PayPal, PayTm, KakaoPay, AliPay, WeChatPay, Vodafone E-Wallet, MasterPass Digital Wallet, etc. PayPal is currently actively present in over 180 countries, among many with low levels of formal financial inclusion.
- MOBILE MONEY: Fundamental transitional intercontinental success of M-Pesa and an array of solutions built on top of M-Pesa (for example BitPesa and some micro-insurance products).
All in all: We are only at the first steps of the ‘revolution in financial inclusion’, yet it is crucial to foresee and understand the highly beneficial nature of The 7 ‘T’s of Digital Financial Inclusion.