“Financial inclusion: Bank accounts vs digital finance”

Digital finance has played a significant role in expanding financial inclusion in the last three years. While the number of bank accounts is not considered by some as a direct proxy for financial inclusion, Fintech is seen as a solution to financial exclusion.

The importance of data, as a commodity, has been recently underscored in two interesting speeches. The first one was by the Chairperson of the National Committee on Corporate Governance (NCCG) at the launch of the ‘networking forum for data protection officers in Mauritius’ on 25 May. Aruna Radhakhessoon indeed stated that it is imperative to protect personal data, since it’s now a commodity.  This statement was independently followed, last Tuesday, by that of the Chief Executive Officer of the Financial Services Commission (FSC). “The world of tomorrow will be characterised by connectivity and the commodity at stake will not be services, but data,” Dhanesswurnath Thakoor said in his opening speech at the opening of a forum on financial inclusion, which was jointly hosted by the Regional Centre of Excellence of Mauritius and the OECD.

According to the Findex Data Book 2021, a global technological revolution has fuelled a sharp rise in the use of digital financial services. This includes, according to the report, a jump in digital payments usage, from 35 percent in 2014 to 57 percent today in developing economies, deepening financial inclusion. From India to Kenya, the smallest merchants in rural markets and smallholder farmers receive and make payments with the mobile phones in their pockets.

“The share of adults making or receiving digital payments in developing economies grew from 35 percent in 2014 to 57 percent in 2021, outpacing growth in account ownership. In Sub-Saharan Africa, 39 percent of mobile money account holders now use their account to save. And more than one-third of adults in developing economies who paid a utility bill from an account did so for the first time after the start of the COVID-19 pandemic— evidence of the pandemic’s impact on digital adoption. It is critical to build on these encouraging trends, especially given the current headwinds. High inflation, slow economic growth, and food scarcity will affect the poor the most. Expanding their access to finance, reducing the cost of digital transactions, and channelling wage payments and social transfers through accounts will be critically important to mitigate the reversals in development from the ongoing turbulence,” David Malpass, President of the World Bank Group, states in the foreword of the data book.

A special report of the COMESA on financial inclusion in 2021 underscores that Sub-Saharan Africa (SSA) has experienced commendable progress in financial inclusion, especially in terms of having mobile phone accounts. Digital finance has played a significant role in expanding financial inclusion. Mobile and digital technologies provided by FinTechs and Telcos are increasing, allowing more people to have access to financial services who would otherwise be excluded from the traditional banking system. Building brick-and-mortar branches in the traditional banking model has proved to be economically unsustainable, leading to financial exclusion of rural areas where a majority of the poor live. Mobile money accounts allow end users to transfer money, pay for transactions in real time, obtain a loan, pay it back, save, etc. At the same time, agent banking is gaining momentum, where financial institutions are engaging third parties – including shops, service stations and post offices – to deliver financial services on their behalf. In some cases, a bank is the ultimate principal behind mobile accounts provided and serviced by agents, while in other cases, it is the Telcos or FinTechs that offer digital financial services either directly or via their own network of agents.

In Mauritius, mobile account holding is at 6%, while bank account holding is at 90% nationally and 89% in rural areas for the adult population. The under-developed mobile accounts in Mauritius can be attributed to the very extensive reach through bank accounts, both in rural and urban areas, the 2021 COMESA report mentions.

In his keynote address at the financial inclusion forum, the CEO of the FSC stated that Mauritius has reached a financial inclusion rate of 91 per cent, the highest on the African continent, compared to 55 per cent for sub-Saharan Africa and the global average of 76 per cent.

He added that there seems to be a paradox between what we do and what we are expected to do. We cannot ignore the fact that the 2008 subprime financial crisis posed threats to financial stability. Regulators around the world have, in a global concerted effort, overhauled and tightened financial regulations. With several versions of the BASEL international reforms added, financial services has today become a costly business for financial institutions, and by repercussion, for consumers.

At the same time, most financial services regulators have financial inclusion as one of their broader mandates. Tighter regulations imply that fewer people have easy access to financial services, leading to a situation where even those who are banked might be deprived of financial services.

And the statistics mentioned earlier prove this state of affairs. But the number of bank accounts is not a direct proxy for financial inclusion. The rising cost of banking services further makes access to basic services out of reach for many people. This means that some people have bank accounts, but do not use them.

Further, in the context of today’s economy, the notion of financial inclusion cannot be limited to people only, but has to be extended to small businesses as well. SMEs are recognised as the engine for growth, giving jobs to more people and thereby bringing them in the financial systems. Yet, we observe, on a daily basis, the outcry of SMEs and start-ups which cannot access financing due to the rigidity of the banking system.

“In the meantime, banks have stayed in their respective comfort zones and focussed on a smaller group of high profile customers for wealth management. Today, banks are still offering product-oriented services in one-size fits all formats while the world has already moved towards customer centricity. Merchants are completely disconnected with pricing and unbanked customers are on the lookout for low cost payment options. In this state of gridlock, the saviour, eventually, would come not from the banking sector, but the non-bank financial services,” Dhanesswurnath Thakoor explained.

Today, new generations of financial technology or Fintech friendly applications are being provided by smart phones, whose adoption is expected to rise significantly over the years. The world of tomorrow will be characterised by connectivity and the commodity at stake will not be services, but data. Several Fintech start-ups are leveraging on the proximity provided by smartphones and the data that they are capable of churning to provide customer-centric services popularly labelled ‘anytime and anywhere’. Such incursions reaching customers in their daily activities will be key to unlocking the barriers to financial inclusion.

“I am fully convinced that Fintech will come to the rescue of the problem of financial exclusion. Fintech can be used to build profitable and sustainable bridges between the demand and the supply of financial services. And these will include people as well as small enterprises. Fintech apps are already bringing change and innovations in traditional areas such as financial literacy, retail banking, investment advice, crowdfunding, capital markets, microcredit, small business financing, transactions and payments, currency exchanges and remittances. According to a study conducted by McKinsey and Company, lenders and credit analytics such as DemystData and FirstAccess are using new and innovative data models to reach lower income groups. At the same time, mobile operators are tapping into new forms of data to reach new customers who do not even have a credit profile or score. This leads to another area of Fintech financially-inclusive developments. There are a number of current developments, based on Fintech, that are already shaping the future of financial services. The focus has already moved from payments to financial services such as lending through micro credit. Technology-enabled lenders such as those already licenced by the FSC are helping SMEs access working capital and financing rapidly. There are also a number of trends that are clearly visible and that characterise financial inclusion through innovation and digital economy, which are Customer-centric service, Peer-to-peer funding or socialisation of financial product and services, Bridge between financial institutions and customers – Focus on financial health, Use of Blockchain technology to go beyond cryptocurrencies, Use of alternative data to improve financial inclusion”, the CEO emphasized.

According to the Global Findex report published by the World Bank in 2021, it has been observed that 76 percent of the world’s adult population has access to an account with either a financial institution or mobile money provider, up from 51 percent in 2011. Developing economies have seen notable progress, with 71 percent of the adult population having an account, a 30 per cent point increase over the last decade. It has also been noted that the COVID-19 pandemic played a significant role in the progress of financial inclusion with the widespread adoption of digital financial services. However, it is also to be noted that 1.4 billion adults around the world still remain excluded from the formal financial sector.

Most economies in the world have evolved in recent years and it is important that households and businesses keep pace with the changing economy and have financial access for almost everything, be it long-term goals or unexpected emergencies. It is equally important that individuals and businesses have access to useful and affordable financial products and services that meet their needs and are delivered in a responsible and sustainable way. It is a fact that people having access to a transaction account are more likely to use other financial services, such as loans and insurance, to start and expand businesses, and invest in education or health. amongst others. It has been observed that access to formal financial services also contributes towards building financial resilience.

This is why many countries and organisations around the world are putting lots of emphasis on financial inclusion. The UN, for example, has identified financial inclusion as an enabler for 7 of its 17 Sustainable Development Goals, while the G20 has committed to advance financial inclusion worldwide.

“Mauritius is a highly banked country. Yet, according to a recent survey carried out by the World Bank, 9% of the population suffer from some form of financial exclusion. A number of steps have been taken by the Government to stimulate the digital economy and improve the financial inclusion of the population and SMEs. The Bank of Mauritius came up with a separate law on the National Payments with a view to regulating and overseeing all payment practices along the exigencies of the digital economy. On the other hand, the FSC came up with a number of regulations to ensure that the non-bank financial services helping the financial inclusion agenda are executed. We can cite in this context the enactment of the Virtual Asset and Initial Token Offering Services (VAITOS) Act 2021, as well as the Crowdfunding rules, the Peer to Peer Lending Rules and Robotic and AI Enabled Advisory Services rules. The gamut of these regulations is testimony to the fact that Mauritius is very much concerned with the adoption of new technologies to fight against financial exclusion. Financial inclusion is not complete without adequate financial education. For this purpose, the FSC has elaborated financial literacy programmes to promote financial inclusion. The world is changing rapidly and it is equally important that we make an effort for everyday financial services to be available to more of the world’s population at a reasonable cost. Developments in Fintech, such as digital transactions, are making financial inclusion easier to achieve,” Dhanesswurnath Thakoor said.