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Journal of Payments Strategy & Systems Volume 9 Number 3
Journal of Payments Strategy &
Systems
Vol. 9, No. 3 2015, pp. 212–214
 Henry Stewart Publications,
1750–1814
Page 212
Editorial
Digital financial inclusion
Worldwide, more than two billion adults
do not have an account at a financial insti-
tution, according to the World Bank’s
Global Financial Inclusion Database. Only
41 per cent of adults in developing
economies have an account — and that
number drops to just over 20 per cent
among adults living in extreme poverty.1
The issue is present in developed countries
as well — FDIC estimated that 27.7 per
cent of US households were ‘unbanked’ or
‘underbanked’ in 2013 in the USA.2
The consequence is that poor people
deal almost exclusively with cash — and it
is expensive to be poor. For people living
on under US$2 per day, sending cash
entails considerable fees, saving money is
difficult, credit is available only at very
high rates, if at all, and drought or illness
can push people without savings or insur-
ance deeper into poverty.
Access to financial services by under-
banked or unbanked people — known as
‘financial inclusion’ — can be a key ele-
ment in overcoming these stubborn real-
ities. Not only does it help consumers
accumulate, increase and protect their
money, it also allows them to weather
financial shocks. People of limited income
could see significant improvement in their
lives if they had access to the kinds of
financial services that many others take for
granted, such as accounts, payments, loans
and insurance. Despite this potential, the
marketplace still fails to serve the poor in
this way.
The problem is not that the poor do
not use or need financial services — stud-
ies show that they do — but that the tools
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poor people are forced to utilise are unre-
liable, expensive and hard to use. The
problem is the inability of financial institu-
tions to reach out to the poor in rural and
remote regions, the lack of adequacy of
the financial services to their needs, and
the perceived lack of business case in pro-
viding these services. Most traditional
financial systems suffer from deficiencies
that prevent their rollout into poor and
rural communities. They involve an infra-
structure that is an arcane mix of costly
connections and slow innovation cycles,
designed to process and settle transaction
sizes far above the reach who of those sur-
vive on less than US$2 per day and have
no bank account.
This is especially true for the most basic
financial service of all — payments.
Payments are the connective tissue of a
financial system. They link buyers with
suppliers, allow governments to transact
with their citizens and connect friends and
relatives in webs of financial support net-
works. But most of the traditional pay-
ment systems require the possession of
accounts, are slow, and entail fees that put
them out of reach of the poor.
As a result, poor people usually struggle
and are only able to stitch together a
patchwork of informal, often precarious
arrangements to manage their financial
lives. The right financial tools at critical
times can determine whether a household
is able to capture an opportunity to move
out of poverty, or weather a shock without
being pushed deeper into poverty.
Financial inclusion could be a true
opportunity for current established banks,
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or new players entering the space such as
telecommunication operators, financial
technology processors and startups lever-
aging new technologies.
Emerging digital payment technologies,
combined with the ubiquitous mobile
phone technology, enable re-engineering
of financial systems with the potential to
strip 90 per cent of the costs out of trans-
actions. Digital platforms can scale up to
the tens of millions of transactions per day
that would be needed if all payments were
made digital instead of cash. We call this
‘digital financial inclusion’. Examples from
Kenya (M-Pesa) and Bangladesh (bKash)
offer a glimpse of future digital payments
and financial platforms.
In countries around the world, many
parties are already involved in providing
financial services to the unbanked poor —
including governments, the private sector,
banks, mobile operators, non-profits, foun-
dations and more. We lack, however, one
shared digital financial system that can
bring these stakeholders together to pro-
vide services that benefit everyone in their
country.
It is digital technology that has the most
potential to shape an economy so it bene-
fits everyone by making payment systems
easier and more efficient, while reducing
transaction costs to encourage access and
use by the world’s poorest.
My motto is ‘all hands on deck’.
Achieving financial inclusion in any par-
ticular country is a massive project. Every
player and force in the country needs to
be leveraged — the incumbent traditional
financial system that provides the settle-
ment infrastructure, the micro-finance
institutions who support entrepreneurs,
the MNOs (mobile network operators)
who provide the reach to the poor people,
the infrastructure providers who provide
an efficient payment platform, the fintech
startups who drive innovation, the private
sector merchants and employers, the regu-
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Editorial
lators who can remove barriers, the gov-
ernment as an institutional payer, and
others. Over the past 18 months, the Bill
& Melinda Gates Foundation has devel-
oped the Level One Project — an initia-
tive intended to enable country-level
digital financial systems that bring the
poor into the greater economy for the
benefit of all. The Level One Project
Guide3 is a principal element of this initia-
tive. Its purpose is to illustrate what a
system designed to include the very poor
might look like, to outline how it responds
to specific user requirements, and to sup-
port a robust interactive dialogue within
the community interested in serving the
financial needs of the poor.
Financial inclusion is not about charity
— it is about designing a single financial
system that serves the poor and provides
an opportunity for commercial players to
create a business by serving the poor.
It is clear, however, that the current
banking model and ecosystem need to
change in order to reach — and appeal to
— financially excluded populations. This
journal found it was time to take stock of
current initiatives and consider new busi-
ness models for digital financial inclusion.
Leading practitioners were asked to give
their views on the most important topics
in the industry, as follows:
• Yawe and Prabhu provide an introduc-
tion and overview of the domain in
their ‘Innovation and financial inclu-
sion: A review of the literature’ paper,
where they describe financial inclusion,
its importance for the development
agenda and the pathways for solutions.
• In the ‘Unbearable lightness of digital
money’, Iazzolino and Wasike examine
one of the most advanced digital money
markets — Kenya — and examine the
cultural, social and business barriers to
adoption of new payment systems to
replace cash.
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Editorial
• No discussion about financial inclusion
could be complete without a detailed
look at India, which is by far the largest
potential market, but also the most
challenging in terms of access and usage
of non-cash payment methods.
Balakrishnan provides a comprehensive
update in ‘Indian payment systems and
financial inclusion — current status and
next steps’.
• Parker and Sachdev set the stage for the
key factor of success of any inclusion
initiative in ‘The commercial viability
of financial inclusion’. They argue that
long-term, strategic, public–private
sector partnerships are the way to suc-
cess and require a different way of look-
ing at the notion of profitability. They
use the example of ANZ’s GoMoney
initiative in the Pacific.
• Porteous provides a deep analysis of the
business case and profitability financial
inclusion in the two related papers enti-
tled ‘Low balance bank accounts’. His
analysis, focused on the banking sector,
is supported by evidence in several
global and African projects. He also
introduces the notion that shared plat-
forms have an important role to play in
the business case.
• In ‘Digitalisation in payments — from
interoperability to centralised models?’,
Milkau and Bott examine the cost,
speed and structure of payment plat-
forms and look at the latest technology
enablers such as distributed ledgers
underlying the Bitcoin crypto-currency.
• In ‘App design for mobile money in a
smartphone dominated world’, Lien,
Hughes, Kina and Villasenor assess the
impact of the increasing availability of
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smartphones for the poor population
and how financial inclusion could be
increased using smartly designed apps.
• Sitbon introduces new, non-bank play-
ers into the equation and describes how
MNOs and their mobile money offer-
ings contribute to financial inclusion.
She describes these competitive and
potentially disruptive mobile or, more
precisely, digital money offerings in her
‘Addressing competition bottlenecks in
digital financial ecosystems’ paper.
• In ‘Factors contributing to successful
deployments in the mobile economy’,
Lal looks at the competitive mobile
money offerings and uses an example
from Pakistan to highlight the impor-
tance of business partnerships between
the central bank, banks and MNOs in
delivering viable money offerings.
REFERENCES
(1) Bill & Melinda Gates Foundation,
Financial Services for the Poor, available
at: http://www.gatesfoundation.org/
What-We-Do/Global-Development/
Financial-Services-for-the-Poor
(accessed 27th July, 2015).
(2) Federal Deposit Insurance Corporation
(2013) ‘FDIC national survey of
unbanked and underbanked households’,
available at: https://fdic.gov/household
survey/2013report.pdf (accessed 27th
July, 2015).
(3) See http://LevelOneProject.org
(accessed 27th July, 2015).
Kosta Peric
Guest Editor
Deputy Director, Financial Services
for the Poor
Bill and Melinda Gates Foundation