Closer to Achieving Inclusive Growth through Financial Inclusion in 2016

Fintech advances and government actions drive financial inclusion and offer the promise of igniting more sustainable and equitable growth globally.

Closer to Achieving Inclusive Growth through Financial Inclusion in 2016

December 21, 2016

2016 saw substantial progress in connecting the world’s people to financial services, from bank accounts to mobile payments to micro-lending innovations. But as the recent Global Microscope 2016 puts it, there’s still work ahead.

Governments are increasingly promoting financial inclusion strategies

“The apparent successes in fields such as mobile payments should not obscure the substantial opportunities—and need—for enhancing inclusion that still exist,” write the authors of the annual “Global Microscope.” The report, by the Economist’s Intelligence Unit, with support from Multilateral Investment Fund, Center for Financial Inclusion at Accion, and the MetLife Foundation, assesses the overall regulatory and institutional environment for financial inclusion in more than 50 countries.

By the Microscope’s metrics, several countries made big leaps in 2016. Colombia joined longtime front-runner Peru at the top of the list of countries that enable financial inclusion. But India garnered special note.

“The most interesting place without a doubt is India,” said Tilman Ehrbeck of Omidyar Network at a panel on “FinClusion: Connecting the Unconnected,” hosted by the Center for Financial Markets at the Milken Institute in December.  India is home to 21 percent of world’s unbanked population, and the Indian government has implemented a financial inclusion strategy that includes access to bank accounts, a domestic debit card, government issued ID, and digitization of social welfare transfers with regulatory changes to improve access to mobile money. As a result, reports Global Microscope, India climbed up the rankings to third place and warranted a “mover and shaker” mention.

It’s worth noting that the private sector has also deepened its commitment for improving financial access for the unbanked and underbanked. In December, the World Bank announced 16 new partners joining other like-minded institutions including Mastercard, State Bank of India and Bank Mandiri in Indonesia,  with commitments to help achieve Universal Financial Access by the year 2020.

Fintech innovations are proliferating and driving inclusion

Technology drove many of the advances in the field in 2016, from the proliferation of smartphones to new digital solutions for small merchants.  Experts on the FinClusion panel singled out Myanmar and Mexico for their progress.

Myanmar “is totally leapfrogging ahead of others,” in interoperability, said Ehrbeck of Omidyar Network. “It’s this one place where mobile telephony and mobile money are being introduced at the same time. It’s a historical accident because the country opened up only recently. But they’ve come up with a good regulatory framework,” he said.

Susan Lund, partner at McKinsey Global Institute, pointed to Mexico’s progress in supporting small stores in accepting small digital wallet payments.

“A fintech startup in Sweden has created a smart-phone based way of accepting payments call iZettle,” said Lund. As an added bonus to shop owners, “It then spits out automated financial reports for the shop.”

Benefits such as these, says Lund, create incentives for business owners to leave the informal sector. The financial reports offer insights into customers’ buying patterns, or when a store needs to reorder items or when and how customers are buying certain products. That, she says, changes the incentives. “So it’s not just, ‘well if I take digital payments, now I have to pay the VAT tax.’ If you see that it saves time and money in reordering and maybe improving sales … then there’s incentives to overcome this tax hurdle of being informal versus going to digital.”

Solutions like iZettle can help address the lack of acceptance of digital financial products in many markets, which remains a leading barrier to the widespread adoption of formal financial services, according to the Brookings Institutions’ annual Financial and Digital Inclusion report.

“Enabling merchants to explore digital payments at low or no cost, investing in digital infrastructure, and digitizing government-to-person payments can serve as incentives and conduits for strengthening the digital ecosystem,” write the report’s authors Darrel M. West, John Villasenor, and Robin Lewis.

QR code-enabled mobile apps are among the low-cost, easy-to-deploy solutions to watch in 2017.  QR codes are matrix barcodes that contain scannable information.  Products like Masterpass QR, which launched in IndiaNigeria, and Pakistan this year allow small merchants to scan the codes to accept digital payments from customers using their smartphones or feature phones.

New estimates point to the enormous potential to ignite inclusive growth

This year, McKinsey Global Institute for the first time documented the impact of digital finance on economic growth. In its report, the institute argues that widespread adoption and use of digital finance could increase the gross domestic product of all emerging economies by 6 percent, or $3.7 trillion, by 2025—the equivalent of adding to the world an economy the size of Germany’s. The growth in GDP could lead to the creation of up to 95 million jobs across all sectors, the report finds.

But caution is in order as well. As more economies go digital, some experts say we must ensure that, as Lund put it, “people aren’t worse off in the end.” Too-easy credit leads to debt that can be burdensome, she said, and banks themselves must guard against inflating another financial bubble. In the end, says Lund, if you get it wrong, “you’ve eroded trust, indebted people, and created a small banking crisis.”

But getting it right holds out the promise of truly inclusive growth through empowerment, said Bob Annibale, global director for community development and inclusive finance at Citi during the Milken panel.

“Success means households will have a lot more control over their funds. Taking people out of a cash, often abusive, financial economy into one in which they are empowered to make decisions and execute them at a much lower cost, that could put a lot of money back into a household, which is a real stimulant to the larger economy.”