How 'financial inclusion' can help lift millions of people out of poverty - on Radio Davos

In the world, 1.4 billion adults have no access to banking. That means it’s harder for them to save, to borrow, to send money or to start a business - than for those of us who do.

Our guest on this episode of Radio Davos is an expert on the global state of people’s access to financial services, who helped create the Global Findex database, a huge survey on financial inclusion.

Leora Klapper, Lead Economist in the Finance and Private Sector Research Team of the Development Research Group at the World Bank, has a truly global view of this issue and explained why financial inclusion - which is, fortunately, on the rise - can be crucial in eliminating poverty and improving lives.

Robin Pomeroy: We're here to talk about financial inclusion. What is financial inclusion?

Leora Klapper: Financial inclusion means that households and businesses have access, and can effectively use, appropriate financial services, services that should be provided responsibly, sustainably, in a well-regulated environment.

Practically, it means that women have a safe place to keep their money outside their home. Their work is paid into an account, don't have to travel home with a wad of cash in their pocket. They can send money home to their families in rural areas or out of the country more conveniently, affordably directly from their phone.

And then merchants paying their suppliers and accepting customer payments using a card or a phone can build a credit history to access credit on better terms, increase their inventory.

Financial inclusion, including access to digital financial services, is an important policy objective because it helps people manage their money better. Accounts give you greater control over your money, your financial life.

Research shows that when a woman gets an account, she builds savings, spends more on a children's education, invests in business opportunities. In other words, having an account can offer women greater privacy, security, and control over her money.

So, for example, a recent study of a government workfare programme in India, which reached over 100 million people, found the paying women their benefits directly into their own financial institution account and not into the account of their husband or other male household head, increased woman's financial control over her money, influenced gender norms that prevented women from working, and incentivised women to find employment compared with those women who are paid in cash. And the biggest impact was on women whose husbands had expressed the most opposition to their wife's work.

Robin Pomeroy: So we're talking here exclusively about women's access to banking and financial services, or is it also sometimes men?

Leora Klapper: So we're talking more generally about all adults having access to an account. Women, men, younger adults, older adults, certainly poorer adults.

And the benefits to having access to financial services, including accounts, credit, digital payments. However, a lot of the research, in addition to the many benefits found by all adults, having an account, the safe place to keep one's money outside the home, could be especially beneficial to women.

Robin Pomeroy: So I'd like to ask when we talk about financial inclusion, how many people are excluded? But before we get into that, let's talk about this thing, Findex. It says on your bio here, you're a founder of the Global Findex Database. That's very important to this discussion. Tell us what that is.

Leora Klapper: So since 2011, the Findex Database has measured how adults around the world save, borrow, make payments, and manage their financial risks. So our headline indicator, which is personal ownership of an account, the bank or other regulated financial institution, including mobile money accounts, has grown to 76% of adults globally, compared to just half of adults a decade ago, as recognised as a UN Sustainable Development Goal, 8.1.

So the 2021 edition, based on nationally representative surveys, we've got 128,000 adults and 123 economies during the COVID 19 pandemic conducted indicators on access to and use of formal and informal financial services, including these of cards, mobile phones and the internet to make and receive digital payments, including the adoption of digital merchant payments, how you buy groceries, and utility payments, how you paid your electric bills during the pandemic, plus questions on people's financial worries and their ability to come up with emergency money.

And we started collecting the data because we were frustrated that data on things like account ownership collected directly from banks was a black box of data. We didn't know how many women have accounts as compared to men, or how many poor adults make digital payments as compared to wealthier adults, or how many young adults are saving. But now we do. And by shining lights on these gaps on account ownership, it's important for policymakers and practitioners to design better policies and products.

Robin Pomeroy: So give us some of those statistics again. It sounded like that was an incredible increase in the proportion of people who now are included in some type of financial services. What are the headline figures of where the world is at the moment?

Leora Klapper: So we find 76% of adults globally have an account at a bank or a financial service provider, including mobile money accounts. Those are accounts on a phone provided by a fintech or mobile money service provider. In developing countries, 71% of adults have an account - that's more than a 30 percentage point increase since we started collecting the data a decade ago.

Robin Pomeroy: So what's driving that trend, that increase?

Leora Klapper: So there are a lot of things that governments have done to support financial inclusion, including regulations that allow for competition from fintechs and non-bank providers like mobile money service providers. It's also investments in infrastructure, in mobile technology, electrification, that allow the growth of agent networks, of bank agents, of mobile money agents, that allow people to access services locally, in their own home communities.

Robin Pomeroy: Is that growth coming in the poorer countries around the world?

Leora Klapper: It is. Over the past ten years, we saw a surge in accounts in some large countries, certainly in China and India. But in this round of data, the growth was more inclusive. We saw growth around the world, in Latin America, Africa and in Asia.

Robin Pomeroy: So what are the easiest things that can be done to improve financial inclusion?

Leora Klapper: Clearly, we still have a long way to go: 1.4 billion adults remain unbanked, and many adults who do have an account don't use them. Reaching the remaining 30% won't be easy.

And so a special feature of the Findex data is that we can ask the unbanked why they don't have an account. A survey asked people why they're unbanked. So only 3% of adults say the only reason they lack an account is that they don't need one. And that really points to the massive unmet demand for financial services amongst the unbanked. If you offer them a good, affordable product that meets their needs, they might well take it.

And many countries don't have the infrastructure like reliable electricity for payments processing and bank branches are often absent in areas where unbanked people live, and too many financial services are poorly designed and difficult to use for the neediest customers.

Many unbanked adults tell us that banking services are simply too expensive, too far away.

So one solution are digital financial services, including those provided by fintech and mobile money service providers, which leverage mobile technology and which can help mitigate the problem of physical distance between financial institutions and their customers.

So, for example, the remote areas in Asia or villages in Africa may not have a bank branch or an ATM. Most areas now have a local merchant - agents who sell not only mobile minutes for your phone, but increasingly are offering financial services. So local villagers no longer need to spend the time and the transportation costs travelling to access formal financial services.

So for example, in South Asia, we find that 240 million unbanked adults have a mobile phone. That's more than half of the 430 million unbanked in the region. But unbanked adults frequently lack the basic tools they need to get both financial and mobile services.

One big barrier is a lack of government identification, which is commonly mentioned by the unbanked, especially in sub-Saharan Africa, where 37% of unbanked adults in the region say the lack of documentation is a reason they don't have a financial institution account. And 30% of the unbanked face a barrier to opening a mobile money account.

The Findex Database also includes data that we collect jointly with the World Bank IT for development team. We find that in sub-Saharan Africa, over 100 million adults, 16% of adults, are unbanked and have no ID.

Another really straightforward thing that governments can do is to take the lead by digitalising some of their own payments. Findex data finds about 85 million unbanked adults receive government payments in cash. That includes wages, pensions, government support transfers. And the research's showing that for the governments shifting some of these payments to an account, it's cheaper, it can reduce leakage and corruption. Shifting some of these payments to accounts can create an entry point for increasing accounts amongst the unbanked.

Let me give an example to illustrate. We had the pleasure to pilot the Findex questionnaire in over 30 countries around the world. And my colleague was talking to a woman in Zambia who is a schoolteacher in a rural area, and she was telling her every month she has to close the schools in the villages for two days to travel to the capital to pick up her wages. And she was complaining about the transportation costs, as well as the risk to her safety of travelling home with this wad of cash in her pocket.

And so imagine if the government digitalised that payments to the teacher. So we know from research that's better for the government. It's cheaper, it's safer, it's more likely the money actually reaches her, and can reduce corruption. It also saves the teacher transportation costs. But ultimately, the biggest impact this could have is if the teacher could be able to keep the schools open an extra day or two a month. And so we believe that financial inclusion, digitisation of payments, have broader developmental goals that can help societies.

Robin Pomeroy: Could you give us an idea of how those mobile technologies work? Because for people perhaps in the Western world, the richer countries, they have a bank account of the type that's existed for generations. Maybe they've got online banking as part of that now, but basically they have a bank account with a bank. That's not really what you're talking about in some of these poorer countries where you're talking about mobile financial services. Can you give us an idea of, for example, for that woman in Zambia, if a financial service was put in place that she could use, what do you envisage that would be?

Leora Klapper: A common model in sub-Saharan Africa is for telecoms to offer financial services. So Orange, M-PESA are examples of the leaders in Kenya, where the telecoms provide an account, often using just a simple text based phone, where people can deposit and withdraw money, using the same mobile agents which sell them their minutes.

So thinking in a rural village which doesn't have a bank or an ATM, there is a mobile agent, often someone that the person familiar with. It might be a community member, it might be a relative they trust, deposit their money and withdraw.

We also see throughout Africa the increasing use of mobile money accounts for savings. These accounts were designed for person-to-person payments, often as a way for people working in the city to more affordably, safely and conveniently send money home to their family in rural areas. This developed into much more.

Often banks aren't designed for the type of high-frequency, low-denomination payments that poor people make. Think about a woman who wants to save a dollar a day to pay monthly bills and wants to keep that $1 outside her home.

For example, in West Africa, we see a model called sousous. These are men who may come on a moped, home to home, to take $1 a day from, typically, a woman, to keep in a safe place. And then they return it to the woman at the end of the month, less a day's savings. So these women are actually paying to save their money in a safe place outside their home. And we asked them, why don't you use your bank account to save the money? And they say the bank, they would have to take a bus across town, wait in line, which isn't feasible to do on a daily basis.

However, now they're able to use a mobile agent on their block, which is, again, easier and costless to deposit $1 a day into their mobile money account, which is based on their phone. And they can easily, at the end of the month, withdraw their money to pay their monthly bills.

Robin Pomeroy: It sounds like there are lots of benefits to the spread of this kind of technology. Are there any drawbacks as well? Some people you question in your research don't want to be connected to these services. Are they right in any way to be a bit nervous of doing so?

Leora Klapper: First of all, people only benefit from account ownership if they have the financial capability and confidence to use their accounts and use their accounts on their own. The Findex data finds that about a third of mobile money account holders in sub-Saharan Africa tell us they can't use their account without the help of a family member or an agent.

It's important to recognise that poor and financially inexperienced users may not be able to benefit from account ownership if they don't understand how to use their account in a way that optimises the benefits but avoids the many consumer protection risks, such as high-end hidden fees, overindebtedness, fraud, and discrimination. And so policymakers need to make sure the regulations keep pace with these digital innovations, ensure that things like that don't happen. Otherwise, people will distrust digital financial services, and these development opportunities could be lost.

Robin Pomeroy: In terms of the costs. You talk about people crossing town, queuing up to deposit money in an actual physical bank, but banks charge fees and presumably these mobile operators charge fees. Do you have some idea of what the cost is to that woman in Zambia deciding or being enabled to receive her salary through some kind of financial service? What what is the cost there, and is that a significant barrier as well?

Leora Klapper: So costs vary widely by country and by product. Often there are costs to opening and maintaining a bank account. Mobile money services, again, they were created and designed for payments. So typically the fee might be on the payment or on the withdrawal of the money, but typically it's lower to maintain and operate a mobile money account than a bank account.

And there's also, again, the tremendous convenience of having the services locally. For example, we've been doing some work looking at the use of fintechs to send international remittances home. So workers working in high-income countries are sending money home to developing countries, in Asia, for example. And there's been a lot of research showing that the costs are often much cheaper if workers can send the money directly from their own firms themselves rather than through a bank or a money transfer operator.

Robin Pomeroy: Just one thing on the tech, then. If you've got money on your phone somehow, is there some way to actually take it out in cash if you're living in a rural area in Africa, say, or does it just stay on the phone and you're making payments through your phone?

Leora Klapper: No, absolutely. So the mobile money operator has all of the money in a deposit account in a regulated financial institution, and you can withdraw money anytime from your local mobile agent. So effectively, the mobile agents who would sell you your minutes for your phone to make calls and texts are now also providing financial services by taking deposits and by making withdrawals.

Robin Pomeroy: So that mobile technology has been around for a fair while now, hasn't it? Could you give us an idea of when that started to come in? And then, are there new technologies? Everyone talks about blockchain and this kind of thing. Is any of that thing going to help or are we better relying on what now is a fairly well-established, fairly low tech solution?

Leora Klapper: We say how in Findex we are asking questions about technology that wasn't invented and dreamed up 10 years ago when we started the survey. Certainly there have been many technological innovations, especially to keep the money safer. But, you know, in sub-Saharan Africa, we're really seeing simply the tech space, technology on mobile phone, really exploding, especially over the COVID period.

So we now find that 33% of adults in sub-Saharan Africa have a mobile money account and are using their accounts for more than just payments, using accounts to save and to borrow. But increasingly, as more and more adults have smartphones, internet-enabled phones, it allows for them to access a greater array of financial services.

Robin Pomeroy: What can we say has been the impact of COVID? You've mentioned that a couple of times.

Leora Klapper: So it's important to remember that 2021, when we collected the data, was not an ordinary year. And so we heard all about during the first year of the pandemic about ways in which digital technology enabled people, especially in wealthier countries, to quickly pivot to hybrid work and leverage digital channels to conduct everyday business, for example, by ordering groceries or kerbside delivery.

The many social distancing and mobility restrictions, along with the perception that cash was unsanitary, really accelerated the shift towards the digitalisation of payments.

And so the Findex Data allowed us to quantify what the digital acceleration looked like for people in developing countries. They were able to leverage digital financial services for the very first time.

So, for example, Latin America and the Caribbean, countries that before the pandemic had the digital infrastructure and really the digital readiness to accelerate, but there were challenges around the costs of digital financial services, business formalisation, taxation. We found that during the pandemic, 40% of adults told us they made a digital merchant payments, including 14% of adults who made their first merchant payment, bought their groceries using a card or a phone for the very first time during the pandemic.

The surprise isn't that it happened, the surprise is how quickly it happened.

We also heard that about one-third of adults in developing countries who paid a utility bill, a water, trash or electric bill directly from their account, did so for the first time after the start of the COVID-19 pandemic. Further evidence in the role of the pandemic in accelerating digital payments adoption.

So why does this matter? So, for example, I talked to a woman in peri-urban India who every month paid 50 rupees for a bus ride to the city to pay a 300 rupee electric bill. So digital financial services could save her both the time and the money.

Robin Pomeroy: We've talked about the developing world a lot here. Does your research also encompass richer countries? And can we talk a little bit about what you found there?

Leora Klapper: It does. So in high-income countries, almost all adults report making and receiving digital payments. It's ubiquitous in our society. Where we really saw this tremendous adoption and growth was the developing countries catching up during COVID. However, we still see gaps in developed countries, especially around frequency of savings, as well as challenges amongst poorer adults in accessing financial services.

Robin Pomeroy: So is that something that's improving, poorer communities having bad access to financial services? Are we seeing this kind of positive trend that you're seeing globally in those parts of the world as well?

Leora Klapper: Yes, we have seen many of the gaps close, but we still find, for example, in countries that have histories of hyperinflation, adults being wary to keep their money in the bank. We also see in some countries issues around trust in the banking sector, in countries that have had episodes of bank crises.

People will only use banking services if they trust that their money is safe in the bank, that they trust that when they make a payment, the money will be received. And that's why it's so important to have strongly enforced consumer protection, to make sure there isn't financial fraud and abuse and that trust in banks remains high, even in high-income countries.

Robin Pomeroy: Could you tell us something about yourself? Why is this such an important issue to you personally?

Leora Klapper: I've travelled the world speaking to people about their financial lives, making sure that we're asking the right questions, and you continuously hear how important it is for all adults to have a safe place to keep their money.

So, for example, I'll never forget in rural India, where we met a small group of women who had banded together to pool their very small savings and were able to get a small microfinance loan to purchase a small hand-held meat grinder, looking like a coffee machine, a coffee grinder. And they charged people in the neighbouring areas to use it. And they had saved the small portion of their very tiny profits to hire the first teacher to travel to their village to teach their daughters to read.

And these are the type of access to basic financial services, like saving accounts and credit, that can support the millions of women around the world who have these idea and dreams to help their families and communities.

Most of my research looks at what are the real benefits of digital payments on the users. Is it more than just a convenience?

So for example, we designed a study to measure the impact of paying factory workers in Bangladesh, mostly women, directly into an account as compared to workers who opened accounts but received their wages in cash. Speaking to a worker, the woman told us that when she was paid in cash, her mother-in-law would literally wait outside the gate for her on payday. But now she can't. Paying her directly into an account gives her privacy, security and more control over her money.

Research finds that factory workers paid into an account are more likely to save and less likely to make impulse purchases. These workers were also better able to manage health emergencies and other unexpected expenses. And quite importantly, over time, these workers learnt to better use financial services without help by avoiding extra agent fees. In other words, they became savvier financial customers.

This is consistent with research that shows, for example, that women with accounts have more say over household budget decisions and spending. So a study in the Philippines shows a household where women have their own accounts are more likely to buy a washing machine and other household goods that might benefit them more.

Robin Pomeroy: This survey was done in 2021. When's the next one and what do you expect to see by the time you do this one again?

Leora Klapper: So one of the exciting, surprising findings in the data was this large adoption of digital payments. But the world has reopened. In my own neighbourhood, where I grew up in Queens, the Italian bakery, who only accepted cash in July 2020, installed their first POS terminal to accept digital payments as people were afraid to use cash. And then I was home this summer and saw a large sign in the window 'We only accept cash!'

And so the question will be, will this adoption, the rapid digitisation of payments, continue when the world reopens? And it will if both the sellers and the users see the benefits, if the merchants who are accepting digital payments have the opportunities to use their payments history to access better credit terms. Whether the benefits outweigh the costs. And that will only happen if these services are provided in a safe environment.

Our next survey will hopefully be in 2024.

Robin Pomeroy: Where do people go if they want to find out more about this issue and more about the Findex database?

Leora Klapper: So there's a lot of data at globalfindex.worldbank.org. We have data for 123 countries plus all of our analysis.

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