There are lots of ways in which FinTech is changing the world, and the one we love to discuss the most is financial inclusion. The figures stun me. Over a billion people have been banked in the last decade, according to the World Bank.
69 percent of adults – 3.8 billion people – now have an account at a bank or mobile money provider, a crucial step in escaping poverty. This is up from 62 percent in 2014 and just 51 percent in 2011.
But what about financial exclusion? Why does that exist and what can be done about it?
Financial exclusion exists for a variety of reasons: too low or unreliable income, no fixed address, no credit history, failed financially in the past, being a woman, being a refugee, being foreign, being a Muslim.
I guess I’m on a crusade here, after my week of diversity discussions, but it does amaze me how many stories I hear about discrimination in financial services against migrants and people who are not the main income earner. The system is biased against them.
Nearly one of every three women in the world — or 1.1 billion — are excluded from the formal financial system.
Financial exclusion in Europe is estimated to be between 10% and 12% and, if focusing on the bottom of the income distribution, between 14% and 22%.
According to Sabe Economics, the rate of financial exclusion for Muslims in Italy is nearly 30%, a lot higher than for migrants (18%).
The trouble with financial exclusion is that it is punishing. If you cannot use the banking system, how do you get a loan? How do you pay? How do you get access to cash?
Adam is currently receiving welfare benefits and is struggling to make ends meet. When he was refused a bank loan – due to his low credit score – he applied for a ‘payday’ loan. “The interest rate was about 1,000% APR or something like that. I kept going back and getting more and more from different companies. I got one to pay off another one. I got eight or nine out in the end... I won't make that mistake again”. He has now paid them off and hopes to be able to save in the future.
That story is from a UK lottery report on Financial Exclusion, which goes on to state that:
- 6.5 million (13%) of UK adults have no cash savings;
- a quarter of UK adults (24%) have less than £1,000 as a savings buffer;
- a fifth of UK adults (19%) hold between £1,000 and £5,000; and
- younger adults are most likely to have few or no savings, with 57% of 18-24 year olds holding less than £1,000, out of which one fifth (20%) have no savings whatsoever.
What really worries me today is how many people are falling into a poverty trap, becoming financially excluded, losing all that they own, becoming homeless and not getting a break.
This really worries me.
I always remember my friend Kosta Peric saying something along the lines of the poorer you are the more you pay, and it’s true. If you are excluded, you pay more. You take more risks; you’re more likely to be overdrawn; you’re more likely to use lenders who charge more; you find yourself stuck outside the system wondering how to get in.
What can we do? Bail everyone out? Give everyone a parachute? Universal Basic Income (UBI)?
It is likely that we will debate this for long, and I’ve mentioned UBI on here before – at that time in the context of artificial intelligence and technology - but this discussion will be even more at the fore now that we have suffered mass lay-offs, furloughs and bankruptcies due to the pandemic.
Note: the world’s most robust study of universal basic income concluded that it boosts mental and financial well-being, as well as modestly improving employment.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...