While in some parts of the world banks and clients form
long-term relationships which persist even over generations, there are still a
lot of people out there fitting under the qualificatives of “unbanked”,
“underbanked”, and “underserved”.
Financial exclusion doesn’t affect only the developing
countries. Unbanked and underbanked individuals are located across the world in
both wealthy countries and undeveloped countries. According to data from the World
Bank, as of 2017 — the most recent year for which figures are available — 1.7
billion people were unbanked globally.
Younger people are also more likely not to have bank
accounts or to be underserved by banks than older people. Around 30% of unbanked
people were between the ages of 15 and 24 in 2017.
So what is financial exclusion in the open finance era?
Financial exclusion involves the difficulty in accessing and
using all those financial services necessary for the complete development of
the daily life of individuals and to their full involvement in society.
Despite the impact of the phenomenon, little is known about
which categories are excluded from the financial market. These are usually
classified as follows:
Unbanked – individuals or organisations who don’t
have any access to a bank’s or financial institution’s services.
Underbanked – individuals or organisations who have
limited access to financial services and still rely on using cash in most
operations, thus depriving themselves of important banking services, like using
credit cards or getting loans.
Underserved – this is a term used to describe the two
aforementioned categories: the unbanked and the underbanked.
Most often, underserved communities are formed of:
People with low incomes from low and middle-income
countries;
People with low incomes or who are marginalised in
high-income countries;
Women and expats in several parts of the world;
Micro businesses – although MSMEs constitute a high
percentage of the total number of businesses in the world, financial exclusion
is the main constraint keeping them from developing.
How can the underserved be helped through open banking?
The answer is simple: by creating alternative solutions that
are easier to be accessed due to the involved technology. And open banking can
be the long-awaited solution to financial inclusion.
Open banking is meant to generate new benefits and
opportunities for economies and societies by efficiently ticking the following
boxes:
Providing access to responsible credit. Properly
designed open banking products, through the use of alternative financial data,
can expand access to financial insights that help increase consumers’ chances
to get approved for loans and accurately assess what they can afford. Such data
can include mobile bill payments, rent payments, utility bill payments, and so
on.
Encouraging informed financial behaviors. Insights
provided by PFMs based on spending patterns provide a detailed view of the
financial situation and the areas that may be improved, like paying too much
for a service, alongside more suitable alternatives.
Enabling participation in the global economy. Open
banking is spurring economic growth and driving financial inclusion by helping
millions upgrade from cash-based transactions to digital financial transactions
in a secure environment.
Supporting MSEs. Micro and small enterprises get
access to affordable financial tools that address their needs including
accounting and cash management. These processes become automated under open
banking and easier to achieve from a technical point of view. Also, companies
can now shop around and find appropriate funding sources for achieving their
business goals, with so many investment apps powered by open banking.
Supporting the contingent workforces. Freelancers
have been underbanked for a long time, and with all the open banking-based
opportunities, this is changing. They get access to affordable financial
products and benefit from so-called nano-loans and micro-insurance, which is
exactly what they’ve lacked up until now.
Open banking is getting more mature day by day, region by
region. One of the greatest things about it is that it keeps financial
inclusion among its top priorities.
Further development with open APIs and strategic
partnerships with fintechs are keeping things moving in the right direction,
and it’ll be interesting to see where open banking goes next.
Click here for the
original article.