What Is Financial Inclusion?

Financial inclusion refers to efforts to make financial products and services accessible and affordable to all individuals and businesses, regardless of their personal net worth or company size. Financial inclusion strives to remove the barriers that exclude people from participating in the financial sector and using these services to improve their lives. It is also called inclusive finance.

How Financial Inclusion Works

As the World Bank notes on its website, financial inclusion "facilitates day-to-day living, and helps families and businesses plan for everything from long-term goals to unexpected emergencies." What's more, it adds, "As accountholders, people are more likely to use other financial services, such as savings, credit, and insurance, start and expand businesses, invest in education or health, manage risk, and weather financial shocks, which can improve the overall quality of their lives."

While the barriers to financial inclusion have been a longtime problem, a number of forces are now helping broaden access to the kinds of financial services that many affluent consumers take for granted.

For its part, the financial industry is continually coming up with new ways to provide products and services to the global population, and often turn a profit in the process. The increasing use of financial technology (or fintech), for example, has provided innovative tools to address the problem of inaccessibility to financial services and devised new ways for individuals and organizations to obtain the services they need at reasonable costs.

Areas of Financial Inclusion

Financial inclusion can mean a lot of things. In general, financial inclusion may refer to but isn't necessarily limited to the following financial, economic, or entrepreneurial concepts.

Financial Education and Literacy

Financial education and financial literacy refers to providing financial education and programs that equip individuals with essential financial knowledge and skills. This empowers them to make informed decisions, budget effectively, and understand the benefits of using formal financial services instead of relying on informal or potentially exploitative alternatives. In some cases, individuals simply did not have appropriate educational access to learn basic financial literacy concepts.

Affordable and Accessible Banking Services

Offering affordable and accessible banking services ensures that unbanked and underbanked individuals can participate in the formal financial system. Offering no-frills savings accounts and low-cost transaction accounts enables financial inclusion at the grassroots level. This promotes financial saving and enforces financial security (both conceptually and physically).

Gender Disparities

According to Women's World Banking, 31% of women are more likely than men to have an inactive bank account. By focusing on gender-specific financial inclusion initiatives, financial inclusion can help empower women economically and close the gender gap in financial services. These efforts involve tailored financial products, financial literacy programs, and initiatives to promote women's entrepreneurship.

Inclusive Credit Scoring

Traditional credit scoring metrics may alienate or discriminate against those with limited credit history. Financial inclusion strives to explore alternative credit scoring methods that consider non-traditional data sources can extend credit access to those with limited credit history. Including factors like utility bill payments or rental history in credit assessments enables more individuals to access credit and other financial services, further promoting financial and economic opportunities.

Consumer Protection

Financial inclusion also entails protecting customers within business. Financial inclusion strives to implement protection regulations safeguards to uphold the interests of financially vulnerable individuals. Strong consumer protection frameworks ensure fair treatment, transparent pricing, and ethical conduct by financial institutions, fostering trust and confidence in formal financial services. Financial inclusion aims to ensure those who may be uneducated or uninformed about financial matters may still have confidence in the financial system.

Importance of Financial Inclusion

There are very broad and general reasons why financial inclusion is important. Some of the key reasons include:

• Financial inclusion reduces poverty and inequality. Financial inclusion provides opportunities for marginalized and low-income individuals to access formal financial services, such as savings, credit, and insurance. By empowering them with the tools to manage their finances and invest in income-generating activities, financial inclusion can help lift people out of poverty and reduce economic disparities.
• Financial inclusion promotes economic growth. A general argument is that when more people have access to financial services, they can participate actively in the economy. Increased financial inclusion leads to higher levels of savings, investment, and entrepreneurship, fostering economic growth and stability in both local communities and national economies.
• Financial inclusion promotes small businesses. Small businesses often face challenges in accessing credit from traditional banking sources. Financial inclusion through innovative lending models and online platforms can provide much-needed funding for entrepreneurs to grow their businesses.
• Financial inclusion empowers otherwise marginalized demographics. For example, financial inclusion initiatives targeted at women can promote gender equality and women's economic empowerment. By providing access to financial services, women gain more control over their finances, which can lead to improved educational opportunities, better health outcomes, and increased decision-making power within households.
• Financial inclusion promotes innovation. Financial inclusion drives innovation in the financial sector, leading to the development of new technologies and fintech solutions that cater to the needs of underserved populations. These innovations can benefit the broader financial ecosystem and lead to advancements in financial services.
• Financial inclusion may foster digital inclusion. As technology plays a significant role in financial inclusion, promoting access to digital financial services also contributes to digital inclusion, ensuring that more people can participate in the digital economy.

Financial Inclusion and Technology

There are countless ways technology can and is playing a major role in enhancing financial inclusion. Here are some ways we can use modern innovations to better serve the world with financial services.

Mobile Banking

Mobile banking applications offer a wide range of services, including checking account balances, transferring funds, paying bills, and even applying for loans. These apps are user-friendly and accessible 24/7, enabling individuals to conduct financial transactions conveniently from their smartphones, without the need to visit physical bank branches.

Digital Payments

In 2021, the FDIC found 46.4% of all U.S. households were using nonbank online payment services. Online payment systems provide various options for making cashless transactions. Mobile wallets allow users to store funds digitally and make payments using their mobile phones, while contactless payment methods such as Near Field Communication (NFCs) and QR codes enable swift and secure payments in physical retail settings. Both solutions reduce the risk of theft or loss associated with carrying cash.

Agent Banking

Agent banking models use technology to equip banking agents with mobile devices and software. Agents act as intermediaries, representing financial institutions in remote areas where brick-and-mortar branches are impractical. They offer services such as account opening, deposits, withdrawals, and fund transfers to individuals who may not have easy access to traditional banks.

Online Lending Platforms

Fintech lending platforms connect borrowers and lenders directly through online platforms. Borrowers can apply for loans, and lenders can assess their creditworthiness based on data analytics and alternative credit scoring. This streamlines the lending process and extends credit access to individuals and businesses underserved by traditional banks or those who would have otherwise been excluded from securing traditional credit. For example, LendingClub boasts that more than 4.8 million members have used their services to achieve their financial goals.

Blockchain and Cryptocurrency

Blockchain technology provides a decentralized and immutable ledger for secure financial transactions. Cryptocurrencies enable individuals without traditional bank accounts to participate in the digital economy, offering potential alternatives to traditional banking systems. Consider developing country implementations of these solutions to promote transaction speed, counter weak national currencies, and promote financial system accessibility.

Financial Education Apps

Financial education apps and online platforms offer interactive and engaging content to improve financial literacy. Users can access educational modules, budgeting tools, and investment insights to enhance their understanding of financial concepts and make better financial decisions. Consider how Mint by Intuit had been downloaded over 10 million times from the Google Play store as of July 2023.

Crowdfunding

Similar to peer-to-peer lending, crowdfunding allows geographically-separated individuals to still commune and support a single cause through donation or equity contributions. Crowdfunding platforms allow individuals, startups, and social impact projects to raise funds from a diverse pool of investors. This democratized fundraising approach expands access to capital for underserved entrepreneurs and impactful initiatives. As of July 2023, GoFundMe has helped raise over $9 billion.

Challenges of Financial Inclusion

There are perpetual and significant headwinds when striving for financial inclusion. First, there is a major hurdle regarding a lack of awareness and knowledge about formal financial services. Rural and marginalized areas may simply not know what services or concepts exist, while some communities may have distrust in formal financial systems. Plus, cultural and social norms and traditions may influence financial behaviors and decisions.

Policy and regulatory barriers can deter financial institutions from serving low-income customers and entering underserved markets. Socioeconomic disparities and gender inequalities can hinder financial inclusion, with women and marginalized groups potentially facing greater barriers to access and control over financial resources.

It can be very difficult to solve a problem that can't be appropriately measured. Inadequate data and market information on unbanked and underbanked populations can hinder the development of targeted and effective financial inclusion strategies. In addition, geopolitical and conflict-related challenges can disrupt financial infrastructure and stability, further limiting access to financial services in specific physical regions. Last, data privacy and security concerns may deter individuals from adopting digital financial services, especially in regions with inadequate data protection frameworks. In some cases, consumers may knowingly or unknowingly elect to financially exclude themselves based on the choices they decide. For example, those not trusting in digital services financially exclude themselves from many opportunities in exchange for greater control and comfort over their personal information.

The Bottom Line

Financial inclusion refers to the process of ensuring that all individuals, especially the underserved and marginalized populations, have access to affordable and appropriate financial services. It aims to empower people with tools like savings accounts, credit, insurance, and digital payment options, enabling them to participate in the formal financial system, manage their finances, and build economic resilience.