Financial Inclusion – is it really for everyone?

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I recently read an article by Bernard Lunn called ‘The financial inclusion on ramp for the next billion’. Financial inclusivity is something that I have touched upon in a few of my previous posts. As such, I found this piece to be of great interest.

What I find particularly interesting is the idea that financial inclusivity is seen by some as a negative thing. This is something I had never really considered, but when you stop and think about it, it’s also logical. Building on this, the running theme of Bernard’s blog was perception. Generally, it seems that we either see financial inclusivity as something that could open up a world of opportunity within financial services, or otherwise as an unwanted threat to our own income and wealth.

The focus of some of my own writing has been on emerging economies across Africa and other developing countries. I’m particularly interested in how Blockchain technology could empowerment amongst unbanked farming families.

The emergence of billions from subsistence farming into a global middle class is arguably the biggest investment opportunity this century. Interestingly though, Bernard suggests it’s also the cause of much of the trauma (political, social, geopolitical) roiling the world today.

Defining Financial Inclusion

To understand further, we need to take a closer look at the definition of those two buzzwords; financial inclusion. It’s important that people are able to differentiate between what Bernard calls analogue financial inclusion and digital financial inclusion.

Historically, Financial inclusion was a) philanthropy and b) governments challenging banks by telling them to serve those with lower incomes. Digital financial inclusion is much more to do with mobile and platforms like Blockchain. Digital financial inclusion is levelling the playing field and presenting billions with the chance to capitalise on new opportunities.

Going back to perception then, there are over seven billion people in the world. That’s seven billion people who, through financial inclusivity, now present a world of opportunity. Or, it’s seven billion people fighting for the chance to climb above the unfortunate, pushing them one step closer to poverty. Bernard sums it up best:

“7 billion in 6 tiers playing snakes and ladders”

If you fall into one of the middle tiers, you may find yourself feeling threatened by new competition stealing a slice of the opportunities that were once reserved for a smaller group of individuals like yourself. Ultimately though, whether you like or not, you have two options; turn a blind eye and pretend none of it’s happening or find a way of trading with the competition.

This competition could be big news for financial environments and physical environments. The economy needs growth, which will come from global trade with billions entering the global middle class. But it must do so without any further increase in C02 emitting fossil fuels which would be disastrous for the planet.

We can either blame the damaging effects on the environment on those entering the global middle class, or we can focus our attention more wisely on sourcing profitable, eco-friendly ways for billions entering the global middle class to do so without causing further damage to the environment.

The financial pyramid is split into six categories as below:

Tier 1 = Subsistence

This refers to philanthropy and social responsibility. I’ve previously referenced the Bill and Melinda Gates Foundation and the great work they do. It’s about supporting those less fortunate than ourselves, whether that be through food, medical aid or other means of support. The success of these initiatives puts more people onto the next ladder.

Tier 2 = Unbanked

As the name suggests, the unbanked do not have access to banking services in the same way that we do. The typical customer will be a labourer, take a farmer for example, who remits money back to their home village and uses the remainder to purchase low-cost services including pre-paid mobile services. But while we have previously celebrated the cross-border payments made possible by Blockchain, this is not always the case and these cross-border remittances have regulatory hurdles. Typically, transactions that remain within national borders are much simpler.

This is the case in India, where the unbanked rely on use “feature phones” to make transactions. The problem here is that transactions of $1 or less must make money. This means unit sizes are typically too low in value for bank payments rails. These customers do not visit branches or use ATMs as they cannot serve to benefit both parties. These customers want basic payment services, but can only afford them at a cost far lower than any financial services provider would care to accommodate. This is the world of services such as M-Pesa. The people in this tier who work hard and save relentlessly may progress to tier 3.

Tier 3 = Underbanked

Despite being split into two categories, the differences between the underbanked and the unbanked are minimal. The key difference is that the underbanked are defined as having a bank account but, like the unbanked, they are still unable for the most part to use banking services as they are viewed as ‘unprofitable’. They therefore rely on the same low-cost transactions as the unbanked, although they do also make more transactions and these are of a slightly higher value.

In India, to their credit, the government actively encourages digital financial inclusion. Payments will be processed into mobile wallets which, like the unbanked, this allows them to remit money home, purchase goods and earn physical cash back from retailers. Physical cashback is vital as a staggering 90% of India’s economy is based around physical transactions, such as market traders.

Interestingly, even in the developed world that exists in the west, there are still people in places like the UK and North America that fall into the underbanked category. While they most likely still have a traditional bank account, they must spend their money on day to day essentials and therefore have little scope to save or invest in their futures, making their custom unworthwhile for banks.

Tier 4 = Banked Middle Class

This is the category that the majority of people living in the west fall into. They will mostly use traditional Retail Banks and, more recently, Neobanks. But while we all use banking services to some extent, genuine demand for financial services is still far lower than it is in tiers 2 and 3. We use banks to house our money, but that’s really about it. The thought of switching our banking provider to another bank offering better returns never crosses our mind.

In contrast, those in lower tiers place sending cash home and topping up their mobile phone minutes firmly at the top of their list of priorities. This is as true in India as anywhere. Tiers 2 and 3 make up roughly 850 million people, compared to 300 million in tier 4. As people climb the ladder of opportunity, the number of people in Tier 3 will grow, but, having used the services designed for Tiers 2 & 3 for so long, it is unlikely that they will desert them for the traditional banking services we use in the UK.

Tier 5 = Overbanked Wealthy

Potential Impact Investors but otherwise irrelevant to this piece.

Tier 6 =The Super Rich

Potential Impact Investors but otherwise irrelevant to this piece.

Velocity 12

The shift in status of countries like India from third-world to emerging will create huge opportunity. These countries have been coined the Velocity 12 in a report by Ogilvy (, which identifies South Asia as the key player when considering future middle-class growth prospects.

Quoting from the Ogilvy report:

“The 12 velocity markets identified herald a shift to South Asia as the epicentre of future middle-class growth.  Centred principally in India, but inclusive of Pakistan, Bangladesh, Myanmar, Indonesia, and the Philippines – and extending up to China, and to Egypt, Nigeria, Mexico, and Brazil in the other direction, the Velocity 12 markets represent a vast arc of future growth. Over the next decade, these 12 markets will be the source of the next billion middle-class consumers, which will create a critical tipping point as the middle-class move from a minority to the majority of the local population in many of these markets.

Miles Young, Ogilvy & Mather Worldwide Chairman said, “The Velocity 12 research shows the world as it will be in the not too distant future. A billion new middle-class members will literally change its shape. It will become, for instance, much more orientated to South Asia, especially India. Most Western businesses simply do not think this way.  This means finding a new lexicon of growth, as the phrase ‘emerging market’ doesn’t now describe the new realities. ‘Velocity’ better describes the real transformation in these markets.”

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