What The U.S. Can Learn About Financial Inclusion From The Developing World

Editor’s note: Matt Homer leads the Digital Finance team’s Policy and Partnerships work and USAID‘s financial inclusion investments in India. He was previously a member of the FDIC\’s policy staff where his work included assessing the intersection of financial inclusion and mobile financial services.

Financial inclusion — expanding access to financial services to those on the margins — is often advocated as a priority for the developing world. And rightly so: It can increase economic security for the people who need it most and promote economic development where those people live.

But financial inclusion isn’t just a developing-world issue. To be sure, the challenge in developing countries dwarfs this challenge at home. Despite significant recent progress, the World Bank’s recently updated Global Findex Database indicates that 46 percent of adults in developing countries are “unbanked” or still do not have an account with a financial institution or mobile money provider.

Compare this to the Federal Deposit Insurance Corporation’s (FDIC) estimate  that just 7.7 percent of U.S. households don’t have an account at an insured depository institution. But when the U.S. numbers are broken out by population segments, the domestic challenge becomes more clear. As the FDIC’s surveys of U.S. households have shown, approximately 20 percent of black households and 18 percent of Hispanic households are unbanked.

Among households earning less than $15,000 per year, over 27 percent are unbanked. Financial exclusion imposes significant costs on these households, including high fees and interest paid to alternative providers.

Banks everywhere, from Ghana or India to the United States, find it difficult to profitably serve the poor. It requires rethinking existing business and service-delivery models, and mobile phones are seen across the board as a way to dramatically reduce the cost of expanding financial inclusion. Research from the Gates Foundationindicates that digital payment systems can reduce transaction costs to financial service providers in developing countries by up to 90 percent. In the U.S, Diebold has estimated that a transaction that typically costs a bank $4.25 in its branch would cost just $0.20 online.

Those on the margins of the financial system also have remarkably similar views on the barriers to account ownership, regardless of where they live. The FDIC’s surveys and the World Bank’s Global Findex Database both highlight concerns of affordability, trust, location and having enough money.

While every country context is unique, there is much that the U.S. and developing countries can learn from each other.

The underserved in developing countries still generally rely upon basic mobile phones. Mobile money transactions on these phones often require five or more steps, with clunky USSD systems that can time out at any point along the way. But smartphone ownership is growing in these locations too, with the GSMA predicting that the developing world will gain 2.9 billion new smartphone connections by 2020.

The innovative features being pioneered in the U.S. fintech community to take advantage of the smartphone’s camera, geolocation technology, peer-to-peer communication capability, and richer interface may eventually benefit the globally underserved, as well.

Developing countries might also learn from U.S. frameworks that build public confidence in the financial system and reduce the risks they can face when using mobile financial services. Enforceable legal frameworks such as those that limit consumer liability, safeguard funds, and establish dispute resolution procedures can help consumers feel safe accessing financial services digitally, particularly when that channel is new to them.

For its part, the U.S. might benefit from closely observing new bank licensing models being explored in countries such as India and Ghana. Sometimes called “payments banks,” these institutions can hold consumer funds and provide basic transaction services. Because they offer only limited-banking services and do not issue credit, the barrier to entry and compliance obligations for new firms can be reduced, thus drawing new players with new business models into the space.

Additionally, the U.S. might consider the efforts of other countries to make their payments systems faster. The ability of consumers to pay bills or send money to family in real-time can be a first step to drawing these consumers into an electronic ecosystem that can meet other financial needs. Speed is particularly important for underserved communities who live paycheck to paycheck and have bills due immediately. Waiting several days or longer for a payment to work through the system to a biller is often too long.

The U.S. also lacks a national financial inclusion strategy, which many countries are now putting in place. These strategies provide an opportunity to elevate financial inclusion as a nationwide priority and develop a coordinated approach between government agencies, independent regulators, and the private sector. The Findex data suggests countries that do adopt financial inclusion strategies reduce exclusion twice as fast as those that do not.

While there are certainly important differences across countries, digital technology can expand financial access to billions of previously excluded people. As a global issue that cuts across nations of all types, we can best tackle this challenge if we can find ways to learn from each other.