Assessing the shut-in economy for financially vulnerable groups
Vulnerable groups of society have by definition always been on the verge of being financially excluded. A situation that has been exacerbated by the current pandemic, pushing people to adapt to a shut-in economy. How can (innovative) financial service providers ensure that all citizens and businesses continue to take part in the economy?
Despite an increase in the share of adults who have an account with a financial institution or through a mobile money service, globally about 1.7 billion adults still remain unbanked. Additionally, women, the poor and lower educated are more likely to suffer from gaps in financial access, in developing countries but also in countries where economies are well developed.
These vulnerable groups — ranging from underserved small businesses, to people with underprivileged socio-economic backgrounds, low education levels or dementia, hearing, speech or visual impairments — are finding themselves effectively excluded from access to financial services, and prone to financial abuse.
Financial inclusion is (far from) perfect
It must be a thing of the poorest countries, right? Not really no.
In the high-income countries of Europe, most adults already own an account, and about 55% save formally in a financial institution. And although over the past decade account ownership has been increasing overall in Europe, the World Bank found that the data is masking discrepancies across sub-regions.
In the US, more than 15% of citizens have a low to bad credit score, preventing them to get access to finance or payments in a traditional way. And with credit card debts amounting to more than $1.5 trillion, students often enter the workforce with predispositions to financial exclusion.
To ensure everyone can engage, equally and safely, in daily financial operations, there are two elements that need to be prioritized. First, increasing the overall understanding of existing financial services so people can engage with them in an informed way. And second, expanding access to new (digital) financial services that can lead to further consumer empowerment.
However, given the widespread impact of the problem, policy responses alone have thus far not managed to ‘flatten the curve’.
While addressing the issue of financial exclusion at an early age is highly important, how can the learning process be embedded in someone’s financial life over time, and/or when the external environment is under pressure?
Why acting now is essential
So far most of the policy work has been targeted toward the young and in standard (read: ordinary) circumstances.
But, while addressing the issue of financial exclusion at an early age through educational programs is highly important, how can the learning process be strongly and lastingly embedded in someone’s financial life over time, and/or when the external environment is under pressure? The current global Covid-19 pandemic is a real-life amplification of how quickly already vulnerable groups can be cornered financially even further.
In normal times consumers have a limited understanding of financial contracts, rarely switch to other financial providers, continue to pay unnecessary costs, have a limited oversight of their spending patterns, don’t save sufficiently for unaccounted events and struggle to exit eventual debt cycles.
That’s the harsh reality.
A reality that doesn’t only apply to those that aren’t sufficiently knowledgeable about financial issues. How many times did you go for a shopping-spree despite your end-of-the-month balance suggesting differently?
Needless to recall the consequences of such choices: researchers found that those who fail to understand the concept of spending, saving and interest compounding spend more on transaction fees, run up bigger debts, and incur higher interest rates on loans.
In this context, it is important that financial services cater for those needing an extra hand.
Services should be provided in a responsible manner so that access to finance, and its usage, helps people — and never harms them. Meaning we should help to mitigate the potential risk that comes with technology progress, such as data and digital identities or the cut-off between cash- or cashless-based payment infrastructures.
While the digital revolution has enabled incredible progress in terms of access, it might also result in increased exclusion.
Fintech to the rescue?
Many governments around the world are embracing the opportunities fintech (both through new actors in this space as through new services offered by incumbents) brings for financial inclusion, so that everyone can benefit and participate equally and fully in society.
Hundreds of millions of individuals globally are under- or unbanked. Many believe fintech can streamline the process in providing fully featured services to these underserved communities. From credit, to savings, to payments and transfers and more, as the IMF stated recently.
But there’s a caveat.
In its 10 year anniversary report, the UNSGSA — the UN agency in charge of inclusive finance for development — stated that “while the digital revolution has enabled incredible progress in terms of access and new convenient use cases, it might also result in increased exclusion.”
So many players are trying to make sure their (new) financial offerings don’t leave some behind.
Take the collaboration between Synchrony Financial and Amazon. They launched a credit card for those who would usually not be able to access credit, alongside trips & tricks to improve their financial knowledge.
Or Africa’s mobile payments as an early driver for the continent’s greater financial inclusion.
In Asia, digital providers utilized the high online financial services adoption to make advances in nearly every aspect of fintech.
Some businesses — so-called Fintechs for good — go even further by focusing on financial well-being, avoiding running debts, increased budgeting skills and aggregators.
By design, all these providers intend to combat potential financial exclusion by empowering consumers in their spending or saving behavior.
The shut-in economy (a topical parenthesis)
The extra-ordinary situation the world is confronted with could most likely have repercussions for consumers’ financial behavior, say behavioral economists. After several years of living an optimism bias, people will reconsider their patterns in a search for (financial) stability.
Especially in times of severe shocks, already vulnerable groups find themselves under additional stress and often rank low on any priority list. Financial providers need to build buffers, reduce risk exposure and make choices. Usually, not in favor for those already exposed.
Luckily, even in unforeseen scenario’s, fintechs are retaliating. We’re already seeing an explosion of new services in what’s been dubbed the ‘shut-in economy’. As showcased by how they are responding to the pandemic, combining efforts in workforces or just adapting to the needs of their clients.
Uncertainties, crises and downturns are multipliers of an already existing fundamental issue of financial inclusion.
Where this leaves policy intervention
In good news, financial inclusion has emerged as one of the continued priorities in the G20’s agenda since 2017.
In less good news, with an ever more digitalized financial services industry comes more potential market risks (ie. online scams, fraud, fragmented access…) for which consumers or businesses are still ill-equipped.
Uncertainties, crises and downturns are multipliers of an already existing fundamental issue of financial exclusion. While policymakers will be (re)thinking how the financial system could look like in the near future, it is important that both the fortunate and the unfortunate, both the financially literate and illiterate, and both the tech-savvy and unsavvy will be able to participate equally.
As the global population continues to age, growing the number of financially excluded can — and will — become an elevated risk to future government spending.
