The shift to digital payments that the Covid crisis has accelerated over the past 18 months appears to be pointing towards a cashless future. Yet, while most westerners take their access to financial services for granted, the World Bank has estimated that 1.7 billion adults worldwide are still entirely cash-dependent, having no access to mobile money accounts or basic products such as loans.
Financial exclusion, which affects people of all ages, can be the result of digital exclusion, social exclusion and/or poverty. Banks have grappled with this problem for years, but recent advances in fintech are enabling the payments sector to play a much more prominent role in tackling it.
Taking responsibility for financial inclusion
Project Inclusion, started by the Emerging Payments Association (EPA) in 2018 and led by a team of CEOs from across the sector, is engaging with both the public and third sectors in its work to promote paytech initiatives designed to combat financial exclusion.
“There are 150 companies across the UK payments value chain, employing 300,000 people in making £7tn-worth of transactions a year,” says the EPA’s director-general, Tony Craddock. “As a community, we have a responsibility and a long-term vision to ensure that more people can access a wide range of convenient, information-rich financial services that allow them to benefit from using digital payments, rather than cash and cheques.”
Project Inclusion’s mentor is Neil Harris, chief commercial officer at Global Processing Services and chair of the Inclusion Foundation, a not-for-profit enterprise established in 2019 to co-ordinate the industry’s efforts to tackle financial exclusion. Although the number of cash-dependent adults in the UK fell by an estimated 270,000 to 1.23 million between 2018 and 2020, he expects that the total will rise again because of the pandemic’s economic ramifications.
“As people suffer job losses and a lack of income, they will fall out of mainstream financial services, so we are anticipating an increase,” Harris says.
Open Banking also enables credit providers to move away from a reliance on legacy credit scores and utilise actual customer income and spending behaviour
More encouragingly, there has been an explosion in recent years in the number of products and services that payment providers have developed with an eye on financial inclusion. These range from financial education programmes to apps that enable users to track their credit history.
“Companies building new payment apps on the latest open-banking technology have a full view of purchase-level data and which transactions are approved or declined, enabling them to design incredibly specialised payment experiences for an unlimited range of constituencies,” says Ian Johnson, senior vice-president and MD, Europe, at Marqeta, “Open banking also allows lenders to reduce their reliance on legacy credit scores and instead use customers’ income and spending behaviour to make better informed lending decisions.”
A new generation of digital finance tools
Products such as Dozens can analyse a customer’s spending behaviour, breaking it down by type, location and even time of day, and offer detailed recommendations to help them save money. Pockit is helping disadvantaged and vulnerable people enjoy the benefits of a payment account without the need for a credit reference history, while Updraft enables users to view all their outgoings in one place; consolidate debts from credit cards, store cards or overdrafts; and monitor their credit score.
The rise of digital wallets with ‘cash conversion’ functionality is fostering greater financial inclusion, according to Anil Malhotra, co-founder and CMO of online payments provider Bango.
“Some digital wallets, such as Apple Pay or Samsung, act only as a vessel for existing funds, like a physical wallet. But a growing number of e-wallets now have a function that enables users to visit a shop or ATM to deposit cash that then becomes electronic money in their wallets, opening new avenues of payment for cash-reliant people.”
Challenger credit bureau Credit Kudos uses new data that’s become available to it via open-banking tech and the second EU payment services directive to predict a user’s credit risk more accurately than was previously possible using traditional rating data. It uses machine learning to link transaction data with loan outcomes, giving lenders a more accurate view of an applicant’s creditworthiness.
Education; the key to financial inclusion
It’s not only about accessing credit. Many payment companies are incorporating financial education into their offerings. For instance, Creditspring’s no-interest subscription model provides an alternative to high-cost, short-term credit options. It includes a Stability Hub that provides free personalised support including monthly financial health checks; alerts to tell people when they have been pre-approved for credit; and advice to help them make more informed financial decisions.
But fintech companies also need to educate themselves to ensure that they are delivering a better service for the largest possible constituency of users, according to Harris. No one should be excluded because the tech is too complex or the cost is too great, he says, adding: “New propositions coming to market need to be completely inclusive in thinking and design. For instance, there are still many people who don’t use a smartphone.”
While payment companies have an important role to play, they can’t solve the problem alone. Banks must therefore remain a big part of the solution. Tackling financial exclusion will require a collaborative effort between the banking community, with its infrastructure, security, resilience and reach, and the emerging payment companies, with their ability to create high-quality user experiences.
“Ultimately”, Harris says, “this is the combination that will really address financial inclusion.”
