Did you know that approximately half of the world’s population live with limited or no access to formal financial services? Until very recently, these financial nomads living at the bottom of the economic pyramid haven’t had a chance to climb up the ladder of financial inclusion. But the situation is changing rapidly. With the help of financial technology (fintech) companies, billions of people have now an opportunity to do the things some of us take for granted: pay their bills, send money to their relatives, save for retirement, or take a loan to finance their small business.
So, why including these people financially has been so hard before? In the following, I’ll go through the three main roadblocks to financial inclusion.
The first roadblock in the way to financial inclusion is cost. For centuries, traditional financial service providers, the banks, have worked with the same business model: the richer you are, the cheaper your service fees and interest rates. Tough luck if you’re a poor person, you’ll just pay more. If you’re making a few dollars per day, it simply doesn’t make any sense to open an account: you’ll just waste your hard earned money.
The cost, however, is also an issue the other way around. If a bank opens an account for a person earning only a few dollars per day, it may take up to years for the bank to break even on all the costs. Think about it: the salary of the teller, bureaucracy, checking the identity and so forth. It all costs. So naturally, banks aren’t very fond of luring the people at the bottom of the economic pyramid to be their customers.
Since the banks are geared towards working for the rich and the affluent, the culture of the banking world is what it is. Imagine that you’re a financial nomad, let’s say a fisherman somewhere in Asia, and you enter a gigantic bank headquarter. What do you see? You see marble floors and suited up bank tellers in a row behind their brass counters. How does this make you feel? I bet you are intimidated. You may think: Can I trust these people? What if I get screwed over? Even if the consumer protection legislation of that particular country is on reasonable level, would you have the know-how on how to proceed in case of a violation? I bet not.
The culture gap between the banking world and the world of a financial nomad is so vast, that it doesn’t promote trust at all. If you’re the Asian fisherman, it may very well be that you’ll never even want to enter the bank in the first place.
The third roadblock is geographical distance. Many of the financial nomads live in hard to reach rural areas. There are no bank branches nearby. Travelling to the nearest city and back may take a full day or more. Traditional financial institutions are simply too far away.
Is there more to the story?
In the next blog, I’ll go through the things fintech companies can do to remove these three roadblocks. Stay tuned!
Elia Elenius is a Community Manager at Tapp Commerce. Follow Elia on Twitter.