Improving financial inclusion can unleash growth


Can disruption in financial services create investment opportunities?


Frédérique Carrier
Managing Director, Head of Investment Strategy
RBC Europe Limited

Financial literacy is often cited as a key hurdle to overcome when it comes to creating equity in communities. Equally as important, yet not as talked about is the notion of financial inclusion.

According to the World Bank, more than 1.6 billion adults do not have a checking or savings account, access to credit or insurance. Inadequate electricity, poor internet access, minimum balance requirements and prohibitive costs are some of the reasons why adults typically do not have a bank account. The lack of identification documentation also affects one billion people worldwide and 45 percent of women in low-income countries.

Whatever the reason, those who lack any sort of bank account or routine financial products are unable to store, send and receive payments, unprotected from theft and loss, and without safeguards if they lose their jobs or fall ill. Not only does this leave them on the fringes of the financial system, it makes them vulnerable to predatory lenders.

What more, this lack of access to basic financial services (i.e. a lack of inclusion) can create crippling financial problems for individuals and businesses, thus holding back an economy’s growth potential.

Nearly half of all unbanked adults live in just seven countries

Percentage of global unbanked population by country (2017)

The pie chart shows that nearly half of all unbanked adults live in seven countries: China (13 percent) and India (11 percent), which have the largest unbanked populations; Indonesia (six percent); Pakistan (six percent); Nigeria (four percent); Bangladesh (three percent); and Mexico (three percent).

China, 13%

India, 11%

Indonesia, 6%

Pakistan, 6%

Nigeria, 4%

Bangladesh, 3%

Mexico, 3%

Rest of the world, 54%

But in this challenge lies opportunity. According to the World Bank, more than two-thirds of adults who do not have access to a bank account, do have a mobile phone. Because today’s technology enables the delivery of financial services through even a basic mobile phone, there exists great potential for financial technology (FinTech) providers to leverage the tools unbanked individuals do have to foster financial inclusion.

Not exclusively an emerging market issue

Unbanked adults predominantly reside in emerging economies. Some emerging market governments that are alert to this issue have invested in infrastructure and encouraged banks and startups to seize the opportunity this state of affairs presents.

China strove to address the urban and rural differences at the root of its large unbanked population after recognizing the economic potential of closing this gap. It encouraged the development of infrastructures such as broadband networks alongside allowing a growing role for the private sector to advance financial services, hence the progress of Alibaba’s Alipay and Tencent’s Tenpay (including WeChat Pay). Together these online payment platforms process more than 90 percent of all mobile transactions in the country.

But poor access to banking services is also a problem faced by an uncomfortably large population in developed economies, particularly the underbanked who have a bank account but no access to credit or other financial services.

The Federal Deposit Insurance Corporation’s 2019 survey “How America Banks” found that 7.1 million (or 5.4 percent) U.S. households had no bank account, while a report by the Federal Reserve the same year calculated that 16 percent of U.S. adults were underbanked. Mintel, a market research firm, reports that six percent of Canadians are unbanked, without a checking or savings account of any kind, and a further 28 percent are underbanked. In the UK, the Financial Conduct Authority estimates 1.3 million adults are unbanked, while the European Central Bank (ECB) calculates that some four percent of households in the EU do not have a bank account.

Central banks and regulators need to adapt

Despite the opportunity, there are inherent risks associated with widening access to financial tools through nontraditional means.

RBC Global Asset Management Inc.’s Julie Thomas, a senior portfolio manager specializing in global financials, points out that while the traditional financial system is regulated, offering safety and security for savings, FinTech sits outside this regulation, affording no such security.

Additionally, for central banks, unregulated newcomers can make delivering monetary policy more difficult. How can central banks control the risk to the economy from increased leverage as FinTech represents a growing share of financial services?

Concern over the loss of control over the economy explains the recent flurry of activity by many central banks to create their own digital currencies. A central bank-backed digital currency would be a digital version of cash, equivalent to a deposit with a nation’s central bank.

China launched the e-yuan in 2020; the ECB aims to launch its own digital currency in 2025, while the Bank of England and the Fed are actively exploring the issue. A Jan. 2021 survey by the Bank for International Settlements (the bank for central banks) reported that most central banks are considering digital currencies. The survey found that central banks representing a combined 20 percent of the world’s population are likely to launch their own digital currencies within three years.

Increased regulatory scrutiny on FinTech is also likely, particularly with the advent of “super apps,” which are popular in emerging countries. These platforms started out by being a dominant provider of a service used daily by customers, such as ride-hailing services (e.g., Grab in Singapore) or e-commerce (e.g., Mercado Libre in Latin America), and expanded from there into financial services including payments, insurance and investment. Super apps are blurring the lines between financial services and other industries. Regulatory authorities will likely focus on who controls the data and how it’s used. This will be a key issue particularly in Europe where protecting data privacy is a primary concern.

How are traditional banks adapting?

Concerned about industry newcomers encroaching on their territory, some traditional banks are adopting some of these FinTech approaches. Technological capability is not an issue: most banks have been delivering progressively more online access to services for the past 20 years. But FinTech entrants, unencumbered by legacy systems and traditional banking practices, not to mention regulation, have successfully gained ground in market segments that banks traditionally regarded as uneconomic, lacking potential, or too risky.

Some traditional banks have opted to create hubs external to their main businesses to allow these new approaches to be properly nurtured. Once mature, these processes may be adopted into the core businesses. This should be a low-risk way to integrate new technology into a traditional bank, mitigating threats to branding or customer confidence while closing the technological marketing gap with FinTech companies.

Embrace the evolution

The face of finance is changing rapidly, and regulators and central banks alike are taking notice. The arrival of a wider range of participants in financial services makes their task more complex. They’ll have to adapt, as will traditional banks, in order to fend off the approach of newcomers into their territory. FinTech will not single-handedly lift the poorest individuals in the world out of poverty, but to the extent that it can reach a portion of them and give them access to financial services, economies will likely benefit. Companies that make inroads into this market segment with a well-thought-out strategy should see bright prospects. Plus, the disruption and competition will likely create investment opportunities in those FinTech companies that gain staying power, as well as in the traditional banks and financial services providers that are able to effectively embrace this new paradigm.

This article is part of our SusTech series, which explores the confluence of sustainability and technology and why this concept matters as an investment theme.

Read more from the series:

With contributions from Jason Deleeuw, CFA, U.S. Equities Portfolio Advisor, RBC Wealth Management Portfolio Advisory Group – U.S. and Stephen Chang, CFA, U.S. Equities Portfolio Advisor, RBC Wealth Management Portfolio Advisory Group – Equities, RBC Dominion Securities Inc.

RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.

Frédérique Carrier

Managing Director, Head of Investment Strategy
RBC Europe Limited

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