Nearly one-third of the U.S. population-106 million people-are either unbanked or underbanked, according to the Federal Deposit Insurance Corporation (FDIC). What that means is they make very few bank transaction or may not have a bank account at all. About 25 percent of those also do not have credit score, thus they are invisible to the mainstream U.S. financial system.
Why is this exceptionally important? Because credit score is required to have access to crucial financial services such as lending – which is an essential part of any economic ecosystem.
The problem with banking industry is that they show very little interest to address this population of the under/unbanked. As a result, these borrowers are often forced to take out high risk/cost loans from unconventional sources, often predatory lenders.
The way we define it: various financial and commercial services distributed over digital channels – with the intention to substitute the use of cash transactions. To make these transactions on mobile phones, computers or the use of credit/debit cards are self-evident to most of us, it is still strange to many.
THE 2 BILLION
Around the world, the situation is much more severe. There are 2 billion people that still do not have a bank account. There are also 200 million businesses of various sizes in growth markets that are denied from accessing to saving and lending services, and those that somehow manage to find some means to get it often pay outrageous fees for the limited range of financial products available to them. According to McKinsey & Company’s report in 2016: ” Financial exclusion affect the middle class, not only the poor. In emerging economies as a whole today, 45 percent of adults-or two billion individuals-do not have a financial account at a bank or another financial institution or with a mobile-money service.
The share is higher in Africa, the Middle East, Southeast Asia, and South Asia, and is particularly high among poor people, women, and those living in rural areas-but many middle class people are also affected. Even those people who do have basic financial accounts lack access to the broad range of financial services that those in developed countries take them for granted, such as different types of savings accounts, loans and insurance products. As a result, the majority of people in emerging economies rely on informal financial solutions that are often less flexible and more expensive than formal alternatives-and frequently fail to deliver when needed the most. These include savings in the form of livestock, gold or through informal savings groups and borrowing from family, employers, or money lenders.”
Financial services are the lifeblood to any economy enabling individuals, households and businesses alike to save and invest and most importantly to get the necessary funding to grow. With the lack of Banking system’s interest or inability to provide the mentioned services, these – especially the developing economies – lack access even to the basic services tremendously contributes to hindering economic growth and perpetuating poverty.
HOW EXACTLY FINANCIAL SERVICES CONTRIBUTE TO GROWTH?
Financial products have the potential to transform even small businesses for the better in miraculous ways. Imagine a sock manufacturing workshop with a steady production rate. They operate without any loans, they sell what they produce, most of their income must be reinvested to buy the raw materials, pay wages, rental costs, machines, maintenance, utility bills etc. This business may operate for many years but this situation is very fragile.
They are exposed to numerous threats:
- A key machine breaks down – without it they are unable to continue production.
- Some natural disaster hits the manufacture, nothing serious, but the roof is gone.
- The source of a key ingredient like cloth cease to exist, now they must transport it from 200 km.
Even trivial problems like these may seem unsolvable, unless they continuously save up for vismajor events. But if they indeed save up, they must do it in an ineffective way, remember they do not have banking access, so what they do is, just store cash under a mattress. That is hardly a secure way to store value, plus they are unable to make interest gains as through a saving account one would.
Also, this amount – if it even exists in the first place – does not guarantee that it is able to cover for the negative event. It is not usable for any innovation or business development, for that they would need to create savings in another bucket. In any fortunate corner of the World, this sock manufacture would be able to sign a low-cost insurance policy to cover unforeseeable negative events. And if you imagine how much discount they would get, if only they were able to purchase greater lots at once from key raw materials! Or by applying for a loan and get much more effective machinery… Even if they were presented by a sudden increase of demand that would promise a significant increase for their business, without the necessary funding they are stuck within the boundaries of their size.
Digital technologies as simple as a mobile phone or smartphone with Internet access is able to open the window for these regions to the Global Financing World. The excuse Capital use that it isn’t financially sound to develop infrastructures in these countries will not do much longer. With the appearance of cryptocurrencies, the traditional barriers and walls will be torn down. The entry barrier to have access to modern financial services for underprivileged people and businesses is getting lower every day. If Banks will not do it, cryptocurrencies and Fintech businesses will be able to create the bridge as there are plenty of people on the other side.