Three ways we’re achieving financial inclusion
22 Oct 2018
Too many people are being excluded from the benefits of capitalism. By applying the three 'A’s' (apps, automatic- enrolment, and assets) we can turn our mobile obsessions into real money. By installing ‘Inclusive Capitalism’ we can see who benefits and who is left behind.
‘Capitalism’ isn’t a dirty word. Yes, it has very obviously benefited rich people in rich countries, but few can deny the fact that capitalism raises the global standards of living.
Poor people in poor countries (defined by the World Bank as living on less than $1.90 per person per day) have experienced some improvement, with global levels of ‘absolute poverty’ falling sharply. Every year between 1990 and 2010, the number of people living on less than $2 per day in today’s terms fell by an average of 50 million. Today, 760 million people globally live below this official definition of extreme poverty: that is around 10%. In the 1980s, it was over 40%.
In the developing world, this has been a positive change as famine and infant mortality numbers decline. We are arguably more than likely going to die from obesity rather than from starvation.
Financial exclusion is a very real problem. Almost a quarter of the world’s population (1.7 billion people) don’t have a bank account. The results of not having access to open a bank account are bad. 50% of households in the U.K. that earn £35,000 per year or less have no savings or insurance
There is a solution: technology – fintech in particular. In Kenya, traditional Maasai warriors are trading and managing their money over a mobile phone. Technology can support mobile banking systems for the illiterate and those with no official papers, and with over 5 billion mobile phone subscriptions globally, the World Economic Forum estimates that the adoption of digital finance in emerging economies could generate $3.7 trillion to the global economy in the next seven years.
Technology to improve financial inclusion has had, however, mixed success. In India, the government created 240 million new digital bank accounts, yet a quarter of them remained untouched. Having a banking app alone is not enough: there has to be money to put in it.
Auto-enrolment is proof of success
There have been many attempts to address the following two problems: Poor income and the ability to afford ownership of items; aka 'assets'.The first step in helping wages is to guide people away from organisiations such as high-interest payday lenders. By speaking to places such as Neyber and SalaryFinance, you can arrange repayments automatically through your employers’ payroll system. This is offered at a fraction of the cost of a credit card or payday lender, and over time allows you to build a bridge from the red into the black.
Auto-enrollment ensures that employers must provide a pension plan, which their employees automatically join. Both you and the employer contribute, and the government provides tops it up with thanks to the tax system. You can opt out (at your request), however 90% have remained in the system, contributing to their own pensions – keeping a hand in the financial system.
Zero assets = zero inclusion
Improving peoples’ incomes is great so people have more to spend, but encouraging more people to own assets changes how we interact with the world. It allows us to plan for the long-term acheive long-term goals.
If you have a pension, you probably don’t think of being as asset owners: afterall, you can’t touch a pension in the way you can a house.
This is where the financial industry must step-up in explaining how things work. By investing and engaging with digital apps, we can show pension savers clearly where their money is invested and what it actually means for them and the broader community. When people become aware that they own a small slice of the biggest employer in their city, a small share in a local windfarm or a local university, you have inclusion.
However, pension saving is still not inclusive enough. Over 40% of US Millennials don’t have access to an employer-sponsored pension plan, and in the UK, there is a huge difference of attitudes between generations. For example, Baby Boomers had the luxury of free university education and cheap housing. Today’s twentysomethings don’t have those advantages, unless they have access to the “Bank of Mum and Dad”.
Inclusive capitalism requires us to buck the trend where educational, financial and digital exclusion results in social exclusion and isolation. This is about more than just providing solutions for those without a bank account: it is using inclusive capital to improve our income and lives by investing cash in a more productive economy, spreading ownership and digital financial access.