• Nick Fisher, General Manager UK at JCB International (Europe) Ltd


• 24.08.2023 11:45 am
#finance

Society is moving towards a cashless financial ecosystem. With individuals relying on cards for day-to-day payments, e-commerce as a percentage of total retail sales continuing to increase, and governments championing the security benefits of digital payments, it is no surprise that cash usage in the UK is predicted to drop below 0.5% as soon as 2026. 

This trend should be seen as having a positive economic impact. However, the digitalisation of financial services could further disadvantage millions of people and exclude them from participating fully in modern society. 

Defining the problem

Financial inclusion is not a new challenge. The House of Commons broadly defines this as “the access that people have to financial services such as banking, savings, credit and insurance.” A proportion of the population has always been unable, or unwilling, to participate in the banking system. Currently, 4% of the UK population is financially excluded, and the same goes for 1.4 billion adults globally.

The recent pandemic has had a profound impact on society, leading to a substantial decrease in the use of cash. In response, digital payment methods have become increasingly favored by individuals when making purchases. They also facilitate quicker and more streamlined transactions. As a result, many economies are now actively transitioning towards becoming cashless societies, making financial inclusion an even more pressing issue to address.

Drivers of financial exclusion

To enable individuals and society as a whole to fully embrace an inclusive financial system, we must raise awareness about the challenges that are preventing people from accessing banking systems in the first place. Here, financial education is one factor. Many may not have the necessary knowledge or skills to use certain financial services – this is particularly true for elderly or vulnerable individuals. Some individuals actively choose to use coins and notes because of privacy concerns (avoid being tracked for certain transactions), taxation concerns (exclude transactions off the table), a lack of trust in banks (or in broader terms, the financial ecosystem) and maybe simply a habit for handling physical cash. Providing clear and impartial information on alternatives can help introduce this group to digital services. 

Certain individuals may not be deemed credit-worthy enough to be offered a bank account by the traditional banking system. This can be due to a lack of a permanent residence or a poor credit score, making it difficult to access financial services such as loans or credit cards. This creates a vicious cycle where individuals who cannot access financial services are further excluded from the formal financial sector. This places them at a greater risk of marginalisation.

Another barrier to financial inclusion is limited financial infrastructure. Many individuals live in areas where there is no physical access to banks, making it difficult and inconvenient to access services. Others may have mobility issues or lack the means to travel long distances to reach a bank. Some regions have poor internet infrastructure which makes it difficult for individuals to get access to online financial services.

Accelerating financial inclusion

Addressing the drivers of financial exclusion requires a multi-faceted approach that tackles existing barriers at every level - from individual, industry to governmental. Financial inclusion cannot be achieved unless the problem is considered on a macro-scale while simultaneously paying attention to individuals and their position in society. An inclusive mindset in the world of payments means considering the needs of all consumers when looking at innovation and introducing new technologies.

There is no easy solution. Governments and financial institutions should address the ongoing challenges with the purpose of facilitating access to the required means and resources that can help bring everyone along on the journey, such as education and infrastructure, so that individuals could follow the path much easier. 

The end goal is to ensure the widespread distribution of financial services that meet the needs of the wider population. By increasing access to financial services and promoting financial literacy, more individuals and businesses participate in the formal financial system, leading to greater economic growth and social development.

Future prospects

Financial technology institutions can help by reducing the barrier of entry costs to banking services, and creating innovative ways to overcome credit scoring and lack of permanent residence issues. Equally, Governments need to incentivise the financial services industry to encourage new credit scoring models that create simple digital products which service the needs of the unbanked, helping them to build confidence and take advantage of the benefits available from the digital economy.  

Governments also need to lead by developing innovative solutions and incentivise technological development  that can provide financial services products for those who are excluded from the traditional banking system. By enabling more individuals to access credit, manage payments, build savings, purchase assets, and make investments, the financial sector can contribute to creating a more unbiased and level economy at a global scale.