How Financial Inclusion Can Go Beyond Access
Between 2011 and 2021, adult access to financial accounts (both banks and wallets) increased by 50% globally. A cause for celebration! However, the toil remains because actual usage of these accounts hasn’t gained much traction - especially when these accounts are beneficial only when people are able to use these services to receive and make payments, save, and withstand shocks.
But Brazil looks well on its way to be a success story for both access and usage.
Mastercard and Nubank collaborated to explore the factors that are enabling this success in their consumer research titled Beyond Access. Here, they first lay out the journey to financial inclusion, and as expected, access is just the beginning.
The journey to Financial Inclusion
The point of getting people into the formal financial system is to ensure everyone has the tools to improve their standard of living; and this means being able to safely make the transactions they need to make to go through life, being able to save for resilience, invest for growth, and access insurance for when the unexpected happens. The more people can use all of these services holistically, on a regular basis, the more inclusive economic growth happens.
Essentially, there are four steps in the journey to financial inclusion:
Access: Sign up to services that allow for basic transactions such as receiving money, spending money and keeping money. So think current/checking accounts, savings accounts, debit, prepaid, account-to-account transfers, mobile payments, mobile wallets
Usage: Intensively use the above products and start to responsibly use more complex products such as credit cards and other lines of credit like instalments, short term loans.
Security: Get used to regularly using all the above, but do even more with them. Plus, start to invest e.g. in equities, mutual funds, etc. Also start to explore insurance such as health, life, pension, etc.
Health: Use all the above extensively, and manage them all to your benefit.
But first, these enablers matter for Access
It’s certainly worthwhile to recognize the significant growth in the financial inclusion journey that Brazil has experienced in recent years; but this growth would not have been possible without some enablers we need to acknowledge.
With ~220 million people, Brazil is the most populous country in Latin America. Other factors aside, this population alone, and the earning potential of all the adults, is massively attractive to businesses. It’s no wonder then, that fintech and banks are attracted to, and thrive in the country
Brazil is also significantly more modern than other markets - only about 10-15% of Brazilians are rural, compared to 40-45% globally! This means that digital infrastructure (like Internet and electricity - all necessary to play in the digital and financial economy) are more readily accessible
Given the above, Brazilians are generally familiar with digital tools such as smartphones and other tech - this makes access and use much more palatable for them in general
They are also generally familiar with debt. Installment payments (e.g. offered by retailers) are the norm culturally, so the leap to other credit-related financial tools is relatively short
Most adults - up to 96% - have government-issued identification; critical for operating in the formal financial market
Finally, the government will is clear, and clearly felt - transformations and aid have done much to push financial access and use, e.g. relatively easy fintech licenses and regulations encouraging competition, free accounts for salaries, open banking regulations, real-time payment (Pix) offered & accessible to all (interoperable across financial providers) for free. Plus, social aid during the Covid-19 crisis was disbursed through formal bank accounts by Caixa (state-owned bank)
So how do we get to Health
The Beyond Access survey revealed that despite high access, almost 60% of people do not feel secure about their inclusion in the financial system and almost 70% do not feel financially secure.
It is one thing to encourage people to open a checking account and get a debit card; but another thing entirely to get them all the way from Access to Health. Beyond Access gives us insights into what is working in Brazil and how other markets can replicate this.
Here are the key lessons in summary:
Encouraging early and regular use of entry level products builds trust and familiarity. But the interactions need to be positive, and frequent usage needs to start as early as possible. Another angle here is that the more consistently people use their product, the more data financial providers have to suggest relevant next-best products for them. For example, someone who has accessed overdraft services might be perfect for a lower-limit credit card. This in turn facilitates the customer to increase the range of financial products they use - thus moving them further along the financial inclusion journey. Interestingly, the study found that it doesn’t even really matter how much income the customer might have - even though that’s an indicator of usage (e.g. you can’t save or send money if you don’t have any), but frequency of use, regardless of transaction amounts, is a much stronger indicator. Others that had high impact on use include the use of an instant money movement solution such as Pix (similar to Interac in Canada) and use of a savings account (which sees more inflow than outflow).
Providing access to credit early accelerates progress through the stages. Right now, most banks wait for customers or applicants to be credit worthy before offering any kind of credit. But the survey shows that this is a mistake. The earlier a customer can access credit of any form, and the more responsibly they can use it, the faster they progress along the financial inclusion journey towards Health. Co-sponsors of the research, Nubank, are proud of their approach to giving credit - their underwriting models are built (using proprietary data about their active customers) such that they are comfortable giving certain amounts of credit to customers who are still early in their financial journey - and then they increase this credit as these customers use it more and more responsibly. The study actually also examines how effective different products are with moving Nubank customers along the financial inclusion journey. Credit came up on top, which is why it’s a key lesson learned. ****
There are barriers to entry at each point of the financial inclusion journey, and these need to be addressed to allow the customer advance. In Access, barriers are infrastructure-related - particularly lack of identification and lack of digital infrastructure (e.g., internet connectivity). Governments are critical here to set the right enablers, but companies can take the opportunity to also make impact in collaboration with these governments. In Usage, enabling digital acceptance amongst micro and small merchants is critical as this makes digital payments widely available to the underserved segments (given that these segments regularly purchase from micro merchants). The study found that this is probably the most critical barrier in the Usage phase as its absence effectively hinders users from becoming comfortable using digital payments, even if they have the will and ability. In Security and Health, consumer trust, product knowledge, and education about the responsible use of products, are key and can be propagated by financial institutions.
Some thoughts to get financial institutions started
The data-based insights (using data analytics and primary surveys) in the Beyond Access report poses questions for any financial institution that is aiming to reach financial inclusion goals while driving higher profits. These questions include:
What tactics can be used to encourage early, frequent, consistent usage of entry products such as checking accounts, prepaid cards and money movement solutions?
How can credit be safely and easily provided to customers early in their usage journey?
What opportunities exist to collaborate with governments to establish infrastructure (e.g. proof of government identity) that can ease typical barriers to access?
How can micro and small businesses be encouraged to accept card payments ubiquitously
What strategies can promote customer trust?
What tactics can help customers grow their knowledge of products and responsible use of said products towards better financial security and health?
Evidence shows that financial service providers that holistically solve the above will enable their customers to not only get Access, but go beyond to Usage and then Security and Health.