With Alternative Data, Global Financial Inclusion Is More Attainable
It’s immensely difficult to lead a better life when you can’t change your economic circumstances. In hopes of reducing poverty and spurring international economic growth, groups like the World Bank are committing to advance global financial inclusion and access. It may seem like an impossible goal, but some countries are already on the way to achieving it.
Over the past few years, this movement has caught on like a wildfire. Fintech incubation, regulatory change, and institutional innovation together have culminated into a true revolution. Let’s start with a look at how India’s financial strategies have been successful, and how the rest of the world can follow suit.
Fighting the good fight
What is financial inclusion for, you might ask? At its core, global financial inclusion is the movement to provide more people with fair and transparent financial services, at an affordable cost. According to World Bank Group president Jim Yong Kim: “Financial inclusion allows people to save for family needs, borrow to support a business, or build a cushion against an emergency.”
“Having access to financial services is a critical step towards reducing both poverty and inequality, and new data on mobile phone ownership and internet access show unprecedented opportunities to use technology to achieve universal financial inclusion.”
As a key building block for the future of financial services – and one of the UN’s 17 Sustainable Development Goals – the fight for global financial inclusion is on the rise. That’s where new tools like alternative data come in. An Experian study found that 78 percent of lenders believe alternative credit data improves financial inclusion. Consumers and small businesses across the globe lack access to credit today, but alternative data for credit scoring has the opportunity to kickstart a more inclusive system. The next question is: has anyone put it to use successfully?
India’s search for inclusivity
Let’s look at India as a case study. In 2017, nearly 80 percent of adults in India didn’t have a credit record – making it very challenging for them to access formal credit. The first step taken? Giving everyone access to a bank account. Transaction accounts serve as a gateway to other financial services, eventually helping to fulfill day-to-day necessities and long-term goals.
The problem of banking access isn’t limited to India, of course. In 2011, the World Bank reported that only 40 percent of adults worldwide had a bank account. Far from an easily attainable resource, owning a bank account in many parts of the world is considered a major source of pride. Unbanked and underbanked consumers are then left to rely on relatives, friends, payday lenders, or cash-only transactions.
On the bright side, India’s government is taking the right steps to support the credit invisible and work toward achieving financial inclusion. From 2014 to 2017, financial inclusion in India grew from 54 percent to 78 percent. To the nation’s advantage, a substantial portion of this progress was driven by the government policy, Aadhar. Aadhar is a biometric database that provides a unique identity for each Indian citizen, bringing visibility to the credit invisible.
Another factor responsible for this growth is the use of digital payments. Mobile penetration is expected to reach 90 percent in India by 2020. With the sheer number of fintech apps out there, simply having a phone can unlock a new world of access to financial services. On top of that, as consumers make payments on their phone bills, phone payment data becomes an increasingly useful source of alternative data to build credit history.
India’s progress is promising, but global credit penetration still remains low. The race to further global financial inclusion continues. So, now we ask – what can the rest of the world learn from India’s growth?
One giant step toward global financial inclusion
More than 55 countries have pledged to invest in global financial inclusion, while over 60 have launched or are developing a national strategy. Within the last decade, these countries have crafted strategic plans, incorporated new data sets, and implemented new policies and regulations.
Here’s a quick overview of what’s going on in other regions:
- Sub-Saharan Africa: 20 percent or more of African adults use only a mobile money account, as mobile money account ownership recently rose from 12 percent to 21 percent.
- Middle East and North Africa: Opportunities to increase financial inclusion among the unbanked are strong, as 86 percent of men and 75 percent of women own a mobile phone.
- Europe and Central Asia: Adults making or receiving digital payments increased from 46 percent to 60 percent, potentially reducing the number of unbanked adults by up to 20 million.
- East Asia and the Pacific: 405 million account owners in the region pay utility bills in cash, even though 95 percent have a mobile phone. If payment behavior changes, digital payments could be a significant source of alternative data.
- Latin America and the Caribbean: The potential to utilize mobile penetration as an alternative data set is promising; 55 percent of adults own a mobile phone to access the internet. In Argentina, Brazil, and Costa Rica, around 20 percent of adults use a mobile phone or the internet to make transactions.
It’s important to understand that each region brings a distinct circumstance to the table; there’s not always a one-size-fits-all solution. The regions that we’ve touched on are well positioned to tap into alternative data sources like banking data, purchase data, and utility and telecom data. But the most important factor is to try for change, especially when so many alternative data sources are waiting to be used.
India is just one example of how digital innovation can make tangible strides in expanding global financial inclusion. But according to the latest Findex data, 1.7 billion adults worldwide are still unbanked today. If you’re ready to help lower that number, we challenge you to help push for change worldwide. Read more about the movement in our eBook.
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About Amy Hou
Amy Hou is a Marketing Manager at Urjanet, overseeing content and communications. She enjoys writing about the latest industry updates in sustainability, energy efficiency, and data innovation.