In a constantly and rapidly changing world where open banking has already begun its transition to open finance, it seems hard to believe that there are still a huge number of people who do not have access to online banking services, cannot make any order or payment via the Internet, or do not even have a bank account.
While in some parts of the world banks and customers form long-term relationships that persist even across generations, there are still many people who fit the qualifiers of “unbanked”, “underbanked” and “underserved”.
Financial exclusion does not only affect developing countries. Unbanked and underbanked individuals are found all over the world, in both rich and underdeveloped countries. According to World Bank data, in 2017 – the most recent year for which figures are available – 1.7 billion people were unbanked globally.
Young people are also more likely to have no bank account or be underserved by banks than older people. About 30% of the unbanked were between the ages of 15 and 24 in 2017.
So what is financial exclusion in the age of open finance?
Financial exclusion involves the difficulty of accessing and using all the financial services necessary for the full development of the daily life of individuals and their full involvement in society.
Despite the impact of the phenomenon, little is known about the categories that are excluded from the financial market. These are generally categorized as follows:
Unbanked – individuals or organizations that do not have access to the services of a bank or financial institution.
Underbanked – individuals or organizations that have limited access to financial services and still depend on the use of cash for most transactions, thus depriving themselves of important banking services, such as using credit cards or obtaining of loans.
Underserved – This is a term used to describe the two aforementioned categories: the unbanked and the underbanked.
Most often, underserved communities are made up of:
- Low-income people in low- and middle-income countries;
- Low-income or marginalized people in high-income countries;
- Women and expatriates in several parts of the world;
- Micro-enterprises – although MSMEs constitute a high percentage of the total number of enterprises in the world, financial exclusion is the main constraint preventing them from growing.
How can the underserved be helped through open banking?
The answer is simple: by creating alternative solutions that are easier to access thanks to the technology involved. And open banking can be the long-awaited solution to financial inclusion.
Open banking is expected to generate new benefits and opportunities for economies and societies by effectively ticking the following boxes:
- Provide access to responsible credit. Properly designed open banking products, through the use of alternative financial data, can expand access to financial information that helps increase consumers’ chances of obtaining loan approval and accurately assessing what they can afford. This data may include mobile bill payments, rent payments, utility bill payments, etc.
- Encourage informed financial behaviors. The information provided by PFMs based on spending habits provides a detailed view of the financial situation and areas that can be improved, such as paying too much for a service, as well as more appropriate alternatives.
- Enable participation in the global economy. Open banking drives economic growth and boosts financial inclusion by helping millions of people switch from cash to digital financial transactions in a secure environment.
- Support for MSEs. Micro and small businesses have access to affordable financial tools that meet their needs, including accounting and cash management. These processes become automated under open banking and easier to perform from a technical point of view. Additionally, businesses can now shop around and find suitable funding sources to achieve their business goals, with so many investment apps powered by open banking.
- Support casual labor. Freelancers have been underbanked for a long time, and with all the opportunities based on open banking, that is changing. They have access to affordable financial products and benefit from so-called nano-loans and micro-insurance, which is exactly what they have been missing until now.
Open banking is maturing day by day, region by region. One of the greatest things about it is that it keeps financial inclusion among its top priorities.
Further development with open APIs and strategic partnerships with fintechs is moving things in the right direction, and it will be interesting to see where open banking goes next.