Tech innovations alone won’t speed up financial inclusion agenda

“Banking the unbanked” has long been the parlance among fintech entrepreneurs across the Philippines. Over the years, tech unicorns as well as financial institutions and local governments have been aiming to provide underserved Filipinos access to financial services and products.

The unbanked population—which refers to adults that do not have access to any basic financial services—shrank to 36 million, or 47 percent of the total adult population, as of second quarter 2021, from around 51 million in 2019, according to central bank data. The significant drop shows how the fintech revolution that has swept across the region during the pandemic, improving consumers’ access to financial products and services, didn’t spare the Philippines.

A unique factor for the country is the strong force of overseas workers, who remitted a record $31.4 billion back home in 2021, up 5.1 percent from $29.9 billion in 2020, based on a central bank study. These workers are often the sole breadwinners in the family, and their remittance inflows have a direct impact on inclusion and economic growth.

Despite the rapid adoption, there still stands a massive gap in which the unbanked are not being served by the financial system, even if they already have a bank account. While tech upstarts have helped connect them with a myriad of fintech services, many persisting challenges point to the fact that technology alone is not enough to supercharge financial inclusion.

A glimpse into the challenges facing the unbanked

The Philippine market mirrors some of the prevailing pain points facing the unbanked in the region, such as the low awareness of bank accounts as payment means and remittance transactions, the lack of official personal documentation, high cost to serve and therefore low revenue potential for the industry.

The gap is particularly salient in rural and remote areas that are unattractive to traditional institutions hindering residents from receiving affordable services. The affected individuals often resort to unofficial channels, for example, by borrowing money from loan sharks or family members. One of the notable lending schemes is called “five-six,” in which moneylenders issue small-sized loans that accrue 20 percent interest per month—by lending out P5 and receiving P6 back.

Abusive loan terms can render borrowers into an endless cycle of debt, with exorbitant interest rates taking up a significant proportion of the income. What’s worse, debt and credit are sometimes stigmatized as mismanagement of wealth or financial plight, instead of a means of expanding business or lifting the household out of poverty.

Better financial literacy could help solve the problem. The Philippines still ranks among the lowest in the world, according to the Global Financial Literacy Excellence Center. In Southeast Asia, only Vietnam and Cambodia score smaller percentages. We, therefore, believe that education is the key. It enables people to make informed financial decisions and make good use of the economic resources, and achieve financial health.

Advance financial inclusion creatively and pragmatically

New innovative tools can help with financial literacy education. Japan-based Global Mobility Service (GMS) is one great example that leverages fintech and internet of things to offer tricycle drivers credit access without the need for collateral.

The lack of a bank account, credit history and inability to make a down payment are some of the factors that bar tricycle drivers from taking a loan from financial institutions, pushing them to either rent their bikes or resort to informal lenders.

GMS’s device allows the bank to remotely access and monitor the tricycle via GPS, recording the distance and time traveled, as well as fuel levels, and it can turn off the vehicle should the driver fail to repay the loan.

This helps instill financial literacy into the drivers—it improves their money management and creates a savings habit that levels up their businesses, found a study by the Asian Development Bank.

The use case demonstrates the potential that innovation and financial services can bring to the unbanked and the micro, small and medium enterprises (MSMEs), a group that is often overlooked by traditional financial institutions.

It’s time for a change

But to address the larger problem in society, additional effort is required from all stakeholders. Telecom operators, including Globe Telecom and Vodafone, have been venturing into the fintech space to accelerate the financial inclusion agenda. Globe Telecom announced a partnership with alternative credit scoring firm FinScore this February that makes it easier to assess the credit scores for Globe’s mobile subscribers. With that, lenders such as traditional financial institutions, neobanks or even buy-now-pay-later platforms can offer loans to applicants who have no credit history and data.

Financial inclusion has been a priority for policymakers over the years, who identified its potential for economic resilience and poverty eradication. While governments have already implemented several initiatives, a more structural approach will need to consider infrastructure, regulation, consumer and data protection, innovation and education.

Tech upstarts have to think creatively and pragmatically in order to boost inclusion that promises sustainable growth. The market is massive—with 290 million Southeast Asians still unbanked—both locally, as well as regionally. —contributed

The author is partner at management consulting firm Arthur D. Little.