FinClusion: Connecting the Unconnected

Context and Scope

• The session focuses on financial inclusion, defined as providing roughly 2 billion unbanked individuals and millions of partially unbanked people with access to lending, savings, and insurance products essential for economic growth.
• The discussion frames financial inclusion not merely as product distribution, but as a critical societal tool to move populations from informal, cash-based economies to formal, productive systems.
• Panelists represent a coalition of traditional banking (Citi, McKinsey), fintech (On Deck), impact investing (Omidyar Network), and payment infrastructure (MasterCard Center for Inclusive Growth).

Market Size, Opportunity, and Economic Potential

• Approximately 50% of working-age adults in emerging markets are currently excluded from the formal financial system, relying on expensive and unreliable informal mechanisms like moneylenders and pawnbrokers.
• By 2020, a target set by the World Bank, MasterCard, Citi, and others, was to include 500 million new people and 40 million merchants, though full inclusion remains a long-term goal.
• The "unbanked" population represents $4 to $5 trillion in purchasing power globally, yet they lack the tools to utilize this capital efficiently.
• McKinsey Global Institute estimates that 1.6 billion adults could be included via digital channels, potentially unlocking $2 trillion in new credit and $4 trillion in household savings currently held in cash or physical assets.
• Digital financial services reduce the cost of providing an account from approximately $100 per year (traditional brick-and-mortar) to $10 per year, a 90% cost reduction that makes low-balance accounts profitable.
• Mobile phone penetration exceeds 80% among working-age adults in the developing world, with a projection that 80% will have smartphones by 2020, providing the necessary infrastructure for leapfrogging traditional banking.

Technological Enablers and Business Models

• Alternative Data: Technologies now allow lenders to underwrite individuals without traditional credit scores (FICO) by analyzing digital footprints, such as mobile usage patterns, transaction history, and social media data.
• Mobile-First Solutions: Innovations include micro-leasing for residential solar units (e.g., in East Africa), micro-insurance for health and accidental death, and automated savings collection via mobile money.
• On Deck's Model: On Deck utilizes automation, data, and user experience to serve small businesses with loans under $250,000, filling the credit gap left by traditional banks post-2008 by using non-traditional data for underwriting.
• Ecosystem Integration: Success requires collaboration between banks, fintechs, mobile operators, and retailers, moving beyond siloed solutions to integrated packages that solve specific productivity needs (e.g., inventory management, tax compliance).

The Critical Role of Government and Regulation

• Digital Identity: National digital ID programs (e.g., India's Aadhaar) are identified as foundational, enabling "Know Your Customer" (KYC) processes and reducing the cost of onboarding new users.
• Government as a Catalyst: Governments are urged to move public payments (pensions, salaries, subsidies) to digital channels to create the transaction volume necessary to sustain financial markets.
• Regulatory Sandboxes: Countries like Mexico, India, Indonesia, and the Philippines are creating regulatory sandboxes to test innovations while managing risk, moving away from rigid, siloed regulations between banking and telecommunications ministries.
• Harmonization: The Alliance for Financial Inclusion is working to create common regulatory frameworks across developing markets to prevent the "Wild West" scenario and ensure interoperability across borders.
• Risk Mitigation: Concerns exist regarding predatory lending, over-indebtedness of the poor, and the potential for digital money lenders to charge exorbitant interest rates (e.g., 5% weekly) due to lack of financial literacy.

Addressing Technology-Specific Risks and Innovations

• Blockchain vs. Bitcoin: Panelists distinguish between Bitcoin, viewed as a fringe currency often used for capital flight, and blockchain technology, which holds potential for secure land registries and collateral management in regions with disputed property rights (e.g., test cases in Peru and Kazakhstan).
• Trust and Adoption: The primary hurdle for digital adoption is not just access, but trust; users must perceive digital accounts as safer and more convenient than physical cash to overcome the "cash-out" behavior where users withdraw funds immediately upon receipt.
• Remittances: Blockchain and digital ledgers are being explored to reduce the high costs of cross-border remittances, though current progress relies more on interoperable digital payment rails than cryptocurrency.

Forward-Looking Statements and Strategic Imperatives

• Failure Consequences: Getting financial inclusion "wrong" risks creating household credit bubbles, eroding trust in digital banking, and leaving the unbanked worse off than before.
• Success Metrics: Success is defined as 5 to 10 years from now by nations (e.g., Singapore, Rwanda, Peru) having established "smart nation" infrastructures where digital payments are the norm, enabling competition on customer value rather than product supply.
• Policy Priorities: Forward-looking policy must prioritize open APIs, interoperable systems, and digital identity to prevent a "gap between information and equality" where data power is concentrated in the hands of a few.
• Future Evolution: The market is shifting from "having an account" to "using an account" for specific productive activities like purchasing medicine, air travel, or managing business inventory, driven by the need for productivity and mobility.