The Canadian financial system has long been known for its solidity, security and efficiency. From our bubble of security, it may come as a surprise to many to learn that more than two billion adults worldwide still lack access to basic financial services. India tops the list with the largest number of financially excluded people. Currently, only one-third of the adult population has a bank account. In an effort to increase this number, the government introduced a new plan to encourage all adults to have bank accounts by 2016.
When one thinks of poverty and development, one often thinks of aid, health care, sanitation and food as priorities – not banking. But financial services, it turns out, are an important ingredient to poverty reduction. Numerous studies have shown that inclusion can accelerate economic growth, reduce income inequality and spur innovation. Having access to services at financial institutions encourages savings and insures against "bad events." This reduces inequality and increases economic growth and stability. Expanding the reaches of the world's banking system to include those at the bottom of the economic and social pyramid needs to be a priority for us all.
While it is tempting to dismiss this as a "global south" issue, we in Canada have our own problems. Approximately 13 per cent of Canadians either have no bank accounts or zero-balance accounts, and a majority of these tend to be the urban poor. To meet the needs of the unbanked in developed countries such as Canada, we are seeing a high growth rate of fringe finance institutions, including cheque-cashing services and payday loan companies.
Fringe finance institutions, used mostly by unemployed people in Canada, present an impediment to financial inclusion. Fees for services are much higher, transactions do not contribute to a credit score and the companies are weakly regulated. Women in Canada also face issues in accessing credit and startup funding. They pay higher interest rates and put up more collateral than men, yet have a higher repayment rate than their male counterparts.
To improve financial inclusion, we need to get banks to people and people to banks. Key barriers to financial inclusion worldwide include high costs, distance and paperwork. Traditional methods of using brick-and-mortar banks do not work in rural areas. The low dollar value of transactions makes it an even costlier service, and many times citizens do not see the benefit of going through all the paperwork to open an account. Innovative and creative solutions are the need of the day.
Banks can now go to the people through mobile units or via the mobile phone. And to get more people to banks, we also need to think about better financial literacy programs and schemes to nudge citizens to more responsible financial behaviours. There are several approaches to this problem. Some successful solutions, such as M-Pesa, have used innovation and technology to reach the unbanked through mobile phones. Other innovations include using an ID system that stores biometric data. This serves as a reliable piece of identification to open bank accounts for the millions of rural residents that are unaccounted for in developing countries.
Financial inclusion might not be perceived to be the highest priority for development. It might also be perceived to not be our problem. In reality, it is critically important, it is our problem, and the time to address it is now.
Sunita Pillai is a student in the MBA/MGA program at the University of Toronto. Dilip Soman is a professor of marketing at the Rotman School of Management and director of the India Innovation Institute. Tiff Macklem is Dean of the Rotman School of Management.