By Jennifer Asma and Rachel Halpern
With the rising demand for financial services as a result of the COVID-19 pandemic, the vulnerability of financially excluded groups (those who do not have access to financial services, typically a bank account) has become increasingly stark.
Most financial institutions in Australia have yet to sufficiently meet the demand for banking services from these groups. This is an untapped opportunity for Australia’s banks and financial services firms. Banks that recognise this opportunity will be best placed to deliver benefits to shareholders by access to markets, and improved reputation (amongst the increasing number of ESG focused investors, customers and regulators).
Despite the upside, Australia does not have an overarching framework in place to facilitate financial inclusion. The big 4 banks introduced financial inclusion goals in 2016/7 but appear to have made little progress in meeting these goals. Given this lack of progress, Australia’s banks should learn from the successes of financial inclusion programs abroad.
What is financial inclusion?
Financial inclusion can be defined as the population’s access to and usage of basic financial services. Women, the very young and the very old, people with low or irregular income, people in remote locations and immigrants tend to have lower levels of financial inclusion. As financial inclusion increases, benefits accrue to individuals accessing those services and the broader economy in which they spend. Small business access to financial services such as credit and loans correlates with increases in employment and reduced financing constraints. Therefore, improvements in household and small business spending can bring growth, reduced poverty rates and increased income equality.
Current state of financial inclusion in Australia
Currently, Australia’s levels of financial inclusion are vague as no measurement has been recorded since 2015. In 2015 a report was released Financial Resilience in Australia 2015 stating that 3 million adults were excluded. This means that in 2015 one in ten people had no savings, one in six people were over indebted or barely met their financial obligations and one in five people had not had access to credit in the preceding 12 months. Since then, these numbers are only likely to have deteriorated with the economic hardship of COVID-19 suffered by the very demographics of our population who were already likely to be at risk of financial exclusion (e.g. women and casual workers).
Current programs in place in Australia to address financial inclusion
Despite the outdated records for financial inclusion, progress has been made. In 2015 the Good Shepherd Microfinance initiative was established by the Commonwealth following its commitment to the G20 Financial Inclusion Action Plan (FIAP) and the United Nations’ Sustainable Development Goals.
Westpac, CBA, NAB and ANZ have all correspondingly issued FIAPs following the Commonwealth’s commitment. These documents provide an extensive outline of their targeted areas of improvement and their plan to alleviate the gaps in financial inclusion. For example, in CBA’s FIAP, one of the statements calls for action to develop policies to support victims of domestic abuse. As a result, in 2020 CBA launched Next Chapter to provide support for victims. However, the banks have not provided regular updates on their FIAP and thus makes it difficult to keep them accountable.
What we can learn from financial inclusion abroad
Kenya currently has the most successful mobile money sector through M-Pesa, a mobile wallet that allows users to transfer money, make payments, receive their salary and apply for loans. This allowed over 80% of the population to be financially included in 2019 with over 58.3 million mobile accounts. The success of M-Pesa is based on:
● Private-led innovation: Heavy investments by private companies have allowed M-Pesa to establish retail agents in both rural and urban areas to facilitate their services.
● Regulatory reform: Previous Kenyan regulatory frameworks would not have been able to legally regulate non-bank operations. However, M-Pesa was approved due to an innovative business model.
● Low barriers to entry: For verification purposes, M-Pesa users applying for banking services only need to provide the same documents that were used during their registration for M-Pesa (for example passport or national ID).
India found success through connecting the population to bank accounts through digital channels. This has increased the rate of India’s adult population with bank accounts from 53% in 2014 to 80% in 2017. India’s success is based on:
● Technological infrastructure: The simplified identification authentication using biometric technology has allowed lower barriers to entry for opening bank accounts.
● Government intervention: Government facilitated the establishment of digital infrastructure and made legal reforms to protect consumer rights and establish a regulatory body to oversee the payment system.
Conclusion
To conclude, Australia’s financial institutions could be doing more for financial inclusion. The government should place more priority onto this issue and make the necessary changes to the legal frameworks to facilitate fintech development for greater inclusion. Financial institutions should be working towards issuing updated and accurate reports that shareholders can use to gauge the market and hold the institution accountable for their commitment to the FIAP.
Shareholders in financial institutions can make a difference by writing to their companies and encouraging them to report on their progress and make stronger commitments to delivering financial inclusion in the country. Shareholders attending AGMs can ask the senior leaders of these organisations for updates on their progress. Retail and institutional shareholders have an important role to play in improving financial inclusion in Australia.
Find research on financial inclusion at Altiorem.
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