Tackling a growing financial inclusion problem

COVID-19 raises the stakes     |     A very different lockdown experience     |     Concerted financial industry response     |     Waking up to dormant assets     |     Targeted funds, impact investments     |     Collaboration urgently needed to build resilience

The stark reality is that we live in a very divided world in which inequality is growing. In an age where the super-rich are prospering, half the world’s population lives on less than US$5.50 a day¹. Around 1.7 billion adults are ‘unbanked’², having no account at all with a financial institution or mobile money provider.

Last year’s report on economic inequality from Oxfam produced the disturbing finding that 2,153 billionaires across the world own the same amount of wealth as the poorest 60% (4.6 billion people) of the world’s population combined³.

The issue of income inequality and financial exclusion is by no means confined to low- and middle-income countries. In high income countries such as the UK, the gulf is also pronounced. A recent analysis by the High Pay Centre found that FTSE 100 chief executives will earn the annual median wage of full-time workers (£31,461) in just 34 hours. The divide is in fact widening; CEO pay now stands at around 120 times that of an average worker – while estimates suggest it was around 50 times at the start of the millennium and 20 times in the early 1980s⁴.

Financial institutions are fully cognizant of the need to run themselves as responsible businesses, treating customers, employees, suppliers and other stakeholders fairly and catering for a wide diversity of needs. There is clear recognition that it is unacceptable for a business to be run for profit without purpose. No financial organization can truly thrive if the communities and businesses around them are failing.

These issues are pervasive and long-standing – and we now need to face the fact that, through COVID-19, they have been made worse. Both in health and financial terms, the pandemic has disproportionately affected low income families living in crowded accommodation with poor health provision and little or no financial safety net. In 2015, 193 countries signed up to a set of 17 Sustainable Development Goals which seek to reduce inequality and ‘leave no-one behind’, but the UN has acknowledged that COVID-19 is hitting the most vulnerable groups the hardest, such as older people, people with disabilities, ethnic minorities and refugees⁵.

It is in some senses a cruel irony that the sectors that employ the greatest number of low paid workers have been hit the hardest by the pandemic, putting the livelihoods of those individuals at risk. Across the world, hospitality and leisure businesses, retailers, restaurants and cafes have been forced to close or significantly restructure how they operate. Great swathes of their workforces, many of whom are employed on a casual or non-guaranteed basis, have found themselves out of work or on significantly reduced hours. It has been estimated that the pandemic could push an additional 70 million people into extreme poverty⁶. In developing countries, the consequences can be particularly severe. Half the world has no access to any social protections such as unemployment benefit or governmental income support: no work literally means no money and no food to eat.

One of the features of the pandemic that many people will remember for years to come has been the lockdown experience – working from home for extended periods, participating in all those Teams and Zoom calls, collaborating on shared platforms. But this is very much a privileged professionals’ perspective. For many millions, lockdown has meant an inability to work. For some, without the right devices and connectivity, it has also meant an inability to look for other opportunities or upskill in order to find a new career.

Lockdowns also dramatically highlighted the consequences of being unbanked or financially excluded. Whereas many people were able to order groceries online, make other purchases, and transfer money between accounts as needed, for others it has been a totally different experience. Financial exclusion has led to social exclusion. Unable to buy online, they have had to find shops that remain open and haven’t gone cashless. Their dependence on going to physical outlets has also exposed them to a greater risk of catching the virus. Meanwhile those who are banked but perform low paid work in the informal sector or run micro businesses, are more likely to need access to physical banks to pay in and withdraw cash, yet many banks have closed a number of their branches.

In the UK, the scenario was also reported of people without a credit history being unable to order COVID test kits online: credit information was being used as part of the process of verifying people’s identity and due to thin credit files, some individuals weren’t able to complete the process. They had no option but to venture out to a physical test site.

The financial industry has mobilized a huge effort to provide economic support to customers and clients through the COVID-19 crisis, administering support packages and providing additional liquidity. This has happened at multiple levels – through central bank initiatives, governmental packages, and at an individual financial institution level. Many institutions have offered payment holidays and moratoriums to existing customers to ease financial pressures where needed.

Multi-lateral bodies such as the European Investment Bank (EIB) have also been highly active. Recognizing that small and medium sized businesses (SMEs) are crucial to local economies and communities, the EIB’s financing package sought to mobilise €28 billion of SME financing through liquidity lines to banks, guarantee schemes and other risk transfer programmes. By taking a significant proportion of the risk, multi-laterals have acted to bolster the resilience of the financial system, benefiting all.

This underlines the fact that all bodies have a part to play. In the wake of the crisis, collaborative and joined-up action is needed to prevent a worsening of the situation. Many of the financially excluded – and indeed many micro businesses who may largely function on a cash basis – are dependent on alternative financial organizations such as microfinance organizations, credit unions and not-for-profit entities, who themselves have come under significant strain through the crisis. Some microfinance organizations have needed to reschedule or restructure their financial liabilities – and it is important that mainstream lenders don’t let this impair their future ability to secure finance. The continuing availability of finance to these organizations will be critical to the wider recovery through societies and communities.

Credit unions and other alternative finance providers have a significant role to play in battling financial exclusion, offering affordable credit to those on low incomes and with limited credit histories, and also providing vital financial literacy and education support.

One encouraging initiative in the UK has seen Fair4All Finance becoming a key player in increasing financial inclusion. It is doing this through funds channelled into it from dormant assets – monies lying unclaimed across bank accounts, savings accounts, investments, pensions and other financial classes. A study by KPMG and Aviva estimated that there could be over US$100 billion in dormant assets across the world. Although many countries have dormant asset schemes, there remains a significant opportunity to establish and increase the scope of schemes (-e.g. many cover only retail bank accounts). Necessarily, there are many legal and regulatory safeguards that need to be met before such funds can be accessed – but they represent a potentially significant source for social good if they can be unlocked.

The UK scheme, backed by the government, has seen £65 million of dormant assets invested into Fair4All Finance which it is using to scale up affordable credit and other mechanisms to support those who are financially excluded. This is part of £745 million distributed for social and environmental purposes.

Other effective mechanisms include funds designed to support vulnerable or disadvantaged groups. In the US, for example, many Black businesses and families cannot access capital from banks in their communities. In response, KPMG’s US firm is working with the Black Bank Fund and National Black Bank Foundation to strengthen Black-owned banks through direct investment. This capital will allow these banks to extend new loans to Black entrepreneurs, families and businesses. The Foundation, a non-profit, will simultaneously provide financial literacy and wealth-building programs for the communities in which these banks operate.

These kinds of targeted actions can have a great cumulative effect. Other parts of the financial community have significant roles to play too – such as the growth in asset managers offering funds that specialise in certain aspects of ESG. Many of these are environmental, but some banks, asset managers and private equity firms offer a range of financial inclusion investment funds.

As a financial community, it will be crucial in the wake of the pandemic that players come together and think about ways in which they can help build greater financial inclusivity. Part of this rests on ensuring the systemic financial resilience of the system as a whole, so discussions are needed on what blended financial solutions can play a part.

Recognizing that financial inclusion spans a complete spectrum of needs – not just day-to-day banking, but insurance, savings, credit and pensions – it will be vital for organizations to collaborate to drive new innovative solutions. Undoubtedly, technology will have a huge role to play. We only need to look at the success of initiatives such as M-Pesa in Kenya (offering easy money transfer by text, and which is now being utilized in 10 countries) and Paytm in India (providing mobile payment services, with some 350 million registered users) to see this.

The pandemic has shaken up our world and created a new reality. One of those is that it is even harder now to be one of the financially excluded. As an industry, we need to find solutions to turn that around and progressively increase financial inclusion for all.