So what is financial exclusion in the era of Open Finance?
Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
In a care[...]
So what is financial exclusion in the era of Open Finance?
Fintech Galaxy | Lisa Gutu | Jan 19, 2022
So what is financial exclusion in the era of Open Finance?
Despite the impact of the phenomenon, little is known about which categories are excluded from the financial market. These are usually classified as follows:
Unbanked – individuals or organisations who don’t have any access to a bank’s or financial institution’s services.
Underbanked – individuals or organisations who have limited access to financial services and still rely on using cash in most operations, thus depriving themselves of important banking services, like using credit cards or getting loans.
See: Minister Freeland releases final report with 34 recommendations on Open Banking from the Advisory committee
Underserved – this is a term used to describe the two aforementioned categories: the unbanked and the underbanked. Underserved communities are most often from:
- People with low incomes from low and middle-income countries;
- People with low incomes or who are marginalised in high-income countries;
Women and expats in several parts of the world; - Micro businesses – although MSMEs constitute a high percentage of the total number of businesses in the world, financial exclusion is the main constraint keeping them from developing.
Financial exclusion doesn’t affect only the developing countries. It involves the difficulty in accessing and using all those financial services necessary for the complete development of the daily life of individuals and to their full involvement in society.
Unbanked and underbanked individuals are located across the world in both wealthy countries and undeveloped countries. According to data from the World Bank, as of 2017 — the most recent year for which figures are available — 1.7 billion people were unbanked globally.
See: Banking barriers: How the Canadian financial sector excludes Black entrepreneurs, stifling innovation
Younger people are also more likely not to have bank accounts or to be underserved by banks than older people. Around 30% of unbanked people were between the ages of 15 and 24 in 2017.
Underserved communities are most often from:
- People with low incomes from low and middle-income countries;
- People with low incomes or who are marginalised in high-income countries;
Women and expats in several parts of the world; - Micro businesses – although MSMEs constitute a high percentage of the total number of businesses in the world, financial exclusion is the main constraint keeping them from developing.
Open banking is meant to generate new benefits and opportunities for economies and societies by:
Providing access to responsible credit. Properly designed open banking products, through the use of alternative financial data, can expand access to financial insights that help increase consumers’ chances to get approved for loans and accurately assess what they can afford. Such data can include mobile bill payments, rent payments, utility bill payments, and so on.
See: Open Finance data adoption varies by country (but one thing is certain)
Enabling participation in the global economy. Open banking is spurring economic growth and driving financial inclusion by helping millions upgrade from cash-based transactions to digital financial transactions in a secure environment.
Supporting MSEs. Micro and small enterprises get access to affordable financial tools that address their needs including accounting and cash management. These processes become automated under open banking and easier to achieve from a technical point of view.
Supporting the contingent workforces. Freelancers have been underbanked for a long time, and with all the open banking-based opportunities, this is changing. They get access to affordable financial products and benefit from nano-loans and micro-insurance, which is exactly what they’ve lacked up until now.
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