If everyone in the world had a bank account and access to credit, the economic benefits would be enormous. According to a new report, broad-based “financial inclusion” would increase global GDP by $3.7 trillion by 2025, a whopping 6% jump over today’s trajectory.
Up to 2 billion individuals and 200 million businesses worldwide lack access to basic financial services currently, crippling their ability to save, borrow, and grow. But new digital tools, including mobile-based payments and peer-to-peer lending, have potential to dramatically change that, the McKinsey Global Institute says.
Report co-author Susan Lund says McKinsey wanted to calculate the financial inclusion opportunity figure to pique the interest of companies to pursue it. South Asia, Africa, and the Middle East have the most under-served customers, with women and rural communities especially numerous. Countries like Ethiopia, India, and Nigeria have most ground to make up, with the potential to add 10% to 12% to their GDP by increasing access to financial tools.
McKinsey reaches its numbers by counting up the effects of switching to digital financial tools. For example, when banks handle digital payments instead of cash, they improve productivity from not having to count, store, and guard physical money. When people open bank accounts instead of putting money under their mattresses, they’re putting their savings into the financial system, where it can be reinvested and expand the economy.
There are well-known, mobile-based finance success stories in developing regions, like M-Pesa in Kenya, but there are also some high-profile failures. When M-Pesa expanded to Tanzania and South Africa, the services weren’t nearly as effective, chiefly because Safaricom, which owns M-Pesa, didn’t have the same agent networks for cashing money in and out of the system.
India could be poised for a mobile banking revolution. The government there has issued hundreds of millions of biometric ID cards, which could form the basis for mobile payments between individuals, businesses, and government. McKinsey says there’s a lot of potential to reduce corruption–for example, in targeting benefits only to people who are entitled to them. Up to a third of India’s fuel subsidies currently go to the wrong people, one study shows.
McKinsey says governments can support digital finance by opening up “backbone” payment systems typically controlled by banks. In Mexico, Bankaool, a new digital bank aimed at the financially excluded, currently has to pay high transaction fees than existing players. Lund says banks often aren’t incentivized to meet poorer unbanked customers, because they make profits on existing clientele.
“You would struggle to find a single country in the world where a bank has taken the lead [on financial inclusion],” she says. Telecoms and fintech startups are more likely to invent new types of products to reach new customers.
The ubiquity of mobile phones opens up the financial system to millions of people and there are some early successes. But, as the report shows, governments still need to create conditions for digital finance to flourish in poorer countries. “They can identify where there are market failures and create incentives for providers to introduce new products—for example, for the very poor—and encourage uptake—for example, by delivering social program subsidies and other government payments digitally,” the report says.
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[Cover Photo: Goettingen/iStock]
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