What happens when you bring together a room full of leading thinkers from financial service providers, donors, media organizations, regulatory bodies and start-ups in four different markets, and ask: “What will the future of financial inclusion look like?”
This is exactly what CGAP did to support development of our next five-year strategy, which will launch in 2018. We conducted a series of four global workshops in Accra, Bangalore, London and Washington, D.C. The goal was to generate possible future scenarios for financial inclusion, taking into account driving forces such as digital technologies, globalization, climate change, migration and conflict. Through this exercise, we gained valuable insights that will help us to identify — for the industry at large and CGAP specifically — the main opportunities to ensure financial services better serve the needs of poor people in a rapidly evolving context.
Forces that will drive change in financial inclusion
Our workshop participants discussed the forces that are expected to influence inequality and economic participation for poor people by 2025. Three interconnected forces clearly stood out from our discussions:
- Digital technologies. Across all four workshop locations, there was a sense that the spread of digital technologies will continue to pave the way for more accessible and affordable services. While exciting, there was also a sense that some segments of the population, such as rural people, women and poorer households, could be further excluded if digital infrastructure remains available to other segments, such as urban people, men and richer households, and providers do not adapt solutions to serve the diverse needs of poor urban and rural populations. Participants also felt uncertainty about the direction of policy decisions that could positively or negatively affect innovation and data protection.
- Globalization. The pattern of globalization is shifting, with global flows of trade and finance slowing down and the volume of data transmitted across borders surging through digital technologies. Digital platforms are changing the way business is conducted across borders, creating opportunities for local economies. As such, participants predicted that digital globalization will have a major impact on the lives of poor people by 2025. However, many participants expressed uncertainty regarding the directionality of this impact given recent political shifts in the North, which appear to have harnessed anti-globalist sentiments to recoil from open trade and manufacturing.
- Migration. Given globalization, climate change, conflicts, changing demographics and people’s aspirations, our workshop participants predicted that urbanization and cross-border migration will grow in importance. However, participants were uncertain whether governments would be able to build the infrastructure necessary to keep pace with growing cities whether the North would embrace international migrants in their economic growth strategies.
Other forces, such as climate change, increased conflicts, and the changing nature of work, were discussed to varying degrees. We concluded that these also matter for financial inclusion given their close connection to digital technologies, globalization and migration. For example, climate change and conflict will affect migration, while digital technologies will impact the nature of work. The chart below depicts how each workshop location ranked the six major driving forces.
What the future may hold
While we are still processing the insights and our strategic process is not over, we see several takeaways emerging for financial inclusion:
- Livelihoods are changing with urbanization. More than half of the human population is now living in urban settings, and this trend will continue. Urban areas offer a wider variety of employment opportunities and better infrastructure, but it is likely that urban poverty will swell if employment opportunities do not keep pace with the influx of people from rural areas. Many urban migrants also keep ties to their hometown or village, sending money and transferring knowledge when they return. In rural areas, it will be important to create opportunities for commercial smallholders who do not migrate to become more productive and plug into value chains, and to help noncommercial smallholders transition to more sustainable sources of employment. The role of financial services to help the poor transition, adapt, and adjust to these new realities will become increasingly important.
- Cross-border migration is inevitable. Labor shortages and aging populations in the North will continue to create a pull factor for immigration, adding to the growing push migration of refugees from fragile states. Financial services can be helpful for migrants. We should also not lose sight of the fact that migration has effects on migrants’ home countries (for example, in the form of remittances as a source of investment, brain drain, and changes in cultural and social structures).
- Suitability will drive consumer adoption and usage. Continuing to emphasize customer-centric approaches to structuring financial services that meet the needs of target customers rooted in local context — from language dialect to social norms — will be essential for financial inclusion in the future. Local people should feel empowered to contribute to digitally enabled solutions that address financial needs and livelihoods in their communities. Governments and local organizations will be needed to help fuel this empowerment. This will also foster trust in the systems and solutions.
- The digital divide is at risk of growing. If digital infrastructure does not reach certain areas, if smartphones are not yet affordable for all people, and if interfaces are not adapted to the education and language capabilities of consumers, there is a risk for specific segments (e.g. women, crisis-affected people, and people living in rural areas) to become more excluded than they are today. More investments are needed to address these gaps, or alternative solutions need to be devised. There is a need to think about public-private solutions to some of these more complex problems, as it is not likely that commercial approaches will be sufficient.
- Disruption will continue across the digital ecosystem. Financial services providers (FSPs) will most likely not look the same in the future. Tech giants such as Google, Amazon and Facebook are expected to continue to integrate financial services into their networks and are likely to become trusted FSPs given their predominant role in the digital ecosystem today. As such, banks might just be used to hold deposits and to move money between newly trusted FSPs, such as social media companies and fintechs. Similarly, the role of mobile network operators (MNOs) might evolve to focus more on network infrastructure and serve as the “rails” for customers to access financial services.
- Data ownership and control could make or break solutions for poor people. Data will be distributed across many players: banks, MNOs, social networks, internet operators, and more. Financial data will be combined with social connections and messaging data to build more complete digital profiles. Who will own the data? Who will aggregate and analyze the data? Will this help or hurt poor people? Are poor people able to make informed decisions, and are they aware of the risks? Governments will have an increasingly important job of regulating data ownership, control and security, but they may struggle to handle these regulatory needs in a rapidly changing environment and due to capacity limitations.
- The role of government remains critical. There is a strong consensus that government will continue to play a key role in driving financial inclusion. However, government faces capacity limitations and governance challenges that will need to be addressed. As data is increasingly controlled at intra-national levels, how will governments supervise and regulate the actors that emerge in control of the data?
These scenario workshops have proven to be useful forums for gathering strategic inputs from a wide range of leading thinkers working across a spectrum of fields. CGAP has incorporated the insights from these workshops into a paper, Vision of the Future: FInancial Inclusion 2025, which outlines the driving forces and scenarios and what they could mean for the future of financial inclusion.
In the meantime, please share with us your thoughts and reactions to these takeaways, what the future may hold, and what this means for financial inclusion in the comments section below.
This post is available in Mandarin on the World Bank Voices blog.
Thank you for asking for input. Two sets of questions/comments:
1. Regarding the expectation that tech giants will become trusted FSPs (leaving banks to hold deposits and make transfers between these FSPs), this may be the case for payments/transfers and credit for purchasing items (and brokering insurance?). But what does this projected future say about how capital will be allocated? Whose access to capital will shrink and whose will expand? (Allocating capital to the most efficient and productive uses is an assumed role of the banks today, although they do not necessarily perform well.) And if banks perform such a much more limited role, what will this mean for the regulation and supervision of banks?
2. Regarding data, in order to have a fair and inclusive financial system, bias - both in the data and in the design of data processing systems (e.g., intake) - must be understood, detected and effectively addressed.
Thank you for the article. I would love to understand more on how "the changing nature of work" impacts financial inclusion specifically.
Dear Prad, thanks for your question. The changing nature of work will not directly impact financial inclusion. It will impact people and their livelihoods. Forces such as urbanization, globalization and technological progress are affecting the world of work. This means new or additional employment opportunities that people can benefit from. On the flip side, these changes are also affecting the demands for new ways of working and skills, and there is a risk of increased inequality and exclusion. So it will be important moving forward that financial services are more linked to people's livelihoods and enable people to adapt to this new environment.
In the "The digital divide is at risk of growing" bullet point, you talk about digital infrastructure and affordability of smart devices in the rural areas. In South Africa, a largely rural country due to the legacy of apartheid, this is especially true.
With capacity limitations in the government, and might I add a lack of political will to decisively bridge the digital divide, the gaps are increasingly growing. and these have a major impact on the future of our country with regards to education and continued exclusion of the masses from the mainstream economy.
Dear Masike, thanks for your comment and sharing the South African experience. You're absolutely right to point out that if that divide is not addressed there is a risk to further exclude people from the economy and society as a whole. The World Bank published a report in 2016 that talks about the digital divide and explores solutions (http://www.worldbank.org/en/publication/wdr2016). For organizations working to advance financial inclusion, we cannot lose sight of this trend as the world is becoming more and more digitized. More investments are needed to address these gaps, or alternative solutions need to be devised. We may need to think about public-private solutions to some of these more complex problems, as it is not likely that commercial approaches will be sufficient.
Dear Lahaye Abela &Hoover, While future scenario of FI is predicted, three points meriting the attention of the experts and policy makers on Financial inclusion include a) How affordable FI as reported is sustainable without subsequent exclusion more particular in nascent inclusion in poverty segment ? What is the cost of such a second exclusion of nascent inclusion and its socio economic implication ? b) Despite affordability , isn’t the factors such accessibility, adoptability and acceptability from geographical, capability and social/community perspectives respectively in the given demography in the last mile? Or Whose perspectives the affordability is taken into consideration ? c) Without making any parallel preparedness and infrastructure for both in the supply and demand fronts across the borders, digital based FI is too fast to cope up its candid mission that bound to create digital divide infested with cyber crime and inequality leading to consequences like ‘Arab spring . demonstrating “exclusion anywhere is a threat to inclusion everywhere “ in Dr V.Rengarajan
Microfinance has largely been successful on the 'relationship' that can be created between staff and the poor. Where this relationship is poor, the sector under-performs. If digital finance continue to weaken this link, financial inclusion will largely fail. Financial services will then continue to serve those better-off and with connections... Getaneh
Dear Getaneh, albeit the act of creation of good relationship between the staff and the poor is necessary, it ‘alone’ cannot ensure successful microfinance. At the most it facilitates financial inclusion(FI) with the accessibility to finance to the poor in the supply side without looking into the demand side realities that influence the success of microfinance. To wit without preparedness for productive absorption of microfinance in the process of income generation activities in the demand side value chains , microfinance Is bound to become unsuccessful one.
Regarding digital finance , there need not any more conjecture or surmise using ‘if’ on its poor impact , many studies assert the failure of financial inclusion in the manifestation of delinquency of included accounts , inoperative or dormant accounts and drop outs leading exclusion in the poverty sector questioning the very purpose of financial inclusion . My advocacy is not against FI but the act of too fast to include digitally without any preparedness in the demand side given demographical features , would be tantamount to “putting the cart before the horse”.