Financial inclusion is the commitment to ensuring that both individuals and businesses—specifically micro, small, and medium-sized businesses—have access to useful, affordable, and non-exploitative financial products and services that meet their needs and are delivered in a responsible and sustainable way.

Financial inclusion extends beyond traditional banking products and includes access to payments, savings, remittances, credit, wealth management, and insurance.

While not one of the G20’s 17 sustainable development goals, financial inclusion has been identified as an enabler for at least seven of the 17 and is seen as key to reducing extreme poverty and driving economic upliftment. The G20 has also committed to advancing financial inclusion globally, primarily leveraging digital technology to address geographical barriers like access to bank branches, as well as other barriers.

Beyond the social and ethical imperative, there has been significant research on the links between financial inclusion and sustainable economic growth, along with its ability to create a more stable financial system for individuals who have access to more formalized savings. In fact, a recent International Monetary Fund (IMF) working paper found that increasing digital financial inclusion in payments boosts annual economic growth by up to two percentage points.

A tradition of exclusion

Historically, several groups have been excluded from traditional financial services for a variety of reasons. In the 2021 FDIC National Survey of Unbanked and Underbanked Households, unbanked rates were consistently higher among households with lower incomes, single mothers, or family members who had less education or were Black, Hispanic, or disabled.

The systemic practices that have perpetuated financial exclusion continue to be experienced today, perpetuating racial and gender wealth gaps. Data from the 2019 Survey of Consumer Finances (SCF) showed that Black and Hispanic families have considerably less wealth than White families, with 17% less wealth than that of White families.

These wealth gaps affect a family’s ability to participate equitably in the economy, as less financial security limits access to much-needed financial products and services.

The promotion of financial inclusion not only allows access to financial resources but creates social change by delivering increased financial independence and control over resources. The financial empowerment of women, specifically, has benefited not only individuals but their families and communities. Given that women remain the primary caregivers in many societies, financial literacy can also have a multigenerational impact, as financial know-how is passed down to their children, thereby setting up future generations with increased potential for financial success.

Digitization improves global access

Digital technology has been an important factor in helping deliver access to previously unbanked or underbanked individuals, who may distrust traditional financial institutions due to past experiences. COVID-19 drove an explosion in the transition to digital payments, and this momentum can be harnessed to expand digitization into other areas. While financial innovation has delivered significant progress in mobile money and payments, two other areas—government disbursements to individuals and cross-border payments or remittances—show promise in the application of innovative technological solutions to provide improved and less-costly service.

What we have seen particularly in developing economies is the use of technology to leapfrog development and provide alternative banking and payment products outside of traditional financial services. An often-cited example is M-Pesa in Kenya, launched in 2007 as an electronic money-transfer product. M-Pesa allows people to store value on their mobile phones and convert it to cash for peer-to-peer payments or to purchase goods and services.

This mobile money-transfer service enabled a banking revolution in Kenya and is now active in seven other African countries, with 50 million active users. The M-Pesa product suite, which also caters to business customers, includes a range of financial services, such as savings, loans, wealth management, and insurance. Prior to its launch, only 27% of Kenyans had access to formal financial services, compared to 84% in 2021.

In another part of the globe, the decision by El Salvador to introduce Bitcoin as legal tender in 2021 was a controversial yet ambitious case study on embracing digital currencies to increase financial inclusion. While it delivered a significant increase in the number of El Salvadorans with access to digital wallets, the subsequent depreciation of Bitcoin and continued instability has been difficult for people to manage. However, Bitcoin is still seen as an easy, cost-effective way for El Salvadorans outside the country to send money home compared to traditional cross-border payment options, which are frequently expensive.

The unbanked and underbanked in America

Financial inclusion is often seen as an issue for developing markets, however, according to the FDIC, 5.4% of American households are unbanked, and approximately three times that many are underbanked. The unbanked as a percentage of the population is greater in the US than in all other G7 countries and, as expected, is concentrated at the lower end of income distribution, where once again those with the least resources are the most underserved.

Central bank digital currencies (CBDCs) and Treasury or Fed accounts (digital accounts created by the Treasury Department) are potential solutions to reach the unbanked population more effectively using digital technology. These digital solutions are seen as a more efficient and cost-effective way to disburse social benefits and emergency funds during times of crisis, as we saw during the pandemic.

ESG and the business case for financial inclusion

Financial inclusion is receiving increased attention in ESG strategies, particularly for financial services companies, where accessing these underserved markets is not only a social but business imperative. In recent research published by S&P on ESG Materiality, access and affordability is seen as the most material social factor for banks from a stakeholder point of view and one of the four most important from a credit perspective. They then go on to say that failure to successfully navigate this fast-moving technological environment may see a loss in market share.

Although several companies have made significant strides in addressing financial inclusion goals as part of their ESG strategy, there is still a ways to go, particularly among small banks with a more localized footprint.

Financial services firms can demonstrate real impact in this space, as well as in the much-needed space of financial education, which is key to building long-term sustainable financial wellness.

In addition to being an ESG strategy, achieving consistent financial inclusion across all demographics represents a significant business opportunity for the financial sector.

As far as future economic growth goes, it’s clear that despite a long tradition of exclusion, the needle is finally shifting in the direction of expanded financial inclusion around the globe. Spurred by many factors, including ESG goals and business and ethical imperatives, this movement benefits not only individuals with improved access but also small and medium-sized businesses, as well as the very institutions that are now serving these new customers.

Digital technology is at the heart of these changes and will continue to play a major role in providing greater financial inclusion. In our experience of helping more than 200 banks navigate the twists and turns of the industry, we believe it’s crucial to have a clear strategy for the future, especially for something as vital as financial inclusion.