Financial Inclusion Must Reach the Last Billion

Wolfgang Fengler

WASHINGTON, DC – At its most basic level, the goal of economic development is to eradicate poverty. By that metric, significant progress has been made: the number of people living in extreme poverty fell from 1.9 billion in 1990 to an estimated 615 million today, largely owing to supercharged economic growth in the world’s most populous countries in Asia.

But just as the last miles of a marathon are said to be the hardest, the progress made so far is insufficient to carry anti-poverty efforts across the finish line. Now that the fastest population growth is occurring in countries where poverty remains entrenched, and the globalization engine is no longer as powerful as it once was, growth alone is unlikely to be enough. Moreover, escaping poverty is just one step toward true prosperity. To extend the ladder of opportunity to all and integrate the poor into dynamic economic activities, we need alternative and complementary approaches.

Here, bolstering financial inclusion would help, because poverty is not just about how much a person earns. It is about what their earnings can buy them. Lowering the cost of goods and services, and thereby making them more accessible to those who have little, can thus reduce poverty. While advanced-economy governments often provide basic services, that is not the case in the Global South, where benefits are limited in scope. In many Global South countries, basic goods and services are sometimes more expensive for the poor, and it is often costlier to reach this segment of society because they purchase only small quantities of products.

Financial firms have been particularly effective in overcoming these barriers. By lowering the costs of services and expanding access to them, they have demonstrated how inclusion can drive broader development. To explore the thresholds where individuals gain access to financial services, World Data Lab, supported by the Mastercard Center for Inclusive Growth, combined its consumption models with the World Bank’s Findex database.

Our research finds that increasing financial inclusion, which ranges from basic mobile money wallets to full-fledged banking services, disproportionately benefits the poor. We focused on the world’s six billion adults – people aged 15 and older, who are more likely to be economically active – and split them into six buckets of one billion each, according to consumption level.

The poorest billion people, who spend less than $5 per day, used to be excluded from financial services – their economic lives were built solely on cash payments. But over the last decade, a silent revolution in mobile money and digital payments has taken place, particularly in India and African countries. As a result, more than one-third of the world’s poorest billion adults now have access to financial services (see Chart 1).

These gains have been propelled by the interplay of the income-growth effect, whereby more people have crossed income thresholds that make them “bankable,” and the price effect, whereby the cost of delivering financial services to the un-banked has fallen.

In 2015, around 3.4 billion people had access to financial services. Back then, the “price point” for entering the financial system (at 2017 purchasing power parity) was approximately $8 per day. That left two billion people – nearly 40% of the world’s adult population at the time – excluded. Over the last decade, economic growth has created a larger global middle class. At the same time, the cost threshold for accessing financial services has dropped substantially, owing to technological innovations such as mobile money and digital banking.

The combination of these two forces has enabled an additional 1.4 billion people – some 800 million from the income-growth effect, and another 600 million from the price effect – to gain access to financial services since 2015. The average global threshold for entering the financial system has dropped to $5 per day. This lower entry barrier, reflecting the impact of digital money systems, has significantly improved the inclusion of poor people. Among the best-performing countries, especially in Africa, financial services can be offered at a price point of $2 per day – below the extreme poverty line of $2.15 per day.

The progress made over the past decade proves that financial inclusion can be achieved with the right mix of innovation, investment, and collaboration. Now, as we approach the last mile in the poverty battle, we must focus on bringing the most marginalized communities into the financial fold.

Wolfgang Fengler, a former lead economist at the World Bank, is CEO of World Data Lab.