Author : Kira Speer
Over the past year and a half we have witnessed the disassembling of historically strong democracies, illustrating a burgeoning populist sentiment across the world. Countries are breaking apart from greater trade or political unions with the belief that their newfound solitude will encourage greater economic and social prosperity. However, the solution to the many challenges of increased economic prosperity will not be found in a state of isolation. Rather, it will be found with greater inclusivity and the extension of financial services previously unavailable to a majority of people in developing countries.
Greater financial inclusion for children and youth in developing countries could be the answer to many of these countries' most dire social and economic issues. And, with the combination of rising global technology penetration and advances in Finance Technology (Fintech) which offers cheaper, more secure banking services, the time is now for financial inclusion and global economic citizenship.
The Informal Economy
A 2014 report from the World Bank reveals that 2 billion people in the world are unbanked, many of whom are operating in the 'informal economy'.
While this system serves its primary purpose as a way to engage in simple, hand-to-hand financial transactions, it lacks many safeguards which protect against during unpredictable events such as natural disasters or medical emergencies. Without inclusion within the formal financial system, these people do not have the opportunity to advance economically and will likely remain in their current financial position.
When excluded from formal banking, people do not have access to many of the benefits that services provide, such as savings accounts, lines of credit, or even a detailed ledger to more effectively manage money. These problems are especially pertinent for youth as they are 33% less likely to have a savings accounts than adults and 44% less likely to save in a formal institution, according to a UN Youth publication. Early introduction for children and youth to checking, savings, and even investment accounts is essential and would give them the opportunity to develop solid financial habits, save, and generate interest on their savings in the meantime.
However, key challenges towards financial inclusion remain:
1) Location: Many of the world's unbanked live in poverty in rural areas, often too far away to easily access traditional brick-and-mortar banks. Their geographical distance poses one of the most difficult challenges for increasing global economic citizenship and financial inclusivity. Because of their remote locations, banking services often do not reach rural populations, and poverty can be perpetuated for the poor as a result of their inability to access bank accounts, save or obtain credit.
2) Financial Education: Despite major advances in education in developing countries over the past few decades, financial literacy still poses a major obstacle to reaching sequestered populations. For children and youth, who are at the dawn of their academic and social educations, the extension of financial education will encourage the formation of good habits that will last the rest of their lives.
Without basic literacy, banks would be negligent to expect a full understanding of important documents such as the terms and conditions of customer to business contracts, liability waives, list of transactions, and tax forms to name a few. Additionally, without basic financial literacy it would be naive to believe that people would use a system that they don't have a basic understanding of.
Efforts like introducing financial education into core school curriculum set children up for sustainable success that will serve them well as they transition into more economically active, financially conscious adults.
3) Banking Risks: An additional challenge for companies hoping to expand their services to unbanked populations is security.
A digital financial platform with low-cybersecurity could be highly at risk, and increasingly financial service providers are viewing consumer protection and the implementation of digital security as an urgent issue. Cyber security is especially important for companies hoping to reach child and youth populations as improving their financial knowledge and experience of handling money could support security.
To effectively combat the location, literacy, and security challenges associated with the extension of financial services, financial service providers, businesses, and governments must be held responsible in revamping their existing policies and business structures to more effectively foster and regulate positive growth in the sector.
Collaborative action through global networks can help to encourage both service providers and governments to adjust their efforts towards a more inclusive, and more child-friendly, approach.
Role of Businesses and Financial Service Providers
As with any product, it is essential to keep the wants and needs of the customer at the core of its purpose. Looking forward, providers of financial services should position their products as youth-friendly by addressing basic requirements, including access, control, positive financial incentives, security, and economic citizenship education. These requirements, complemented with growing responsibilities as a child ages, will encourage positive financial habits and result in more financially responsible adults.
In return, financial service providers can expect to gain long-term, loyal customers. According to a MasterCard study only 10% of teens would consider changing their bank once their relationship is established. This loyalty is only heightened by the brand allegiance commonly associated with millennials, the largest target market of financial providers.
Role of Governments
As the economy develops and expands, it is important that governments take action to regulate growth. These actions will be paramount to the viable success of financial inclusivity. A range of principles have been identified as the global standard for safe banking for children and youth.
Some of these principles include:
-Availability and Accessibility: No minimum age to open or operate a bank account
-Maximum Control to Youth: Independent opening and ownership
-Positive Financial Incentive: No overdraft charges, interest rates that outweigh cost of opening account, no penalty for demand deposits/low penalties for term deposits
-Communication Strategies: Child tailored communication strategy, clear explanation to youth of rights/responsibilities
By upholding these principles and putting into place laws that can effectively foster them, governments will be supporting the economic success of their country. While some effects may be immediately evident such as an increased number of child and youth-appropriate bank accounts, the more positive, long-lasting results will be evident over time as the children and youth of today become adults. These adults will be equipped with both a practical and theoretical understanding of the financial tools available to them, and this knowledge lays the foundations of a more stable and sustainable economy.
Financial Technology (FinTech)
Along with a population of more financially literate adults, countries and companies alike are moving towards the adoption of financial technology (FinTech) services. FinTech, a rapidly growing sector of the financial industry, generates around $12 billion a year in profits, a number on track to experience exponential growth. In comparison to traditional banks, FinTech companies require less infrastructure and less specialized staff and therefore can provide comparable and far-reaching services at a fraction of the cost.
Research carried out by Pew Research Center in 2016 showed that in developing nations smartphone ownership rates had risen from 23% to 37% from 2013 to 2015. These numbers will only continue to climb as worldwide digitalization of products and services becomes more mainstream, making access to Fintech services easier.
In terms of making digital financial services safer, a new wave of financial innovation, called Blockchain, has the potential to make a great impact on digitized banking worldwide. According to a October 2017 report by the IFC, Blockchain could tackle many issues emerging markets face in regards to financial risk. Through its extensive, secure network and its detailed history of transactions, Blockchain has the ability to increase security, transparency, and cost efficiency.
The role that FinTech companies and services play will be the driving force in the lives of the children and youth today. As we witness a growing penetration of smart devices in daily life, companies and countries alike would be well-advised to create components of these services geared towards the younger generations. By doing so, they will be creating loyal users who will be a part of the population walking alongside them into the ever-changing future of formalized banking. FinTech, although young, will likely have a significant effect on these countries where the opportunity and need exists to reshape current market structure.
The Future of Economic Growth
There are many ways in which unbanked populations can be reached around the world, and the opportunity for economic prosperity drives the case for global economic citizenship. In addition to being financially included, increased access to financial education and the opportunity to create sustainable livelihoods will improve the lives of children and youth, their families and communities.
Despite their economic or political differences, governments, businesses, financial service providers from around the world must work together to achieve the common goal of poverty eradication and economic growth. Economic citizenship for children and youth will provide the most comprehensive and effective long-term approach to achieving empowerment and prosperity worldwide.
Kira Speer is a Financial Analyst at a Financial Consulting Firm in Mexico City, Mexico. Kira holds a dual-degree in International Business and Finance from the University of South Carolina.