Financial exclusion is a term seldom associated with Europe. Here Lucinda Beeman explores the extent of the problem in Europe, and how to bring the continent’s 165m unbanked into the financial system.
It’s a Monday morning and the rent on your flat — clean, comfortable and nestled in a desirable street in any European capital — is due. How do you pay it? For the majority of the European population this is a hurdle easily overcome. A simple bank transfer — from your desk at work, your living room sofa or even your phone during a commute — will ensure that your family has a roof over their heads for another month at least.
But for 165m people from Iceland to Russia’s Pacific coast, the process is much more complex. These are the ranks of Europe’s financially excluded. Without a bank account, they operate in a cash-only environment where simple tasks like paying the rent are complex, dangerous and time consuming.
This article first appeared in our Payments Revolution magazine
As Louise Holden of MasterCard Europe explains: “When we talk about financial exclusion we think about Africa, Asia; those markets where it is a significant problem. But with 165m excluded people across Europe it’s a significant problem in our region, too.”
While data from the Financial Exclusion Initiative indicates that rates of financial exclusion are much lower in Europe than in other geographies, just a single country — the Netherlands — can boast a financial inclusion rate of 100%. For countries in emerging Europe like Bosnia, Moldova and Georgia, less than 20% of the population uses financial services. In Albania just nine per cent of the population is financially included. And that’s not the whole story.
According to Aurora Ferrari of the World Bank, any discussion of financial exclusion must begin with a common definition.
She says: “What we identify as financial inclusion is access as well as usage of basic financial services. In the Eurozone 90% of the population have an account, but another issue to understand is whether people really use these accounts.”
Just as the scale of financial exclusion in Europe is vastly different from Asia and Africa, so too are the underlying causes.
While poverty is a determining factor world wide – poor people are less likely to have a bank account, regardless of their geography – Europeans are more likely than their African or Asian counterparts to opt out of the financial sector.
And, because maintaining a bank account incurs a cost in many European markets, it’s common to see spouses and families sharing one account between two or more people.
Ferrari explains: “Even if the cost of an account is €20 per year, why would you spend that when you could have an account with your spouse? In many cases people will wonder that. The higher income a country is the more likely each individual is to have an account, but I think there may always be a percentage who do not.”
The ranks of the unbanked are made up, too, of some of Europe’s most marginalised populations, including the Roma. These groups are difficult to bring into the system, primarily because the odds are stacked against them.
And, as would be expected on a continent as large and diverse as Europe, each market has unique factors at play. In Turkey, Ferrari says, the main priority is bringing women into the financial system; in Russia, on the other hand, the key challenge is ensure that safe financial services are available in the most remote and sparsely populated areas.
Threads of Change
While projects from a number of sources have made a significant dent in the number of unbanked across Europe over the last several years — according to Holden more than 35m people have been brought into the official banking sector since 2012 – a number of trends are impacting the future of financial exclusion in Europe.
The highest profile of these are wrapped up in world events: ID cards and consumer protection.
With more than 100,000 Syrian refugees crossing the European Union’s borders in July alone, this huge wave of humanity will need access to financial services.
Holden says: “How do we make sure that [inbound refugees] have access to transactional banking, particularly if these are individuals entering the European geography without the paperwork and identification that other individuals have within the continent’s borders?”
One challenge is reconciling Europe’s tough anti-money laundering regulations — which require ID checks — with the grim realities of facing the most vulnerable segments of the European and refugee populations.
“India comes to mind,” Ferrari says. “They made a big push to give a biometrically linked ID card to everybody, allowing them to open accounts.”
Consumer protection — highlighted by eastern Europe’s Swiss mortgage crisis, when hundreds of thousands of homeowners across central and Eastern Europe took out low interest rate mortgages with Swiss banks only to be stung when the franc surged against their home countries’ currencies — has become a heated political topic in countries like Hungary, Croatia and Poland.
Ferrari says: “This is an area where there is more to be done at the European Union level. After the crisis, Europe did a lot to support the creation of a banking union and to introduce laws to facilitate bank resolution, but they haven’t really done much in terms of consumer protection at the EU level. We would say that having a framework that ensures clear rules for consumer information disclosure and effective dispute resolution is a very important part of financial inclusion.”
Europe also lags on mobile payments, she says. While initiatives like M-Pesa have made huge strides in Africa, the mobile payments system reached Europe relatively recently, with licences to operate in Romania and Albania secured in 2014 and 2015, respectively.
The very technologies with potential to bring many into financial inclusion could put others off. With trust in traditional financial institutions already weak in some areas – Turkey included – the risk of cyberattacks could be a significant block to progress.
Ferrari says: “This is becoming a serious issue. Who knows what could happen to customers’ details following a cyber-attack?”
Individual governments also have a central role to play, Holden says. The way governments disburse benefits and pay their staff can be an ideal entry point into the formal financial sector. Russia, for example, on-boarded 25m people when a group of cities switched their local welfare payments onto an electronic solution. Similarly, Italy was able to bring 1.3m of its citizens into the loop by distributing a welfare payment via prepaid card.
Holden explains: “Many of our national governments recognise that by leveraging new technology and connected infrastructure they can deliver services more inclusively and cost-effectively.”
Governments can also impact the future of financial exclusion through regulation. As Holden points out, regulations can either support or hamper the growth of inclusive financial products.
For example, regulations that make it more expensive to run banks in Europe could spur the entrance of non-bank actors that deliver basic services in a more innovative and cost effective way, Ferrari says.
“It’s important to have an ongoing conversation with individual regulators,” Holden says. “We’re always trying to make the right decision for the consumer.”
The Public-Private Partnership
With so many powerful stakeholders and complex trends governing the future of Europe’s unbanked, to whom does it fall to drive financial inclusion initiatives forward?
Holden and Ferrari are in agreement: strong, mutually-beneficial partnerships between governments and the private sector will do the most good for Europe’s financially excluded.
Ferrari says: “On the one hand the government has to create an environment where it is possible for innovation to happen. Then there has to be the private sector, because all of these operations are run privately for profit. A combination can help these solutions emerge.”
Governments have much to gain from financial inclusion — higher rates of financial inclusion correspond to better economies, a more productive workforce and a more secure population. But what’s in it for the private sector?
With 165m individuals excluded from financial services, it’s not hard to tell: market share.
Holden explains: “MasterCard is a commercial organisation, and we’re very honest about that. We recognise that as more individuals who move into transactional banking — whatever solution they take — some may come onto the MasterCard Network. But there’s also the social imperative: this is the right thing to do.”
And, as the world moves more and more online, the issue of financial inclusion will only become more urgent.
Holden says: “The gap between the included and the excluded is getting bigger. Not only do they lack the same opportunities to create personal wealth, but also they may not have a digital identity. And the way the world is moving — more and more towards a digital presence being a core requirement of buying a house, getting a job, establishing your identity — being part of this connected world.
“The implications are so much more than being able to pay your bills online,” she concludes. “It’s fundamentally being able to be a part of the growth of the global economy.”
This article first appeared in our Payments Revolution magazine
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