Fighting Financial Exclusivity: What Role Does The Government Play?

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When PYMNTS.com attended MasterCard’s Cashless Conversation on Financial Inclusion last week, we heard opinions from private sector, non-profit and academic voices coming together to brainstorm solutions for one of the world’s biggest problems: providing financial solutions to the billions of underserved people around the globe.

As a Microfinance Specialist for the Consultative Group to Assist the Poor, or CGAP, Kabir Kumar has familiarity tackling the problem of financial exclusivity from all angles.

PYMTNS.com spoke with Kumar to discuss the government’s role in expanding financial inclusivity, how household cash flow impacts the types of solutions the financially underserved need and how technological innovation can help billions of the poor around the world.

CGAP states that its mission is to”[advance] financial access for the world’s poor.” According to Kumar, CGAP works at the global policy level, the in-country policy level, with regulators and policy makers, and with private sector organizations, such as MasterCard. In his own words, CGAP is “set up to be sort of a public good at the frontier of financial inclusion.”

How pressing of a problem is financial exclusion? According to Kumar, about 77 percent of the world is unbanked, meaning they lack access to formal banking services. Kumar notes that a considerably larger portion of the population has access to informal financial services, but estimates that such practices can be “five to 10 times more expensive” than their formal counterparts.

“What we need is to create a way, a low-cost mechanism, with which we could get formal financial services to poor people,” Kumar said. “That’s why we see payments as a very powerful stepping stone. The ability to make very small value transactions at low cost is possible via cell phones, it is possible via retail locations, and we can see that in a number of markets. So that could be the beginnings of a range of formal financial services.”

Kumar notes that in order to extend formal financial services to the unbanked, those services need to be tailored to fit specific household needs. In his presentation, Kumar broke down four typical types of household cash flows – formal salaried, informal salaried, entrepreneurial and seasonal – and illustrated why different financial solutions would or would not appeal to each segment.

“Let’s take seasonal workers; there are periods at which they don’t have cash on hand. And so service needs to be designed where it’s not just a straight-laced account, or not just a simple credit service that fits all of those segments, but for them, something that helps them mitigate when they don’t have cash on hand and when they still have expenses to meet,” Kumar pointed out.

What role should governments take in assisting the financially underserved? Kumar said that there is a wide range of possibilities, but highlighted three specific strategies governments can take to catalyze greater financial inclusion. 

The first method is through creating an “enabling environment,” in which people are given the freedom to make small money transactions, allowing “innovation on business models” to take place.

The second method is through providing the infrastructure for payments to take place. Kumar notes that in many countries, it’s difficult to legally identify people, leading to obvious problems when attempting to make transactions. By providing a solution, governments can facilitate a higher volume of more secure payments. 

And the final method is by having the government itself become a client, picking electronic channels or digital means through which to deliver financial services.

“In a number of countries, governments are interested in bringing benefits to the very poor,” Kumar said.” They’re choosing to use formal mechanisms, and not create systems that sort of stand apart, but are integrated with the formal financial sector.”

To hear more Kumar on the role of government in financial inclusion, how mobile technology can aid the poor and more, listen to the full podcast below.

Kabir Kumar

Microfinance Specialist, CGAP

Kabir Kumar helped launch CGAP's program on technology-enabled business models for financial services and has worked closely with some of the pioneering implementations in the mobile financial services space, including Easypaisa in Pakistan and Eko in India. He manages CGAP's key relations with businesses, especially in the global mobile and finance technology space. He has been an adviser to banks, mobile network operators, technology companies, and investors in over 15 countries in Asia, Africa, and Latin America. Kumar has led the Technology and Business Model Innovation team's work on business case questions where he has identified alternative models. He continues to identify new areas of business opportunity, such as the role of data and digital footprints for financial inclusion. Recently, he has been investigating how interoperable digital payments can drive financial access and inclusion. He is also coordinating the team's policy and business work in Brazil and Pakistan. His work has been quoted in numerous publications including CNN, The Banker, Economist, and NPR, and he has represented CGAP at major events, including GSMA Mobile World Congress, MMT conferences, Tech@State, NFC Forum, and FINNOVATE. Kumar has a dual master's degree in public administration and international relations from the Maxwell School of Syracuse University. He can be found on LinkedIn and Twitter.