Unbanked But Connected: The Developing World Dilemma

In many developing countries, a significant portion of the population owns a smartphone yet lacks access to basic banking services. This paradox, where individuals can video call someone halfway across the world but cannot open a bank account, highlights a prevalent issue in these regions.

The widespread availability of smartphones contrasts sharply with the limited access to formal financial services, underscoring the urgent need for innovative solutions to bridge this gap. This situation reflects a broader challenge faced by developing nations, where technological advancements have outpaced the development of essential financial infrastructure.

In Sub-Saharan Africa, the penetration rate of SIM connections is 88% while 51% of the population owns smartphones and that number is expected to grow to 81% in 2030.

Only 50% have access to usable bank accounts. According to the World Bank, account ownership varies significantly across different countries, with South Sudan having as low as 6% of its population owning bank accounts, while Mauritius boasts a high rate of 91%. Over the next five years, smartphone ownership in the region is expected to rise to 67%, significantly outpacing the growth in banking access. This disparity underscores a critical issue where connectivity is improving, but financial inclusion is lagging.

The absence of a bank account presents numerous challenges, such as the lack of access to savings, investment opportunities, and loans. While mobile money services like M-Pesa and Orange Money provide some financial services, they are not as comprehensive as those available in developed countries. Ideally, an iPhone user in Africa should have access to the same range of financial services as an iPhone user in Europe, the United States or in Canada.

Understanding why banking in developing countries has not kept pace with developed nations is essential. This inquiry involves examining the barriers to financial inclusion and identifying necessary steps for improvement. In this blog post, we delve into these issues, exploring current solutions and potential strategies for enhancing financial services in developing regions.

The Banking Access Gap

Problems with Being Unbanked

Access to banking services is a critical component of economic participation and financial stability.

Firstly, being unbanked presents numerous problems for individuals, including the inability to save, borrow, or invest, which is crucial for building financial stability and wealth. Without access to formal banking services, unbanked individuals cannot apply for loans to start businesses, purchase property, or manage financial risks. The absence of a credit score further exacerbates this issue, making it impossible for them to access credit.

According to the Global Findex Database Report of the World Bank, the proportion of adults in Sub-Saharan Africa who saved money in 2021 remained largely unchanged from 2017. However, the use of mobile money accounts significantly increased the number of adults saving formally. In 2021, an average of 26% of adults—approximately half of all savers—were saving formally, compared to just 15% in 2017. This rise in formal saving was almost entirely due to adults who reported saving through a mobile money account rather than a traditional financial institution. In developing countries, many people save semiformally through savings clubs or by relying on individuals outside their families, with 25% of adults in Sub-Saharan Africa reporting this method. Additionally, about 14% of adults in both high-income and developing economies save in other ways, such as keeping cash at home or investing in assets like livestock, jewelry, or real estate.

Secondly, unbanked individuals are unable to benefit fully from the growth of the economy. In thriving economies, investment flows and consumer spending consistently increase, driving economic development. However, without a bank account, individuals struggle to receive investments, income, and loans easily, thereby widening the income disparity. This financial exclusion prevents them from participating in the broader economic activities that contribute to national growth.

Lastly, cash-heavy economies often lead to lower reported incomes, resulting in reduced tax revenue for governments. This fiscal constraint hinders the government's ability to invest in the necessary infrastructure of financial services, creating a "chicken and egg" problem. The lack of financial infrastructure means fewer people can access banking services, while the government struggles to generate the funds needed to build such infrastructure due to lower tax revenues. In Sub-Saharan Africa, a report on the informal economy by the International Monetary Fund (IMF) estimated the informal economy to account between 35% and 40% of the different countries’ GDP. It poses significant challenges for tax collection and economic planning.

Addressing the banking access gap requires a multifaceted approach, including policy reforms, investment in financial infrastructure, and the promotion of financial literacy. By tackling these issues, developing countries can enhance financial inclusion, support economic growth, and improve the overall quality of life for their citizens.

It’s 2024: Why Are So Many Still Unbanked?

Despite rapid advancements in technology, access to banking services has not kept pace, leaving millions of people unbanked. Several factors contribute to this persistent issue. First, the fees associated with maintaining bank accounts can be prohibitive for individuals with limited incomes. Account maintenance fees and transaction costs deter many from opening accounts, making physical cash an attractive alternative as it incurs no such fees. On the other hand, as supported by McKinsey research, for banks, maintaining a physical infrastructure is very expensive and often financially impractical for servicing low-income individuals.

Additionally, poor infrastructure, particularly in rural areas, significantly hampers access to banking services. Reliable broadband and mobile internet connectivity are often lacking, making internet banking difficult. For many rural inhabitants, the nearest banking branch can be hours away, which discourages the regular use of banking services. As a result, people in these areas are not incentivized to open bank accounts due to the inconvenience and impracticality of accessing them.

A vicious cycle exists in some countries where merchants predominantly accept cash or checks, avoiding card payment systems. Consequently, consumers see no need to hold cards, reinforcing merchants' reliance on cash transactions. This cycle perpetuates a heavy dependence on cash and stymies the adoption of formal banking services. The World Bank reported in 2021 that only 20% of adults in developing economies, excluding China, made a payment to a merchant using a card, mobile phone, or the internet. Addressing these challenges requires targeted interventions, including reducing banking fees, improving infrastructure, and encouraging the adoption of digital payment systems to break the reliance on cash.

Why Mobile Phones Haven't Translated to Banking Access

As explained in the previous section, banking in the developing world presents a unique set of challenges and opportunities that distinguish it from banking in more developed economies. This exclusion from the formal financial system impedes economic development, as individuals lack access to credit, savings, and other financial services that can help them manage risks and invest in their futures. Factors contributing to this situation include a lack of banking infrastructure in rural areas, high costs associated with maintaining bank accounts, and low levels of financial literacy.

Addressing these issues requires a concerted effort from both governments and the private sector to expand financial inclusion through innovative solutions such as mobile banking and microfinance.

Shortcomings of Mobile Money

While solutions like mobile money have significantly advanced financial inclusion in developing countries, they remain limited compared to the comprehensive banking services available in developed nations. Despite its promise of financial inclusion, mobile money in Sub-Saharan Africa faces significant challenges such as security risks, high transaction fees, and regulatory hurdles.

Mobile money platforms, such as Kenya's M-Pesa, primarily facilitate basic transactions like money transfers, deposits, and bill payments. However, they fall short in offering more complex financial services that people in developed countries have taken for granted for decades. For instance, mobile money services typically do not support foreign currency exchange (FX) transactions, limiting users' ability to engage in international trade or travel.

Additionally, access to digital cards for online payments is often restricted or nonexistent, hindering participation in the global digital economy. Investment options, such as stocks, bonds, and mutual funds, are generally unavailable through these platforms, preventing users from growing their wealth through diversified portfolios.

Consequently, while mobile money provides a crucial entry point to financial services for many unbanked individuals, it is not a holistic solution and does not yet offer the full spectrum of financial products and services needed to drive sustained economic growth and development.

Political & Compliance Considerations

Despite the progress made through technological innovations, significant challenges remain. Regulatory barriers and political instability in many developing countries complicate efforts to expand financial services. Regulators, such as central banks, ministries, commissions and agencies, often have overlapping jurisdictions that create confusion and inefficiencies in policy implementation.

For instance, stringent Know Your Customer (KYC) requirements, aimed at preventing money laundering and terrorist financing, can inadvertently exclude low-income individuals who lack formal identification. It also underscores the need for regulatory frameworks robust, clear, and adapted to the local reality to protect consumers and ensure the stability of these new financial systems.

Economic volatility and political unrest can disrupt banking services and erode trust in financial institutions. For example, the Financial Sector Assessment Program (FSAP) by the International Monetary Fund (IMF) and the World Bank has highlighted the need for improved regulatory environments to foster financial stability and inclusion. Addressing these challenges requires a comprehensive approach that includes regulatory reforms, investment in financial literacy programs, and the development of financial products tailored to the needs of low-income populations. Only through such multifaceted efforts can the full potential of banking in the developing world be realized, contributing to broader economic growth and development.

Bringing financial inclusion to the entire population requires a comprehensive approach that activates all parties involved. From setting regulatory rules to incentivizing companies to build innovative products, the Central Banks, regulators, and governments play an important role in driving financial inclusion in developing countries.

How EZO Bridges The Financial Gap

Local fintech companies in developing countries have struggled to keep pace with the rapid development of their counterparts in more affluent nations. Beyond the advantage of an early start, developed nations provide a conducive environment for experimentation and innovation. This environment is fostered through supportive policies, abundant funding, and strong infrastructure. 

For example, regulatory frameworks in Canada often include sandboxes that allow fintech companies to test new products and services with fewer constraints, thus accelerating innovation cycles. Additionally, access to venture capital, government grants, and research and development (R&D) tax credits provides essential financial support for research and development, enabling fintech firms to take risks and pursue groundbreaking projects.

This reality creates a significant opportunity for banks in emerging countries to partner with EZO to digitize their operations, thus having a substantial impact on increasing financial inclusion. By providing digital banking solutions, EZO can help bring financial services to people who have never had access due to the lack of physical banking infrastructure. These efforts are always undertaken in close collaboration with regulators and central banks to ensure clear directives on compliance requirements, thereby fostering a sustainable and secure financial ecosystem. 

Bridging this gap requires a concerted effort to create a more supportive environment for fintech innovation in developing countries, including regulatory reforms, increased funding opportunities, and investment in infrastructure. Without such efforts, the digital divide in financial services is likely to persist, exacerbating economic inequalities between developed and developing nations.

We have gone over the reasons for the gap in access to financial services between developed and affluent countries. So what is the solution?

At EZO, our vision is to create a world where financial services are accessible to all, regardless of geographical location or economic status. We envision a future where individuals and businesses have the tools they need to manage their finances efficiently and securely, empowering them to achieve their financial goals with ease. EZO uses the current infrastructure to solve the problem of financial inclusion.

Let’s Explore the Full Suite of EZO Products:

EZO SuperWallet: The all-in-one financial application that integrates payments, basic financial services, and investments into a single, user-friendly platform.

EZO Swap: Seamlessly convert between fiat currencies and cryptocurrencies within the EZO platform. It offers a simple, user-friendly interface for quick and cost-effective currency exchanges

EZO Pay: With EZO Pay, you can send, receive, and pay using any fiat currency or cryptocurrency. You no longer need to swap to a foreign currency when traveling. Using this feature, you can easily receive payments from foreign clients if you own a business.

EZO Earn: Access savings and investment products using EZO earn and protect your money from inflation. We offer different financial products tailored to your risk appetite. Invest in fractional shares of public companies from as little as $10.

EZO Business: EZO Business provides a basic Point-of-Sale (PoS) system. Receive card payments, pay employees digitally, manage inventory, handle accounting – all in one place, and all from your smartphone. No need for hardware, we keep it simple and efficient.

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