The more, the merrier

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RUTH F. BLASCO

In this age where everything seems to be available at our fingertips, it is ironic that access to useful and affordable financial products and services continues to be a challenge.

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A recent World Bank study shows that about 2 billion working-age adults, representing more than half of the world’s total adult population, still do not have an account with any formal financial institution. Majority of those without an account cite lack of money as the key reason. Other barriers to account opening include distance from financial service providers, prohibitive documentation requirements, and lack of trust in financial service providers.

In the Philippines, despite the continuous efforts of banks to reach out to the marginalized sectors, a huge percentage of Filipinos remain unbanked. While the Philippine banking system expanded its network from 8,620 banking offices in 2009 to 11,392 as of June 2017, only two in 10 families have been saving their money in banks, as revealed in the latest Consumer Finance Survey of the Bangko Sentral ng Pilipinas (BSP). The survey shows that about 86 percent of Filipino households remain unbanked due to varied reasons, similar at the global level – there are those who say they don’t have enough money to keep a bank account, some simply don’t feel the need to have an account, while others mention the accessibility of banks as a key factor to opening and maintaining a bank account. The BSP survey highlights the need for stronger efforts toward financial inclusion and enhancement of financial education for Filipinos.

The need to address the concern for financial inclusion has never been more vital, mainly because it is clearly intertwined with a country’s social and economic development. Take for instance the Philippines’ gross domestic product (GDP), which grew by 6.5 percent in the second quarter of 2017. GDP is one of the primary indicators of a country’s economic health, with a higher GDP rate signifying a better economy. However, even if the country’s GDP places us ahead of other Southeast Asian nations, majority of the country’s population sadly still do not feel the impact of high GDP numbers and continue to struggle to save even a small amount in banking institutions.

Supply and demand barriers to inclusion

In trying to understand why formal financial systems do not appear to be inclusive as yet, it may be helpful to look at the supply side and demand side. The supply side can be viewed as the providers of financial services and products, while the demand side pertains to the users.

On the supply side, among the more usual barriers to inclusion are geographical, financial and regulatory in nature. Lack of proximity to bank branches, given that the country consists of more than 7,000 islands, coupled by the fact that most banks are situated in high income and urban areas, hamper the Filipinos’ access to these financial institutions. High transaction cost for services and the regulatory requirement in setting up bank accounts, for example, also hinders accessibility to services by the marginalized sectors in our country.

Demand-side barriers, on the other hand, constitute a range of factors that effectively excluded individuals from accessing financial services, such as lack of a formal identification system, distance from financial institutions and level of financial literacy.

Overcoming the supply and demand side barriers is important in the approach of policy makers and financial institutions in addressing financial inclusion.

Innovation promoting inclusion

There has been a rapid expansion of new technologies and innovations, which are helping banks to reach the ‘unbanked’ and ‘underbanked’ populations. Technological breakthrough has effectively leapfrogged from the traditional brick-and-mortar branch banking to online banking, and even mobile money. Digital financial technology, or fintech, provides the advantage of being able to reach areas that are unpenetrated by banks mainly due to poor physical infrastructure and lack of financial capacity on the part of the customers.

Fintech companies, which offer certain financial products such as remittance, credit and payments, are also seen as a way of improving financial inclusion. This enables companies to provide financial services without having to offer a full suite of banking services. Primary consideration though should be given to security, affordability and connectivity. Regulators should make sure that these institutions have functions that are safe and secure. Internet connection should also be reliable, wide-ranging, and affordable for the public.

The National Retail Payment System (NRPS), the BSP’s flagship program for digital finance, is a shared clearing and settlement system that allows banks to offer digital financial services in an interoperable way. This means all transactions can be done electronically from a single account and with anyone, even if the banks involved are not related parties. This mechanism processes payments as accurately and as quickly as possible at a reasonable cost from any digital device.

The NRPS project, once completed, is expected to be a game changer. It can facilitate low-cost and convenient transactions, as well as promote greater financial inclusion by catering to the needs of all users, particularly the small-value, high frequency transactors from the lower-income segment.

While there have already been significant efforts made in the last few years to advance financial inclusion, the continuous coordination and involvement of all stakeholders, both public and private, is vital to making financial inclusion a reality. Banks should speed up employing technology or even acquiring technology-based entities, not only to improve their business processes and customer experience but also to reach the majority of Filipinos who still do not have access to financial institutions. Fintech companies, on the other hand, should find more ways in coming up with products and services that cater to the needs and pockets of the underserved customers.

Access to financial services and financial education opens doors for individuals and families, enabling them to manage and save their finances, while at the same time empowering them to invest in their future and make the right financial decisions. Collectively, this leads to investment within the community, which can, in turn, boost employment and economic productivity and reduce inequality. The more people in our society who get financially included, the merrier it will be for our nation as financial inclusion can certainly fuel economic growth.

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Ruth F. Blasco is an Assurance partner and Methodology co-lead partner at Isla Lipana & Co./PwC Philippines. Email your comments and questions to markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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