Financial inclusion, defined as providing access to useful and affordable financial products and services to all individuals and businesses, has become a key priority for emerging economies around the world. Recent estimates indicate that nearly 2 billion working-age adults globally lack access to formal financial services. The majority of financially excluded individuals reside in Africa, Asia, Latin America, and the Middle East – regions that contain most of the world’s developing economies.
Lack of financial inclusion impacts both individuals and countries. On an individual level, not having access to banking, credit, insurance and other financial services makes it difficult to secure loans, save money, start a business, build credit history, send and receive payments affordably, and more. On a macro level, financial exclusion constrains overall economic development and growth for countries by hampering productivity, employment opportunities, and market potentials.
However, in recent years there has been a growing recognition of the importance of financial inclusion in fueling sustainable growth and reducing income inequality. Governments, development organizations, and the financial services industry have been collaborating on initiatives aimed at promoting financial inclusion across the developing world. One important focus has been expanding access to digital financial services, including mobile money accounts, mobile banking, and cross-border remittance transfers.
Cross-border remittance payments, which involves sending money earned or received in one country to another country, can play a particularly crucial role in driving financial inclusion for individuals and small businesses in emerging economies. Here are some of the key ways cross-border payments can help bridge financial gaps:
Expanding Access to Formal Financial Services
Migrants sending money home to families and friends abroad via formal remittance channels effectively brings these recipients into the formal financial system. Receiving remittances allows people to open a bank account, get a debit card, gain experience with financial management, and build up savings. One study found recipients of remittances through official channels are more likely to borrow from a formal financial institution compared to non-recipients.
For example, Western Union partnered with India’s YES Bank in 2014 to create savings accounts for first-time recipients of remittances in rural areas. Similarly, in the Philippines, the World Bank’s RemitSCOPE program helped connect remittance receivers to savings and credit products at rural banks.
Providing Capital for Micro and Small Businesses
A significant portion of remittances sent home by migrant workers is invested into starting or supporting micro and small enterprises in their countries of origin. IFAD estimates about one-third of remittances are used for this purpose. Access to capital is a major pain point for small business owners in developing nations who struggle to secure affordable financing from local banks and lenders. Informal remittance channels also carry high fees.
Fintech innovations are overcoming these hurdles by facilitating cheaper, easier international transfers. Services like WorldRemit allow customers to directly send funds to mobile wallets, eliminating agent middlemen. Reduced fees and market FX rates make capital more accessible to recipients. WorldRemit also partners with organizations like Kiva to specifically provide remittances for microfinance loans.
Increasing Financial Resiliency for Households
Remittances often function as a vital social safety net for families and communities in the developing world, providing income smoothing and insurance in times of financial distress. Things like sickness, unemployment, economic downturn, and natural disasters can completely derail households already living on the edge. Money sent from abroad helps families pay for unexpected costs and protects against destitution.
The Mercy Corps RESCUE program demonstrated the power of mobile transfers in building financial resilience during crises. Working with Somali diaspora communities, RESCUE facilitated mobile remittances to over 60,000 households suffering from famine – providing immediate relief, driving local economic activity, and supporting long-term recovery.
Promoting Gender Financial Inclusion
Women in developing countries disproportionately face barriers to accessing financial services and credit. This prevents them from becoming economically empowered. However, research shows female-headed households tend to benefit even more than male counterparts from international remittances.
Services like TerraPay allow migrants to directly send money to women’s mobile wallets and savings accounts, improving their access to finances and control over money. Empowering women as economic change agents propels broader gains towards financial inclusion and gender equality.
Challenges and Potential Solutions
While cross-border payments hold much potential, several challenges remain in leveraging remittances to drive financial inclusion:
- Cost: Average fees on $200 remittance transfers run over 6% – significantly higher than the 3% target set by the UN Sustainable Development Goals. New technologies can help reduce fees through improved competition and efficiencies.
- Access Points: People in remote rural villages need more access points to actually send and receive transfers. Partnerships with local agents, merchants, banks, and mobile operators can overcome last-mile gaps.
- Digital Literacy: Many recipients may not understand how to use digital services or mobile money accounts. User education and tailored product design is critical.
- KYC Requirements: Senders may lack official identification documents required for KYC and AML regulations. Tiered KYC can balance compliance with inclusion.
- Interoperability: Fragmented payment systems abroad and lack of interoperability between platforms hampers adoption. Coordination between providers on payment interoperability standards is needed.
- Gender gap: Women lag men in access and usage of mobile money accounts often used for remittances. Better product design and marketing for women is essential.
- Data Gaps: More data collection is needed on how remittances are used and their impact on financial outcomes. Academic insights can inform policymaker efforts.
By addressing these challenges and maximizing the opportunities, remittance payments can become an integral part of national financial inclusion strategies worldwide – providing gateways into the formal system for the unbanked.
Several developments highlight the growing recognition of cross-border payments as a financial inclusion tool:
- The G20’s Global Partnership for Financial Inclusion made reducing remittance transfer costs one of its core objectives.
- The World Bank aims to achieve Universal Financial Access for adults worldwide by 2020, including access to payments like remittances.
- The UN Sustainable Development Goals include targets for reducing remittance fees, recruiting remittance service providers, and leveraging new technologies.
- The Committee on Payments and Market Infrastructures published a report in 2016 on Payment aspects of financial inclusion highlighting remittances.
With coordinated efforts from industry, policymakers, and development agencies, cross-border payments can become a gateway into broader financial services for the world’s poor. New technologies are rapidly increasing efficiency, reducing costs, and enabling innovative deployment models. Tapping into trillion-dollar remittance flows will unlock critical capital, financial management tools, and economic opportunities for the underserved worldwide. Financial inclusion for all can become a reality in emerging markets through payment system innovations bridging geographic and institutional divides.
