Technology could boost financial inclusion -- but will it?

By Michael Lloyd

The UK is one of the leaders in payment innovations. Brits have long embraced plastic payments, and now contactless and mobile payment numbers are on the rise. But is the changing way we pay for things in the UK helping underbanked consumers across the country, or leaving them worse off?

Some experts believe that the rapidly changing payments world will aid the underbanked -- those without access to a bank account or credit card. But in actuality, it could simply provide new barriers for vulnerable consumers to overcome.fintech-inclusion

Technology's role in reaching the underbanked
In a March 2015 report, the Financial Inclusion Commission (FIC) urged financial institutions to make sure every adult is connected to the banking system by 2020 and acknowledged that emerging payment technology can play a major role in promoting financial inclusion.

"Technology enables innovative financial services companies to make their services more widely available, to cut the cost to serve, to increase the speed of delivery and to tailor products to different needs," the report states.

Peter Keenan, CEO of UK mobile payments start-up Zapp, said in an emailed response to questions that he believes innovative payment technologies such as tap-and-go payments and mobile payments have the power to bridge the gap between the unbanked and the banks.

"This has successfully happened in developing parts of the world, such as Kenya with the introduction of M-Pesa, and we're hopeful the same will happen in the UK," Keenan said. If the FIC's and Keenan's hopes prove true, it could mean good news for some of the most vulnerable consumer groups, as being connected to a bank could not only allow them to progress with the country's technological developments, but they could end up saving money as well.

The underbanked typically pay a "poverty premium" of about £1,300 a year for goods and services due to the fact they can't access the cheapest deals, according to the FIC report. That's because companies such as utility firms and telecoms companies only make their best deals available to customers who can set up a direct debit or recurring credit card payment. This results in some of the most under-privileged consumers in the country paying more for essential services.

Financial technology's inclusion limitations
While technology undoubtedly has a role to play in boosting financial inclusion, there are limits to the number of underbanked people emerging payment innovations can reach.

As things stand, the majority of consumer-facing FinTech -- financial technology -- advances are targeted at digitally literate consumers who are more likely to already have access to a traditional bank account, not to mention the ability to pay for the latest technology required to run them. That leaves such products unavailable to those who can neither afford nor understand how to use the hardware these solutions need to operate. Even as new payment technology is rolled out to more affordable devices, the financially excluded still won't have any banking or credit facilities to connect to, regardless of whether they're tech-savvy enough to use the hardware or not.

Additionally, the vulnerable groups who make up the majority of the underbanked -- such as the elderly, the disabled and low-income consumers -- typically rely on cash and cheques, despite the shift away from those payments to electronic payment systems. And some groups are not interested in moving congruently to that trend.  According to a November 2014 Payments UK survey, only one in six older people who do not already use internet banking were interested in doing so.

Users are naturally hesitant toward new technology, Keenan said. "Providers must therefore build trust with both consumers and retailers."

The UK government does not have an official financial inclusion policy in place, but to adhere to the FIC's plan to connect every adult to the banking system by 2020, it will need to harness emerging payment technologies, improve digital literacy and work with financial institutions to help the underbanked onto a more level playing field.

See related: Incentives to switch current accounts tempting, but logical?, Calling all payment tech junkies: Emerging innovations gather steam

Updated: 4 May 2016