Financial Inclusion and the Payments Industry.

• Author: Zucarro, Michael

INTRODUCTION

Financial Inclusion is a recent concept that has emerged from a combination of computer technology, especially mobile phones, and political mobilization by social activists who seek to enhance economic opportunities for the lowest income citizens in the developing world. An indication of the growing importance of Financial Inclusion was accentuated at the 2016 Spring Meeting of the International Monetary Fund. The first event of the week was a panel discussion jointly sponsored with the Center for Global Development entitled, "Financial Inclusion: Macroeconomic and Regulatory Challenges" with IMF Managing Director Christine LaGarde as the Keynote Speaker. She emphasized that "The post-2015 [UN] Development Agenda squarely puts financial inclusion as a key objective for United Nations member countries...To date, more than 60 governments across the world have set financial inclusion as a formal target" (Alliance for Financial Inclusion, 2016).

Prior to the internet, many countries, especially in rural areas, had large informal economies that functioned on a cash or barter basis and were essentially outside modern formal institutions. An example of the dynamics between the informal and formal economic sectors is Argentina. In 2003, 49.6% of the workforce was in the informal sector, but due to various government programs since then, this was reduced within ten years to 33.6% in 2013 (Frayssinet, 2014). The greatest vulnerability of the informal sector was that many senior citizens who had lived most of their lives being paid in cash were not eligible for government pensions. President Nestor Kirchner proclaimed that as a matter of social justice, these workers deserved government pensions, which was then implemented beginning in 2005. Those workers who had made no or little pension contributions were allowed to collect a government pension which included a process of deducting over time the official payments that should have been made. As a result of these and other reforms, whereas in 1996, only 69% of senior citizens had pensions, that percentage had risen to 90% in 2012. Simultaneously, the government enforced new laws penalizing businesses that operated in the informal economy and also advocated that all workers should enter the formal economy by fully participating in government social security pension programs (Valente, 2012).

One of the early successful financial inclusion initiatives to move individuals into the formal sector were the Brazilian Bolsa Familia and Zero Hunger programs during the Presidency of Lula Da Silva from 2003 to 2011. Benefits for families and low income citizens were given in the form of electronic payments instead of cash or checks. Recipients went to a local financial institution to collect their funds and this process encouraged the opening of bank accounts. These social solidarity programs provided a solid financial foundation that enabled 40 million out of 200 million Brazilians to move out of absolute poverty into more formal working-class lives (Tepperman, 2016).

A major factor encouraging financial inclusion has been mobile phones which have enabled the electronic transfer of money for business transactions and family remittances without having to use cash or traditional bricks and mortar banking. The Bill and Melinda Gates Foundation has predicted that the expansion of computer technology and the emergence of digital banking is so powerful that economic growth among low income populations will lead to the elimination of absolute poverty in most of the world by 2030 (Gates, 2016).

FINANCIAL INCLUSION AND THE PAYMENTS INDUSTRY

On a global basis, the payments industry, most prominently, Visa, Master Card and PayPal, has played a large role in spreading financial inclusion across developing countries in Africa, Asia and Latin America. The widespread use of mobile phones has allowed the payments industry to reach individuals who previously relied on cash for both economic transactions and as a medium for savings. A recent study by the World Bank declared that mobile payments "can have a positive impact on a variety of microeconomic indicators, including self-employment business activities, household consumption, and wellbeing" (Cull et al., 2014). This has been positive for the payment providers as each new person they are able to reach adds a new consumer to the market which will increase usage and acceptance of their products, all while performing a service to society.

Financial Inclusion can be defined as the delivery of financial services at affordable costs to low-income segments of society (Scronce, 2015). Today, about two billion of the world's seven billion people are without a bank account (Kelly & Rhyne, 2015). Visa and MasterCard are looking to capitalize on these opportunities and both take a similar approach to financial inclusion. They have partnered with the Bill and Melinda Gates Foundation as part of the Better Than Cash Alliance. The goal of the alliance is to promote and expedite the transition from cash to digital payments by conducting research and acting as a catalyst for this change (About The Better Than Cash Alliance, 2015). The roles of MasterCard and Visa are to work with governments and financial institutions to create new technologies to enable the switch from cash to digital. This also enables the two largest US payment providers to continue their global growth, and their help to low-income communities can be viewed as a form of corporate social responsibility. The use of electronic and card payments has developed steadily over the past fifteen years but, as...