Financial Inclusion and the Role of Payment Systems

Financial Inclusion

In the tech world, at any given time there is always a buzzword that marketers use to market already existing technology. For example, when guys wanted to market data, they branded it Big Data, when they wanted to market camera-based systems, they came up with the term smart cities. Currently, they moved from the big data to Blockchain, I call it the new quill in town. If you are still wondering what Blockchain is, it is simply a distributed database. The idea is to avoid a single entity from controlling the database, but that comes with its own challenges. Recently, I wondered to the financial field and I started to study yet another term that has been used there for a while. The financial inclusion.

At first, I thought it is one of those terms that are used more like the short-lived tech buzz words, but I found out that financial inclusion is more durable and tangible than I had thought initially. According to World Bank, Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.

A long that line you will come across the word unbanked. Basically unbanked refers to guys who have no bank accounts, but with the coming of mobile banking, the term changed a little bit. So in places like Kenya where millions of people have mobile wallet accounts (MPESA and others), the unbanked are considered to be those without the normal bank accounts or mobile money accounts (MPESA).  In other words, those who are outside the official financial system. In Kenya for example, they would typically be keeping their money under the mattress. They normally don’t save though some of them invest in buying animals like cows, goats, sheep and sometimes land.

Based on that I asked myself why Financial inclusion is so important. It reminded me of something that my friend Sam Wakoba of once posted on Facebook while discussing a report that had indicated that MPESA had increased per capita consumption levels and lifted 194,000 households or 2% of Kenyan households, out of poverty within a period of six years. After reading that report Wakoba posted the following on his Facebook feed

Economists, ye middle class people and realists please help me here: How is simplifying access to my money so I blow it up helping me rise out of poverty? The same thing that is sinking me into it. >Consumption is not = >Investments but just more debt.

Asking for a friend….

What Wakoba missed on that post is the fact that mobile money and MPESA in particular created a system that enables households and individuals to do many things including saving money (Mshwari), get funding (mobile money loans), making payments, sending and receiving money to/from relatives. The sending money is how the MPESA was marketed at the beginning and it is also how different payment systems like Pesapal came to be.

Before we look at the payment systems contribution to the financial inclusion, I got a few insights from as to why people being included in the formal financial system is important. It helps people:

  • Make day-to-day transactions, including sending and receiving money;
  • Safeguard savings, which can help households manage cash flow spikes, smooth consumption and build working capital;
  • Finance small businesses or microenterprises, helping owners invest in assets and grow their businesses;
  • Plan and pay for recurring expenses, such as school fees;
  • Mitigate shocks and manage expenses related to unexpected events such as medical emergencies, a death in the family, theft, or natural disasters; and
  • Improve their overall welfare.

I think more emphasis needs to be put on the second point above, especially when thinking about the payment systems. It is important for businesses in particular to have a payment system that enables them to make transactions, store some value and connect to other financial services. When you look closely at some of the payment systems, you realize that they pay a big role deepening the financial inclusion both for individuals and the businesses.

To use Pesapal, for example, the user has to open an account. To pay for a ticket or DStv or electricity bills through Pesapal, one has to deposit money on the account. From there, the account acts as the funding source for the payment being made. For one to make one payment or a number of them, the account would require one to keep a sufficient amount of money within the account and that means the monetary value is maintained in the account for some time.  Just like other payment systems.

Pesapal, is outright part of the instrument for financial inclusion.  To further this discussion, next we will look at a system that was launched by Pesapal late last year called Pesapal Sabi. A point of sales terminal designed to help the small businesses make and receive payments, as well as to keep update the records of the business transactions. Here is what the then CEO of Pesapal Agosta  Liko said about it at the launch: “We’re looking at small businesses. Our target includes people selling clothes at Toi Market; the taxi driver; the salon owner; or even the curio seller,”

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