Editor’s Note: Kai Keller is project lead of financial stability, innovation and economic growth at the World Economic Forum. Peter Vanham is lead writer at the World Economic Forum. The opinions expressed in this commentary are their own.
For decades, the US has led the way in helping other countries develop. Whether it’s been through USAID programs like Farmer-to-Farmer, educational programs like Fulbright scholarships, or volunteer activities like the Peace Corps.
But the tables have turned — at least, when it comes to advances in financial inclusion. Countries like Kenya and Vietnam have been leapfrogging the US. While tens of millions of Americans remain unbanked or underbanked, these countries are rapidly developing modern financial systems, introducing millions to services previously unavailable to them.
Of course, emerging market environments differ dramatically from mature markets like the United States, and solutions cannot be simply copy-pasted from one market to another. But given the rate of progress in each of these countries, it is worthwhile to look at how they did it and where the US may be falling short.
The catchphrase “it is expensive to be poor,” continues to be true in the US. While wealthy customers are lured by financial institutions with juicy sign up offers, fee waivers and complimentary golf tee times, those at the bottom of the pyramid pay for every basic service, including human tellers, paper statements and monthly account maintenance fees.
For many, the inability to even get to a physical branch — bank branches are highly concentrated in urban areas — means that they don’t have access to banking services at all. As a result, about 6.5% of American households still don’t have a bank account, while another 18.7% are “underbanked” — they have an account, but also use check-cashing or payday loans. In all, over 60 million adults are unbanked or “underbanked” in this country.
It doesn’t need to be so. In Kenya, for example, 82% of inhabitants have a financial account, the highest in Sub-Saharan Africa, according to the World Bank, and almost double what it was in 2011.
That Kenya was able to accelerate while the US stood still is thanks in large part to mobile wallet system M-Pesa. This low-tech innovation — it is offered on regular mobile phones, not just smartphones — came to Kenya long before Venmo became the latest craze among Millennials.
Launched in 2007 by mobile operator Safaricom, M-Pesa allows users to pay for everything from their utility bills to food at street stands. The system is simple: People store money in digital wallets on their phone and use that wallet to pay for services by sending it instantly via text message to other users for little or no cost.
Convinced by its benefits, Kenyans adopted the technology in masses. Not only did virtually everyone with a financial account adopt the M-Pesa platform, so too did millions of people who previously did not have any financial accounts. Indeed, 73% of Kenyans use a mobile money account, according to 2018 World Bank data.
A similar evolution happened in Vietnam. After decades of war and failed economic policies turned it into one of the world’s poorest countries, Vietnam has since become an economic “mini China” over the past decade as a mobile revolution takes hold. Smartphones and their subscriptions are relatively cheap, bringing millions of Vietnamese online.
The results are arriving at lightning speed. As of 2014, the World Bank noted, only one in three people had an official bank account in Vietnam. That’s less than half of the global average. But as e-wallets emerged as an alternative, many more are getting access to the financial system.
MoMo, an online payment service in Vietnam, already has 5 million users. And just last month, Grab, Southeast Asia’s Uber, launched its mobile payment solution GrabPay, which is expected to bring many millions more in the financial system.
Such initiatives also exist in the US. Many people by now use PayPal, Venmo, Zelle or some other mobile banking app. And a recent US Treasury report on financial technology highlighted that in the last seven years, more than 3,330 new “fintech” companies have been founded. They provide a wide range of financial services, including lending to small businesses that historically had difficulty getting loans, digital payments and investing.
Yet rapid and large-scale adoption of financial innovation in the US still remains a challenge. While emerging markets like Vietnam still lag behind on financial inclusion overall, they are often in a position to jump ahead as they are not burdened by the outdated customs and infrastructure established in developed countries.
No consumer in Kenya, for example, would dream of ever writing a paper check. Meanwhile, in the US, paper checks remain an annoying, yet accepted part of financial life.
So what does the US need to do?
First, expand mobile coverage in rural America. The Federal Communications Commission estimates that 30% of people living in rural America lack broadband access. Many of these approximately 15 million Americans will remain cut off from broadband Internet and also from basic financial services if government and mobile operators don’t take action.
In the 1930s and 1940s, the federal government established a system of grants and loans to ensure universal access to electricity and telephone service. Businesses and urban customers were charged a slight premium in order to subsidize the cost of rural connectivity expansion. A similar approach might work for expanding broadband access today.
Second, improve financial literacy. Efforts to teach high school students basic finance skills have been picking up over the past couple of years. These efforts are mostly focused on low-income communities, and they tend to bear fruit.
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But the lack of financial literacy in the US is bigger than high school kids. Making sound financial decisions requires constant relearning. The low-interest rate environment of the past decade, for example, fundamentally reshaped the way employees should approach retirement savings. Excessive borrowing, too, continues to create significant challenges for many American households.
Third, update rules and regulation from policy makers and central banks so they encourage, rather than inhibit, innovation. A patchwork of state regulators and heightened uncertainty on the future direction of regulation make it difficult for fintechs to scale businesses and creates headaches for investors looking to fund them or traditional banks considering to partner with them.
While the US remains home to some of the biggest names in the space, more unicorns are appearing elsewhere, particularly in innovation-friendly ecosystems in Asia. One quick fix regulators should consider: Introducing “sandboxes,” or areas where regulation enables responsible experimentation. They would allow providers to test new solutions on a limited scale first before rolling them out to larger customer groups.
If the government and private sector take action on these and other fronts, full financial inclusion may one day be possible in the US. Many Americans may never have thought they could get there by learning from Kenya and Vietnam. But that may be exactly what the US needs to do.