Emerging markets are ‘banking’ on growth

The pandemic accelerates financial inclusion in developing countries

30 June 2021 Henry Ward, Analyst

The pandemic has slashed global economic growth. But opening access to banking could unlock new growth drivers. Switching from cash towards digital payments could boost annual GDP by as much as 1 per cent in mature economies, according to some estimates – but by more than 3 per cent in emerging markets.

Countries with the greatest capacity for growth in bank account access are Argentina, Colombia, Egypt, Indonesia, Mexico, Peru, the Philippines, and Vietnam – each with less than 50 per cent banking coverage.

Global extreme poverty – living on below USD1.90 a day – increased last year for the first time in two decades. But bringing workers into the formal economy enables them to save, receive payments securely, and borrow more cheaply.

Financial inclusion is vital for growing e-commerce in emerging markets. Firms can expand into new areas at lower cost and enlarge their customer bases, creating new jobs.

The World Bank estimates that digitising all government payments could turn 100 million unbanked people into bank customers. Social-benefit programmes during COVID-19 brought 40 million people in Argentina, Brazil, and Colombia into the banking system, with Brazil’s unbanked population falling by 73 per cent.

Even when emergency payments end, these people will remain online and financially included.

The pandemic accelerated the global demise of cash, as consumers purchased online or used contactless cards and smartphone wallets. But since 2010, the reduction in cash usage has been greatest in advanced economies because less than half the population in many emerging markets have bank accounts.

That is changing quickly as internet access and smartphone adoption increases. Kenya’s central bank, for instance, encouraged mobile payments during the pandemic by eliminating transaction fees on low-value transfers.

Bank accounts are safe and private places to save, but they also provide access to credit and other financial products. Digital finance could increase the GDP of all emerging economies by 6 per cent by 2025, according to one estimate, creating 95 million jobs as a potential USD2 trillion in new credit flows into markets.

The main drivers of banking adoption are economic development, financial infrastructure, technology, and urbanisation. Poverty and low incomes prevent people from saving, financial literacy is often lower in emerging markets, and in rural economies, banks can be far away.

Internet and mobile phone access track closely to bank account uptake, but only 40 per cent of adults in developing economies had access to both in 2017, compared with 82 per cent in the developed world.

A better, broader technology environment across the emerging world could involve new forms of payments, including stablecoins – fixed-value cryptocurrencies – and the central-bank digital currencies being developed in several markets, including mainland China.

However, the starting point for financial inclusion in emerging markets is not uniform. Markets with the wealth and technological ability to set up massive payment infrastructures will be among the first to expand banking access rapidly, as already seen with mainland China.

But demographics are also important. Young people in emerging markets are becoming smartphone users much faster than their parents, especially in Latin America and South Asia, including Indonesia and the Philippines.

Urbanisation also brings people closer to bank branches, technology, and higher-wage jobs, so movement to cities in Egypt, Peru, and Vietnam should boost banking access.

First published 17th June 2021.

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