Technology-based financial innovation has transformed the financial sector. In particular, financial technology (FinTech) firms have revolutionised financial services for the historically underbanked or unbanked, who can now access, transfer and save money, particularly in parts of the world where mobile phones are affordable but institutionalised banking is limited. For example in Kenya, the sixth poorest country in Africa, mobile payments system M-Pesa has 17 million users and transacted 42% of Kenyan GDP in 2014-15.
This gain toward financial inclusion is to be welcomed; however, just as FinTech has opened or increased access to financial services for some sectors of society, it has prompted a reduction in access to financial services for others, in the form of a loss of local traditional banking institutions.
Bank Foreclosures Soar
Given the explosion of mobile banking in recent years, it is perhaps unsurprising that banks are closing their bricks and mortar branches at record rates.
In the U.K. there were 479 documented closures in 2014, of which 124 were “last bank in the community” closures, meaning local people were left without any traditional banking institution.
Alternative banking locations, such as the post office, have also seen significant closures in recent times with nearly 7,000 shutting up shop since 2000. Prominent figures from the banking community have explicitly referenced online banking as a driver of branch closures. Comparable trends have been witnessed in the U.S., with one financial institution closing a fifth of its branches in five years.
Marginalising Those Without Internet Access
These closures, and the FinTech disruption galvanising them, have the potential to marginalise certain sectors of society, at least temporarily.
A study published earlier this year by Ofcom found that 15% of adults in the U.K. do not have household access to the internet, and interestingly the overwhelming majority of this group have no intention of gaining access in the future.
Furthermore, of those adults in the U.K. who are not online, they are most likely to be over 65 years old and in lower-income households. This elder, less well-off group will likely struggle to access smartphone or online banking when faced with the disappearance of their local traditional banking institutions.
There is a risk that when this vacuum occurs, these people may approach, or be approached by, more predatory forms of financial services. We have already seen the impact pay-day lenders, who are only a phone call away, had on vulnerable customers.
The financial industry should remain alive to these concerns to ensure that financial inclusion for one individual does not come at the cost of financial exclusion for another.
This post was co-authored by Willis Towers Watson Wire blogger Jagdev Kenth.