Financial inclusion The role of finance

A quarter of the world's adult population is unbanked, which means they have no access to formal financial institutions such as banks and mortgage lenders. People who experience financial exclusion are often also socially marginalized and disadvantaged in other ways, for instance as a result of poverty and low educational attainment, or due to their gender, ethnicity, citizenship, or refugee status.

FAST, which stands for Finance Against Slavery & Trafficking, is a multi-stakeholder initiative that works to mobilise the financial sector to address modern slavery. Financial institutions may be connected to human trafficking through their own operations or business relationships, and it's precisely because the sector is so intertwined with the global economy that action by financial organisations can change the way this operates. The FAST initiative aims to lead this transformation through an ambitious and innovative strategy.

The need for financial access

Individuals who lack access to finance often turn to informal service providers like loan sharks, which can lead to them borrowing money at exorbitant rates, and even to debt bondage, when they are forced to work for low or no wages to repay their loans. Many will never be able to accumulate sufficient capital or savings to strengthen their financial resilience, and they may not be able to access social safety nets offered by government. Very often, the survivors of modern slavery and trafficking who cannot use formal financial services become dependent on informal economies and cash-based transactions, which puts them in danger of re-exploitation.

Financial inclusion promotes resilience in both individuals and communities. "FAST works in partnership with civil society, governments, and many others to achieve the inclusion targets within the UN Sustainable Development Goals," explains Alice Eckstein, Project Director of the FAST initiative. "Many of the pivot points for us have been around working to remove the profit motive for traffickers to engage in these forms of human exploitation, finding ways to apply leverage along value chains and helping to close the unbanked gap."

What this means in practice is promoting a set of actions to proactively bring as many people as possible into the formal financial system, as well as thinking how this can extend beyond just basic banking services to include more sophisticated products such as credit, savings, investment, and even financial literacy training. To do this, though, requires understanding where the pinch points are. What are the barriers to access and usage, and the experiences of those who are excluded?

Refining “know your customer” rules

In the UK, Canada, and the US, through the FAST-managed Survivor Inclusion Initiative (SII), financial regulators, supervisory organisations, and financial institutions have worked together to simplify their 'know your customer' processes, allowing for manual interventions in automated systems. These novel approaches, highlighted in FAST briefings, have helped to address the specific challenges that survivors of modern slavery often experience, such as the lack of identity documents, poor credit histories, and no permanent or safely shareable address. The SII has helped over 3,000 survivors to access basic banking services.

This effort has also inspired a number of banks to go further in what they offer. Some have provided survivors with financial education. Others have enabled survivors to use financial products with which to rebuild their credit status. Yet others have worked to provide safe and manageable lines of credit for survivors to set up their own businesses and access education.

Interestingly, there has also been a simplification of 'know your customer' rules in the wake of the Ukrainian refugee crisis in Europe. Leona Vaughn, Vulnerable Populations Lead at FAST explains, "This has allowed us to establish specific principles and proofs of concept that can be extended to other jurisdictions." For instance, it is possible to let applicants delay the presentation of identity documentation, or to accept alternative forms of identity documents. 

Building a more robust financial infrastructure

FAST has also been working to break down barriers that affect entire communities, as well as individuals. "In Haiti, for example, we've looked at the lack of a financial infrastructure, which makes the whole community vulnerable," says Vaughn. "We found that communities were self-organising financial services in the absence of external infrastructure, through community lending and the pooling of resources. These are activities that financial regulators can build on to create more robust structures."

The various simplified models that financial institutions have employed globally, including hugely successful schemes in Latin America, have helped FAST understand how financial barriers can be addressed, and extended to other contexts. "In turn, that means we can help civil society and governments to think carefully around targeted interventions to improve financial access for marginalized groups and those that might be considered very high risk," Vaughn concludes.

Both Eckstein and Vaughan confirm that while regulation is important, financial institutions have an opportunity to innovate further when it comes to the delivery, use, and design of financial services. For example, harnessing technology to provide people with more accessible, appropriate, and affordable ways to improve their financial health, or in the case of digital finance operators in the Global South, using  technology to offer embedded financial services, such as pay-as-you-go renewable energy payment models, and mobile payments for health insurance. 

Financially accessible remittance services

Vaughn points to work that FAST has done with Western Union to explore survivors' needs for affordable remittance services. "Cost is an issue here. Survivors desire a very transparent way of communicating what those charges are, because monetary transactions have often been a traumatic issue for them," she says. "Financial services companies need to invest in understanding their customer base and by doing so, will make services more accessible and relevant to survivors and the needs of other vulnerable populations."

But, explains Eckstein, these technologies and innovations are not universally available. For instance, since women are under-represented as mobile phone owners globally, they are often excluded from services based on this technology. So there is a significant opportunity here for investors to help in the development of inclusive fintech.

Changing lives through financial inclusion

For finance to be truly inclusive, providers have to understand the diverse needs of their clients and how they may experience barriers to access. Meanwhile, innovations designed to ensure financial inclusion for traditionally marginalized communities have already created significant opportunities to reach more people globally, and to provide financial services that are effective, relevant, and secure. FAST's guidance shows how these services are offering survivors and other vulnerable populations increased independence and financial resilience, while also aiding the battle against modern slavery and human trafficking.