How Faster Payments Empower Financial Inclusion in Banking
- All, Insights
Under the influence of technology, organizations, and customers receive more advanced, convenient, and high-quality financial services. However, financial exclusion is the other side of the coin, which leaves certain social groups behind in the fintech ecosystem.
The solution to this problem requires a comprehensive approach composed of social, economic, and, paradoxical as it sounds, technological measures. Instant digital payments are one such technological measure that allows financial organizations to expand their customer base and promote financial inclusion initiatives.
The current state of financial inclusion in banking
Fintech and financial inclusion are advancing rapidly. Just several years ago, many elements of modern banking that users actively use daily seemed like brand-new ideas.
- The world’s first ATM appeared in 1967. Today, there are about 3 million ATMs worldwide.
- In 1970, 51% of households in the USA had credit cards. Now, the percentage of US cardholders has reached 82%.
- In 1994, the first online payment was made. In 2022, the volume of digital payments reached $12.3 trillion, and it is expected to hit $20 trillion by 2027.
Despite the expansion of financial technologies, many fintech services remain inaccessible to specific demographics. A look at global statistics demonstrates that global financial inclusion is uneven among countries and regions and may bypass certain age and social groups of society.
- Digital payments gained the most significant adoption in the Asia-Pacific region, followed by North America and Europe. These payments are least developed in Latin America and Middle East Africa. However, the growth trend of digital payments is observed across countries. It is expected that the global CAGR will reach 11.8% by 2028, with the volume of global digital payments solutions increasing from $112.2 billion in 2023 to $193.7 billion in 2028.
- Instant payment processing is leading in countries such as India, Brazil, China, Thailand, and South Korea. At the same time, instant payments in Europe and North America are slower, but these regions are on their way to establishing inclusive finance through a faster payment system.
- The most unbanked countries are Morocco, Vietnam, Egypt, Philippines, and Mexico, with the percentage of the unbanked population varying from 63 to 71% here.
- It’s worth noting that developed regions of the world are not the best examples of digital financial inclusion either. For instance, in the USA, 6% of adults were considered fully unbanked in 2022. This means that neither they nor their spouse or partner had a checking, savings, or cash account. The highest percentage of unbanking was observed among people with an income of less than $25,000 per year and in the age category of 18-29 years.
Challenges of financial inclusion
Access to financial services is crucial in overcoming poverty. The United Nations has identified financial inclusion as one of the key sustainable development goals. However, various challenges hinder global financial inclusion.
Financial inclusion technology. Modern finance is increasingly dependent on technology. Digital real-time payments involve an internet connection, mobile or desktop devices, and behind-the-scenes mechanisms for data storage, transmission, and encryption. Considering that two-thirds of the population is unconnected, governments should focus on establishing widespread Internet connectivity, and fintechs should work on error-free transactions that are resistant to network interruptions.
Financial inclusion cost. Technology comes with additional costs. After all, money is needed to create and maintain a payment infrastructure, and this money, as a rule, is collected from transaction participants in the form of commissions. Governments and investors should support fintech companies with additional cash injections to encourage consumers to use fintech services. Fintech companies, in turn, should look for more affordable instant payment methods, using innovative technologies and reducing fees.
Cybersecurity and data protection. The digitization of financial transactions leads to new types of financial fraud. Cybercriminals use technologically advanced and sophisticated methods to gain access to payment data. This necessitates financial institutions to implement more thorough checks on customers before providing them with financial services. Consequently, some customers may be unfairly denied financial services. In light of this, fintech companies must develop Know Your Customer (KYC) procedures that provide a complete picture of potential clients. Such procedures must not only conduct a detailed check but also be bias-free. Artificial intelligence (AI) and machine learning (ML) are now increasingly utilized for such systems. Banks seeking to establish secure instant payments should partner with payment service providers (PSPs) that have advanced cybersecurity and KYC measures in place.
How instant payment can promote inclusive finance
Instant payments are a powerful tool for financial inclusion due to their innovation and customer orientation. Implementing instant payments benefits both businesses and customers because it involves more social groups in the financial ecosystem, offering more convenient and accessible financial services.
Creating a faster payment system is not done overnight; it is a step-by-step process that requires effort from public banking institutions and fintechs. However, countries are gradually progressing toward creating an effective instant payment infrastructure, enabling instant payment for a broader range of consumers worldwide.
Instant payments were invented to make payments immediately, that is, at the moment the transaction is executed. Unlike other types of transactions, instant payments do not have a delay in debiting money from the payer’s account and crediting it to the payee’s account. This immediacy allows real-time payments to attract and retain customers while promoting financial accessibility. The following benefits of real time payments make them a powerful tool for creating fintech financial inclusion.
Benefits of real time payments for customers
Control over the account balance. For many years, cash and cheques were the dominant payment methods. Even now, the number of cheque transactions remains relatively high. Users often chose cheques because they seemed safer than electronic payments, especially for expensive purchases. At the same time, the problem with cheques was the lengthy period needed to debit money from the payer’s account; sometimes, it could take up to 5 days. This situation made it impossible for the user to have up-to-date information about the account balance and prevented the ability to plan future purchases.
The emergence of the COVID-19 pandemic has disrupted electronic payments and pushed users to abandon outdated payment methods. The main advantages of digital payments were faster balance recalculations, but they are still not instantaneous.
Real-time payments enabled immediate remittances and balance recalculation. As soon as the customer makes a purchase, the money is instantly debited from their account, and the balance is updated. This allows the customer to have up-to-date information about the available funds and plan their budget wisely.
Zero unexpected costs. During an electronic payment, a set of actions is launched to check whether there are sufficient funds in the payer’s account. However, the problem with non-instant payments is that the payment authorization and the actual settlement do not occur simultaneously. The delay between these two operations often counts for several hours or even days. In many cases, this situation leads to an overdraft. As a result, a customer faces unexpected fees charged for credit usage. According to a report on banked and unbanked households issued by the Federal Deposit Insurance Corporation, unexpected bank commissions are the main reason why some people don’t open a bank account.
Instant payment methods solve the problem of unexpected fees. At the moment of the transaction, the bank checks the availability of the required amount in the account and authorizes the transaction; the real time payment platform immediately debits the required amount. Thus, the customer always has up-to-date information about the available funds and the account balance. The customer can also set the necessary settings so the balance does not go into negative value. Consequently, the purchase will simply be blocked if there is not enough money in the account, and the customer doesn’t face the risk of unwanted costs.
Improved financial flexibility. People often find themselves in situations where they need to make a payment here and now. This may apply not only to purchases but also to person-to-person (P2P) transfers. In urgent situations, every second can be critical. This is where the role of faster payments becomes crucial.
Imagine, for example, that a child calls their parents asking to transfer money to buy a bus ticket. Instant payments provide indispensable help here. The parent just needs to press a couple of buttons in the application to transfer money. They do not need to pick up the child personally, ask someone to bring the money to the child, or wait several hours for the transferred money to be credited to the child’s account.
This convenience becomes a necessity in a fast-paced, technologically oriented world. It encourages more people to use digital payments and promotes diversity and inclusion in financial services.
Benefits of real-time payments for businesses
Immediate availability of funds. Small businesses often lack sufficient accumulated funds to invest in subsequent purchases. They require quick deposits of money from buyers to replenish their inventory and continue selling activity. This situation is particularly relevant for businesses dealing with perishable goods. Fast cash flows enable them to update their stock and resell it to customers immediately. The importance of instant payment for such businesses cannot be overstated. They allow companies to receive funds for sold goods immediately and use them to purchase the next batch of goods in no time.
Fast business-to-customer payments. Real-time payments allow businesses not only to accumulate funds quickly but also to transfer these funds to their customers quickly. This capability is critical for some companies, such as insurance firms. It enables an instant transfer of the required amount in case an insurable event occurs. When such an event involves serious physical injury, illness, or loss of home, receiving the insurance amount immediately can provide significant support to the affected person. By providing such prompt service, the company strengthens its reputation since it demonstrates that it cares about its customers’ well-being.
Ability to request payments. Modern instant payment platforms offer a variety of digital transaction options. They allow businesses to receive and make payments and also give them the ability to request payments from clients or business associates. This can be especially useful for service-oriented companies that charge for the work performed rather than having set prices for specific service packages. For instance, car rental companies, copywriting agencies, or taxi services can benefit significantly from request-for-payment.
Enhanced security. Businesses that work with online payments should pay increased attention to the safety of payment data. Today, the skills of cyber criminals are developing along with modern technologies. So, cybersecurity strategy should be a priority for businesses that value their reputation and have ambitious goals for development. Real-time payments offer stronger security compared to other types of digital payments. This is because instant payment removes the window between payment confirmation and execution. As a result, the opportunities for malicious activities are reduced, and the chance to detect an unauthorized transaction rises.
Reduced costs. Instant payment eliminates the need for lengthy clearing and settlement processes. This reduces the risk of failed transactions and minimizes time value for money. Additionally, real time payments platforms eliminate the need for manual reconciliation. This allows businesses to have automatic settlements and save on administrative costs. On top of that, modern PSPs use advanced technologies to enable secure instant payments. Among other things, they utilize blockchain for financial inclusion and faster payments. This mitigates the risk of fraud and prevents organizations from financial losses.
Developing inclusive finance with DCM
The importance of financial inclusion lies in promoting economic growth, reducing poverty, and opening up new opportunities for business. By providing convenient, secure, and fast financial services, fintech companies and traditional banks contribute to the development of the economy, expand their customer base, and strengthen their reputation.
Instant payments empower financial inclusion by providing monetary transactions at reasonable prices and in the shortest possible time.
Businesses that want to integrate instant payments need to partner with a reliable PSP with deep expertise in financial technologies. DCM is one such provider that stands at the forefront of secure real-time payments. Thanks to innovative technologies, we close the gap between traditional and digital finance and contribute to financial inclusion.
Are you ready to join the ranks of inclusive finance ambassadors? Contact us, and we will help you take the first steps toward more efficient and faster transactions using our interoperable instant payment platform.
info@dcm.systems
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