Financial Inclusion: Addressing the Unbanked and Underbanked Populations Globally

Abstract

Financial inclusion stands as an indispensable pillar for achieving equitable economic development and fostering social upliftment globally. It encompasses the vital process of ensuring that individuals, households, and businesses, particularly those traditionally marginalized, gain meaningful and sustained access to a comprehensive spectrum of useful, affordable, and responsible financial products and services. These services span fundamental offerings such as savings mechanisms, credit facilities, insurance coverage, and efficient payment systems. Despite significant advancements over the past decade, a profound global challenge persists: a substantial segment of the world’s population remains either entirely unbanked or severely underbanked, disproportionately concentrated in developing economies and fragile states. This comprehensive report meticulously examines the expansive global scope of financial exclusion, delving into its intricate underlying causes across economic, geographical, social, cultural, and technological dimensions. Furthermore, it rigorously assesses the profound socio-economic implications of this exclusion, affecting individual well-being, national economic trajectories, and broader social stability. Finally, the report undertakes an in-depth evaluation of the multifaceted initiatives, innovative policy frameworks, and transformative technologies, including groundbreaking financial technology (fintech) solutions, that are currently being deployed and refined to champion and accelerate financial inclusion for these critically underserved demographics.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction

Financial inclusion, at its core, represents the aspiration that every individual and enterprise, irrespective of their socio-economic standing or geographical location, possesses the ability to access and effectively utilize a range of appropriate financial products and services. These services are designed not merely for transactional convenience but as tools for economic empowerment, risk management, and wealth creation. The concept extends beyond mere access to formal financial institutions; it encompasses the responsible provision of services that meet genuine needs, are affordable, convenient, and delivered with integrity. The World Bank’s Global Findex database, a seminal source of financial inclusion data, revealed in its 2021 edition that despite considerable progress, approximately 1.4 billion adults worldwide still lacked access to formal financial services (World Bank, 2021). This staggering figure, while an improvement from 1.7 billion in 2017 (idemia.com, 2020), underscores the persistent magnitude of the challenge. The absence of access to formal financial mechanisms profoundly impedes economic growth, exacerbates poverty cycles, entrenches social inequalities, and undermines individual and collective resilience against economic shocks. Consequently, a deep, nuanced understanding of the multifaceted nature of financial exclusion is not merely academic but absolutely imperative for the design and implementation of effective, scalable, and sustainable strategies aimed at seamlessly integrating unbanked and underbanked populations into the formal financial system.

Historically, financial services were predominantly the preserve of urban, affluent, and formally employed populations. Traditional banking models often struggled to serve low-income individuals due to high transaction costs, lack of suitable products, and stringent identification requirements. The advent of microfinance in the latter half of the 20th century, pioneered by institutions like Grameen Bank, marked a significant paradigm shift, demonstrating the viability of providing small loans and savings services to the poor. More recently, the digital revolution, particularly the widespread proliferation of mobile phones, has catalyzed an unprecedented opportunity to leapfrog traditional infrastructure barriers and deliver financial services directly to the fingertips of previously excluded populations. This report seeks to provide a detailed exposition of these dynamics, highlighting the urgency and transformative potential inherent in achieving universal financial inclusion.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Global Scope of Financial Exclusion

2.1 Unbanked and Underbanked Populations

The global landscape of financial exclusion is characterized by two primary categories: the ‘unbanked’ and the ‘underbanked’. The unbanked are individuals who have no formal relationship with any financial institution; they operate entirely outside the formal financial system, relying solely on cash, informal lending networks, or community-based savings groups. The underbanked, by contrast, possess some connection to the formal financial system, such as a basic bank account, but their access is limited, or they predominantly rely on alternative financial services (AFS) that are often high-cost and predatory. Examples of AFS include payday loans, check-cashing services, pawn shops, and high-fee remittance services. In the United States, for instance, a significant proportion of adults, approximately 22%, fall into the unbanked or underbanked categories, representing an estimated 63 million people (lumindigital.com, n.d.). This highlights that financial exclusion is not solely a developing world phenomenon, though its scale and impact differ significantly.

Globally, the vast majority of the unbanked population resides in developing countries, particularly in regions that combine large rural populations with low per capita income and underdeveloped financial infrastructures. Sub-Saharan Africa and South Asia consistently show the highest rates of financial exclusion. In some countries within these regions, more than 50% of adults remain unbanked. Other regions, such as parts of Latin America, the Middle East, and North Africa, also contend with substantial unbanked populations, albeit with varying national specifics. While the overall number of unbanked adults decreased from 1.7 billion to 1.4 billion between 2017 and 2021 (World Bank, 2021), this progress was largely driven by the expansion of mobile money and digital payments in certain economies, notably in Sub-Saharan Africa and parts of Asia. However, significant pockets of exclusion persist, particularly among specific demographic groups and in remote areas. Furthermore, the COVID-19 pandemic, while accelerating digital adoption in some contexts, also highlighted vulnerabilities among those without access to digital financial services, reinforcing the urgency of inclusion efforts.

Measuring financial exclusion accurately presents methodological challenges. Data is often collected through surveys, which can sometimes understate the extent of informal financial activity or misrepresent the nuanced definition of ‘access’. Moreover, the definition of ‘formal financial services’ can vary, impacting cross-country comparisons. Despite these challenges, the consensus among development organizations and financial regulators is that a significant proportion of the global population remains outside the ambit of safe, affordable, and useful financial services.

2.2 Demographic Disparities

Financial exclusion is not uniformly distributed across populations; instead, it disproportionately affects specific demographic groups, exacerbating existing inequalities.

Gender: Women consistently face greater barriers to financial inclusion than men. Globally, in developing economies, 56% of unbanked adults are women (lumindigital.com, n.d.). The World Bank’s 2012 data indicated that women were 28% less likely than men to have a bank account in developing countries (worldbank.org, 2012). While this gap has narrowed to 6 percentage points globally by 2021 (World Bank, 2021), it remains a significant issue. This disparity stems from a confluence of factors including lower levels of literacy and education, legal and social restrictions on property ownership, limited mobility, lack of identification documents, lower income levels, and cultural norms that restrict women’s autonomy over financial matters. In some societies, women may face social barriers to interacting with male bank staff or may not have the legal right to open an account without a male relative’s consent. Mary Ellen Iskenderian, President and CEO of Women’s World Banking, emphasized the mission to ensure one billion women have bank accounts by 2025, underscoring the scale of this challenge and the targeted efforts required (reuters.com, 2025).

Age: Younger adults (15-24 years old) are often more likely to be unbanked or underbanked due to factors such as irregular employment, lack of a stable income history, insufficient funds to meet minimum balance requirements, or a general lack of understanding of financial products. Conversely, some elderly populations, particularly in rural areas, may also face exclusion due to limited mobility, lack of digital literacy, or absence of identification documents.

Income and Poverty: Poverty is arguably the most significant driver of financial exclusion. Individuals with limited and irregular incomes often perceive traditional financial services as too expensive (due to fees or minimum balance requirements) or irrelevant to their immediate needs. They may lack the consistent savings or collateral required for formal credit. This creates a vicious cycle where exclusion perpetuates poverty by denying access to tools for wealth accumulation and risk mitigation.

Rural vs. Urban Populations: Individuals residing in rural and remote areas face significant geographical barriers. The cost of establishing and maintaining physical bank branches or ATMs in sparsely populated regions is prohibitive for many financial institutions. Limited infrastructure, such as unreliable electricity and internet connectivity, further compounds this challenge, hindering the adoption of digital financial services.

Minority Groups and Indigenous Populations: These groups often experience higher rates of financial exclusion due to systemic discrimination, lower educational attainment, language barriers, lack of widely accepted identification, and cultural differences that may make traditional banking models less appealing or accessible.

Refugees and Displaced Persons: A critically vulnerable group, refugees and internally displaced persons often lack formal identification documents, stable addresses, or verifiable income sources, making it extremely difficult for them to access basic financial services, even for humanitarian aid disbursements. This exclusion further compounds their pre-existing vulnerabilities.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. Causes of Financial Exclusion

Financial exclusion is a complex phenomenon stemming from an interplay of economic, geographical, social, cultural, technological, and regulatory barriers. Understanding these root causes is paramount for developing targeted and effective interventions.

3.1 Economic Barriers

Economic constraints form the bedrock of financial exclusion, particularly for low-income individuals. The perceived or actual high cost of formal financial services acts as a major deterrent. These costs manifest in several ways:

• Minimum Balance Requirements: Many traditional bank accounts impose minimum balance requirements, which are often out of reach for individuals living hand-to-mouth or with irregular income streams.
• Account Maintenance Fees: Monthly or annual fees, transaction charges, and dormancy fees can quickly erode small savings, making formal accounts appear unattractive or unsustainable for the poor.
• High Loan Interest Rates: While formal credit can be empowering, some regulated lenders may still charge interest rates that are perceived as high by low-income borrowers, or the application process may be complex and require collateral they do not possess. This often pushes them towards informal, unregulated lenders who may charge even higher rates but offer easier access.
• Lack of Sufficient Funds: For many, the primary reason for not having a bank account is simply a lack of money. They may feel they do not earn enough to warrant opening an account or do not have surplus funds to save or invest.
• Irregular Income: Individuals engaged in the informal sector, agriculture, or precarious employment often experience highly irregular income flows. Traditional financial products are often structured for predictable, salaried income, making them ill-suited for this demographic.
• Over-indebtedness: In some cases, individuals may avoid formal financial institutions due to existing debt burdens or a history of defaulting on loans, fearing legal repercussions or further financial instability.

3.2 Geographical Constraints

Physical distance and limited infrastructure pose significant hurdles, especially in developing regions.

• Lack of Physical Infrastructure: Many rural and remote areas lack basic banking infrastructure, including bank branches, ATMs, or even reliable internet connectivity. Traveling long distances to reach the nearest banking point can be costly, time-consuming, and unsafe, making frequent transactions impractical.
• Limited Agent Networks: Even with the rise of mobile money, the density and liquidity of agent networks (cash-in/cash-out points) can be insufficient in remote areas, limiting the practical utility of digital financial services.
• Poor Transportation Networks: In many parts of the world, inadequate roads and public transportation systems exacerbate the challenge of physical access, further isolating communities from financial services.
• Security Concerns: In areas prone to conflict, civil unrest, or high crime rates, financial institutions may be reluctant to establish branches or deploy agents, citing security risks to personnel and assets.

3.3 Social and Cultural Factors

Beyond economic and geographical limitations, deep-seated social and cultural dynamics significantly influence financial inclusion.

• Lack of Trust and Financial Literacy: A fundamental barrier is a pervasive mistrust of formal financial institutions, often rooted in historical exploitation, perceived corruption, or a lack of transparency. Many potential clients do not understand the benefits of formal financial services, nor do they possess the basic financial literacy required to navigate complex products or protect themselves from fraud. Financial literacy encompasses budgeting, saving, understanding interest rates, and recognizing investment opportunities, and its absence leaves individuals vulnerable and hesitant to engage with the formal system.
• Lack of Official Identification Documents: A staggering number of individuals globally, particularly women, refugees, and marginalized communities, lack basic proof of identity such as birth certificates, national ID cards, or utility bills. Without these foundational documents, individuals cannot meet Know Your Customer (KYC) requirements, effectively barring them from opening bank accounts or accessing formal credit. This is a primary cause of exclusion for millions.
• Cultural Norms and Practices: Traditional community-based financial practices, such as Rotating Savings and Credit Associations (ROSCAs) or informal money lenders, are deeply ingrained in many societies. While these informal systems provide essential services, they can also act as a comfortable alternative, reducing the perceived need for formal banking. In some cultures, there may be a preference for cash transactions over digital ones due to tradition or a lack of understanding.
• Discrimination: Explicit or implicit discrimination based on gender, ethnicity, religion, disability, or social status can prevent individuals from accessing financial services. For instance, disabled individuals may face physical barriers in bank branches or a lack of accessible digital interfaces.
• Language Barriers: In multilingual societies, a lack of financial service information or customer support in local languages can deter potential users.

3.4 Technological Limitations

While technology offers immense promise for inclusion, its absence or misuse can also be a barrier.

• Limited Access to Devices and Connectivity: Despite widespread mobile phone penetration, a significant digital divide persists. Many unbanked individuals may not own a mobile phone, particularly a smartphone, or may not have access to a reliable and affordable internet connection. The cost of data plans or devices can be prohibitive.
• Lack of Digital Literacy: Even with access to devices, many individuals, especially the elderly or those with low educational attainment, lack the digital skills necessary to operate mobile banking apps, understand transaction prompts, or protect themselves from online fraud. This ‘digital readiness’ gap is a crucial barrier to the adoption of fintech solutions.
• Unreliable Power Supply: In many developing regions, unreliable electricity supply poses a challenge for charging mobile devices and maintaining the uptime of agent terminals or network infrastructure.
• Lack of Interoperability: A lack of seamless interoperability between different mobile money operators, banks, and payment systems can fragment the digital ecosystem, making it difficult for users to transact across platforms and limiting the utility of digital money.

3.5 Regulatory and Policy Barriers

Government policies and regulatory frameworks, while intended to ensure financial stability and protect consumers, can inadvertently hinder financial inclusion if not appropriately designed.

• Onerous KYC Requirements: Strict and inflexible KYC regulations, often designed for traditional banking in developed markets, can be a major barrier for individuals lacking standard identification documents, utility bills, or a fixed address. Simplified or tiered KYC approaches are crucial for inclusion.
• Restrictions on Non-Bank Financial Institutions (NBFIs): Overly restrictive licensing requirements or operational limitations on mobile money operators, payment service providers, or microfinance institutions can stifle innovation and limit their ability to reach underserved populations.
• Lack of Enabling Legislation: The absence of clear legal frameworks for digital identities, e-money, agent banking, or data protection can create uncertainty for innovators and limit the growth of inclusive financial services.
• Inadequate Consumer Protection: While important, an absence of robust consumer protection frameworks specific to digital financial services can lead to distrust, particularly concerning fraud, unauthorized transactions, or opaque fee structures. This can deter adoption.
• Taxation Policies: High taxes on mobile money transactions or digital payments can disincentivize their use, making cash a more attractive option for low-value transactions.
• Limited Regulatory Sandboxes: A lack of ‘regulatory sandboxes’ – frameworks that allow financial service providers to test innovative products and services in a controlled environment – can stifle innovation that could otherwise benefit the unbanked.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Socio-Economic Implications

Financial exclusion carries profound and far-reaching socio-economic implications, hindering individual prosperity, undermining national development efforts, and exacerbating existing inequalities. Conversely, financial inclusion is widely recognized as a powerful catalyst for sustainable development.

4.1 Economic Growth and Poverty Reduction

Access to financial services is intrinsically linked to economic development at both the micro and macro levels. For individuals, it provides essential tools for economic agency:

• Facilitating Entrepreneurship and Small Business Growth: Access to affordable credit, even small micro-loans, enables individuals to start or expand small businesses, purchase necessary equipment, or manage working capital. This fuels local economies, creates employment opportunities, and increases household income. The World Bank estimates that achieving universal access to banking services could potentially lift 1 billion people out of poverty by 2030 (coinlaw.io, 2025), primarily through enhanced economic participation.
• Promoting Savings and Investment: Formal savings accounts offer a secure and convenient way for individuals to accumulate capital, which can then be invested in productive assets (e.g., farming equipment, livestock, education) or serve as a buffer against unforeseen shocks. Without formal savings, individuals often resort to less secure methods, such as keeping cash at home, which is vulnerable to theft or inflation.
• Mitigating Risk and Enhancing Resilience: Financial services like insurance (e.g., crop insurance for farmers, health insurance) and emergency credit lines provide safety nets that protect vulnerable households from unforeseen economic shocks such as illness, crop failure, or job loss. Without these tools, households are forced to sell productive assets or pull children out of school, pushing them deeper into poverty.
• Boosting Domestic Capital Formation: When individuals save formally, these deposits become a source of capital for banks to lend out, stimulating broader economic activity, investment in infrastructure, and industrial growth. This contributes directly to a nation’s GDP and overall economic stability.
• Reducing Transaction Costs: Digital payment systems significantly reduce the time and cost associated with cash transactions, particularly for remittances or government-to-person (G2P) payments. This efficiency gain frees up resources that can be channeled into more productive uses.

4.2 Gender Equality

Financial inclusion is a powerful instrument for advancing gender equality and empowering women, a critical component of the United Nations Sustainable Development Goals (SDGs), particularly SDG 5 (Gender Equality).

• Economic Empowerment: When women have direct access to and control over financial resources, they are better positioned to start and grow businesses, generate income, and contribute to household finances. This increases their bargaining power within the household and in the community.
• Improved Household Welfare: Evidence consistently shows that when women control financial resources, a higher proportion of income is spent on family well-being, including children’s nutrition, education, and healthcare. This leads to healthier, more educated families and stronger communities.
• Enhanced Decision-Making Power: Financial autonomy enables women to make independent decisions about their lives, their children’s future, and their participation in community affairs, breaking cycles of dependence.
• Reduced Vulnerability: Access to savings, credit, and insurance reduces women’s vulnerability to economic exploitation and domestic violence, providing them with more options and greater security.
• Bridging the Gender Gap: While challenges persist, initiatives specifically targeting women’s financial inclusion are narrowing the gap. The World Bank reported that the gender gap in account ownership in developing economies decreased from 9 percentage points in 2017 to 6 percentage points in 2021 (World Bank, 2021), indicating positive trends driven by digital financial services.

4.3 Social Stability

Financial inclusion contributes significantly to social cohesion and stability by enhancing individual and community resilience.

• Increased Resilience to Shocks: By providing tools to manage economic risks, such as savings, insurance, and emergency loans, financial inclusion reduces the likelihood of households falling into extreme poverty due to unexpected events. This stability at the household level contributes to broader social stability.
• Reduced Inequality: By integrating marginalized populations into the formal economy, financial inclusion helps to redistribute economic opportunities more broadly, reducing income disparities and fostering a more equitable society. This can mitigate social tensions and unrest.
• Enhanced Security and Reduced Crime: Carrying large amounts of cash, a necessity for the unbanked, exposes individuals to a higher risk of theft. Digital payments reduce this risk, contributing to personal safety. Furthermore, by providing legitimate avenues for economic activity, financial inclusion can reduce the allure of informal or illicit economic activities.
• Improved Governance and Transparency: Formalizing financial transactions through digital means can enhance transparency, reduce opportunities for corruption, and improve government’s ability to collect taxes efficiently, leading to better public service provision. When government payments (e.g., social welfare, pensions) are disbursed directly into digital accounts, it reduces leakages and increases accountability.

4.4 Other Implications

• Health and Education Outcomes: Financial access enables families to pay for healthcare services, purchase necessary medicines, or afford health insurance premiums. Similarly, it allows for consistent payment of school fees, purchase of educational materials, and investment in children’s human capital development.
• Efficient Remittances: For migrant workers, sending money home through informal channels is often costly and risky. Formal financial services, particularly mobile money, can dramatically reduce the cost of remittances, ensuring more money reaches the intended recipients, often in rural areas, thereby boosting local economies and improving family welfare.
• Data for Development: The increased transaction data generated by digital financial services can provide valuable insights for policymakers, researchers, and financial institutions to better understand the needs of underserved populations, tailor products, and inform development strategies.

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. Initiatives Promoting Financial Inclusion

Addressing the multifaceted challenge of financial exclusion requires a concerted and collaborative effort from governments, international organizations, financial institutions, technology providers, and civil society. Numerous initiatives are underway globally, employing diverse strategies to expand financial access.

5.1 Government Policies and Regulations

Governments play a pivotal role in creating an enabling environment for financial inclusion through proactive policies and adaptive regulations.

• National Financial Inclusion Strategies: Many countries have adopted comprehensive national financial inclusion strategies that set targets, outline policy priorities, and coordinate efforts across different ministries and regulators. Examples include the National Financial Inclusion Strategy in Pakistan, the Kenya Vision 2030, and Brazil’s focus on universal access.
• Mass Enrollment Campaigns: India’s Pradhan Mantri Jan Dhan Yojana (PMJDY), launched in 2014, is a prime example of a government-led mass enrollment campaign. It aimed to provide universal access to banking facilities, including a basic savings bank account with an overdraft facility, RuPay Debit Card, and accidental insurance cover. By the end of 2023, over 510 million Jan Dhan accounts had been opened, with a total balance exceeding INR 2.08 trillion (approx. USD 25 billion) (PMJDY Dashboard). This initiative significantly boosted financial inclusion in India by simplifying account opening and waiving minimum balance requirements (en.wikipedia.org, n.d.). Such schemes demonstrate the potential for policy-driven approaches to rapidly expand access.
• Simplified KYC and Digital Identity: Governments are increasingly implementing simplified or tiered Know Your Customer (KYC) requirements for basic accounts, reducing the burden of documentation for low-income individuals. The adoption of digital identity systems, like India’s Aadhaar, which links biometrics to a unique ID, has significantly streamlined the KYC process, enabling millions to open accounts easily and securely.
• Agent Banking Regulations: Regulations permitting and governing agent banking networks allow financial institutions to extend their reach beyond traditional branches by partnering with local businesses (e.g., shops, pharmacies) to provide cash-in/cash-out services, account opening, and basic transactions. This significantly reduces the cost of service delivery in remote areas.
• Government-to-Person (G2P) Payments: Shifting government welfare payments, pensions, and salaries from cash to digital accounts is a powerful financial inclusion tool. It introduces recipients to formal financial services, increases transparency, and reduces leakage. Mexico’s Progresa/Oportunidades program and India’s Direct Benefit Transfer (DBT) scheme are notable successes.
• Financial Literacy and Education Programs: Governments often initiate or support national financial literacy campaigns to educate citizens about the benefits of formal financial services, budgeting, savings, and debt management, empowering them to make informed financial decisions.

5.2 International Organizations and Partnerships

Global bodies and multi-stakeholder partnerships are crucial for setting standards, sharing best practices, and coordinating efforts.

• Alliance for Financial Inclusion (AFI): AFI is a global policy leadership alliance of financial regulators and policymakers from developing and emerging countries committed to advancing financial inclusion. Since its inception in 2009, AFI members have made over 920 policy commitments, known as the ‘Maya Declaration’, leading to tangible policy changes and bringing 841 million people into formal financial systems (en.wikipedia.org, n.d.). AFI fosters peer learning and knowledge exchange, enabling countries to learn from each other’s successes and challenges.
• World Bank Group and CGAP: The World Bank Group, including the International Finance Corporation (IFC) and Consultative Group to Assist the Poor (CGAP), plays a leading role in research, policy advisory, and financing financial inclusion initiatives. The World Bank’s Universal Financial Access by 2020 initiative (now extended to 2025) and its Global Findex database are central to measuring progress and identifying priorities. CGAP, a global partnership, focuses on improving the lives of the poor through financial inclusion, providing cutting-edge research and technical assistance.
• United Nations Capital Development Fund (UNCDF): UNCDF works to make finance work for the poor, focusing on building inclusive financial sectors in Least Developed Countries (LDCs) through innovative approaches like digital finance, local development finance, and project finance for small and medium-sized enterprises (SMEs).
• G20 Global Partnership for Financial Inclusion (GPFI): The GPFI is a platform for the G20 countries to advance the financial inclusion agenda, promoting international cooperation, knowledge sharing, and peer learning on key policy issues.

5.3 Financial Technology (Fintech) Solutions

Fintech innovations have emerged as arguably the most transformative force in accelerating financial inclusion, leveraging mobile and digital technologies to reach previously underserved populations at scale and lower costs.

• Mobile Money Services: Mobile money, pioneered by Safaricom’s M-Pesa in Kenya, has revolutionized financial inclusion in many developing countries. Launched in 2007, M-Pesa allows users to deposit, withdraw, transfer money, pay bills, and access credit and savings services via their mobile phones, primarily through a vast network of agents. Its success significantly contributed to Kenya’s banked population rising from 27% in 2007 to 75% in 2017 (idemia.com, 2020). Mobile money thrives where traditional banking infrastructure is sparse but mobile phone penetration is high, offering a low-cost, convenient, and accessible alternative to cash.
• Digital Banks and Neobanks: These fully digital financial institutions operate without physical branches, offering a range of services (accounts, payments, loans) through mobile apps. Their lower operational costs allow them to offer more competitive fees and reach a broader customer base, including those traditionally underserved by incumbent banks.
• Payment Service Providers (PSPs): Companies specializing in facilitating digital payments, often leveraging QR codes, NFC, or online platforms, are expanding access to cashless transactions, particularly for small merchants and consumers in urban and peri-urban areas.
• Insurtech and Healthtech: Technology-driven insurance and health services are developing micro-insurance products tailored for low-income segments (e.g., pay-as-you-go insurance, parametric insurance for farmers) and digital health platforms that integrate payment solutions, improving access to essential services.

5.4 Microfinance Institutions (MFIs)

Microfinance institutions have been instrumental in empowering entrepreneurs, particularly women, by offering financial products tailored to their unique needs, often using group lending methodologies.

• Evolution and Impact: Originating from grassroots initiatives, MFIs, like Bangladesh’s Grameen Bank (founded by Nobel Laureate Muhammad Yunus), provide small loans (microcredit) to low-income individuals and groups who lack collateral for traditional bank loans. Beyond credit, many MFIs now offer micro-savings, micro-insurance, and financial literacy training.
• Targeting Women: MFIs have historically focused on women, recognizing their high repayment rates and the positive impact on household welfare. Group lending models often foster peer support and accountability, overcoming traditional barriers to individual lending.
• Challenges: Despite their significant impact, MFIs face challenges including sustainability (balancing social mission with financial viability), potential for over-indebtedness among clients, high operating costs for small-value transactions, and sometimes high interest rates. The sector is increasingly integrating digital technologies to improve efficiency and reach.

5.5 Community-Based Approaches

Informal community-based financial systems play a vital role, and initiatives often seek to link them to formal services.

• Savings Groups and ROSCAs: Rotating Savings and Credit Associations (ROSCAs) and community-based savings groups (e.g., Village Savings and Loan Associations – VSLAs) are prevalent in many developing countries. They allow members to regularly contribute to a common fund, which is then disbursed to members on a rotating basis or as needed. These groups build trust and financial discipline. Initiatives often focus on linking these groups to formal financial institutions, allowing them to deposit their collective savings in a secure bank account or access larger loans.
• Financial Cooperatives and Credit Unions: These member-owned financial institutions are often deeply embedded in local communities, providing services tailored to their members’ needs, often at lower costs than commercial banks.

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Technological Innovations Enhancing Financial Inclusion

The digital revolution has profoundly reshaped the landscape of financial inclusion, offering unprecedented opportunities to overcome traditional barriers. Emerging technologies are enabling more efficient, accessible, and personalized financial services for underserved populations.

6.1 Mobile Banking and Digital Wallets

The widespread proliferation of mobile phones, even basic feature phones, has been the single most impactful technological driver of financial inclusion.

• Ubiquitous Access: Mobile banking allows users to perform a wide array of financial transactions – sending and receiving money, paying bills, purchasing goods, even accessing loans and insurance – directly from their mobile devices, bypassing the need for physical bank branches. This is particularly transformative in regions with vast rural areas and limited traditional infrastructure.
• Feature Phone Solutions (USSD/SMS): Many mobile money services are designed to work on basic feature phones using Unstructured Supplementary Service Data (USSD) codes or SMS, ensuring accessibility even for users without smartphones or reliable internet connectivity. This ‘lowest common denominator’ approach maximizes reach.
• Smartphone Apps: For smartphone users, sophisticated mobile banking and digital wallet applications offer enhanced user interfaces, richer functionalities, and integration with other digital services (e.g., e-commerce, transport).
• Agent Networks as the Backbone: The success of mobile money heavily relies on extensive agent networks. These local businesses (e.g., shops, pharmacies) act as crucial cash-in and cash-out points, bridging the gap between the digital and physical worlds and ensuring liquidity for users. They serve as the ‘human ATMs’ in remote areas.
• Interoperability: A key challenge, and increasingly a focus of regulators, is achieving interoperability between different mobile money operators, banks, and payment systems. This allows users to send money seamlessly across platforms, increasing the utility and network effect of digital payments.

6.2 Digital Identity and Biometrics

Lack of formal identification is a primary barrier to financial access. Digital identity solutions offer a powerful remedy.

• Foundational Digital ID Systems: Countries like India with Aadhaar, a unique 12-digit identification number linked to biometric data (fingerprints, iris scans), have demonstrated how a robust digital identity infrastructure can drastically simplify and reduce the cost of KYC for financial institutions, making it easier for millions to open accounts. Similarly, Pakistan’s NADRA (National Database and Registration Authority) provides biometric ID cards that facilitate financial access.
• Biometric Authentication: The use of biometrics (fingerprints, facial recognition, voice recognition) for authentication enhances security and convenience, especially for individuals with low literacy or who struggle with remembering PINs. This is particularly relevant in environments where traditional signatures are not common or reliable.
• Self-Sovereign Identity (SSI): Emerging concepts like Self-Sovereign Identity, often leveraging blockchain, aim to give individuals more control over their digital identity data, potentially streamlining KYC processes while enhancing privacy.

6.3 Digital Credit Scoring and Lending

Traditional credit scoring models rely on extensive credit histories, which most unbanked individuals lack. Fintech is innovating new ways to assess creditworthiness.

• Alternative Data Sources: Digital credit scoring models leverage alternative data points to assess credit risk for individuals without formal credit histories. These can include:
  • Mobile Phone Usage Data: Call records, airtime top-ups, data usage patterns, and mobile money transaction history can indicate payment behavior, income stability, and social networks (arXiv, 2020).
  • Utility Bill Payments: Consistent payment of electricity, water, or gas bills can serve as a proxy for reliability.
  • Social Media Data: While controversial due to privacy concerns, some models have explored using social media activity to assess trustworthiness, though this approach requires careful ethical consideration.
  • Psychometric Testing: Some lenders use psychometric assessments to gauge an individual’s financial behavior and risk tolerance.
• Machine Learning and AI: Advanced algorithms and machine learning are employed to analyze these vast and unconventional datasets, identify patterns, and predict repayment probabilities with increasing accuracy. This allows for automated, instant credit decisions.
• Peer-to-Peer (P2P) Lending Platforms: Online platforms connect individual lenders directly with borrowers, often bypassing traditional financial institutions. These platforms can offer more flexible terms and reach niche markets.
• Micro-Lending and Nano-Loans: Digital platforms are enabling the provision of extremely small loans (nano-loans) for very short durations, catering to immediate liquidity needs of low-income individuals.
• Cautionary Note: While innovative, the rapid expansion of digital credit also necessitates robust regulatory oversight to prevent predatory lending, excessive indebtedness, and data privacy abuses. Responsible lending practices are paramount.

6.4 Blockchain Technology and Distributed Ledger Technology (DLT)

Blockchain and DLT hold significant potential for enhancing financial inclusion, particularly by reducing costs, increasing transparency, and enabling new models of financial services.

• Efficient Remittances: Blockchain-based remittance services can significantly reduce transaction fees and speed up cross-border payments, directly benefiting migrant workers and their families who rely heavily on remittances. Traditional correspondent banking networks are slow and costly; DLT can bypass these.
• Digital Currencies (CBDCs and Stablecoins): Central Bank Digital Currencies (CBDCs) and privately issued stablecoins could offer a more efficient, inclusive, and programmable form of money. If designed with financial inclusion in mind, they could provide direct access to central bank money, reduce transaction costs, and facilitate G2P payments.
• Decentralized Finance (DeFi): DeFi applications, built on blockchain, aim to recreate traditional financial services (lending, borrowing, trading, insurance) using decentralized protocols. While still nascent and volatile, DeFi’s promise of permissionless access and disintermediation could, in the long term, offer new avenues for financial services, particularly for those without access to traditional banks. However, high volatility and complexity remain significant barriers for mainstream adoption by underserved populations.
• Digital Identity Management: Blockchain can be used to create tamper-proof, verifiable digital identities, potentially addressing the issue of lack of identification for KYC purposes, while giving individuals more control over their personal data.

6.5 Open Banking and APIs

Open banking frameworks, driven by Application Programming Interfaces (APIs), allow customers to securely share their financial data with third-party service providers (with explicit consent). This fosters innovation and personalized services.

• Ecosystem Development: Open APIs enable fintechs, startups, and even non-financial companies to build new financial products and services on top of existing banking infrastructure. This can lead to a richer ecosystem of specialized services tailored to the specific needs of unbanked and underbanked segments (e.g., personalized budgeting tools, embedded finance within e-commerce platforms).
• Enhanced Customer Experience: By allowing data to flow seamlessly, open banking can simplify financial management, enable faster loan applications, and offer a more holistic view of an individual’s financial health, making formal financial services more user-friendly and relevant.
• Innovation in Product Design: Access to customer data (anonymized and aggregated) allows financial service providers to develop more targeted and appropriate products for underserved segments, such as flexible repayment schedules for gig economy workers or micro-savings products linked to consumption patterns.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Challenges and Considerations

While the momentum for financial inclusion is strong, and technological advancements offer immense promise, several significant challenges and considerations must be addressed to ensure sustainable and responsible progress.

7.1 Digital Literacy and Financial Education

The transition to digital financial services, while offering unparalleled reach, necessitates a fundamental shift in skills and understanding among users.

• Beyond Basic Usage: Digital literacy extends beyond simply knowing how to operate a mobile phone. It encompasses understanding app interfaces, recognizing phishing attempts, safeguarding PINs and passwords, and discerning legitimate financial communications from scams. Without this foundational knowledge, users are highly vulnerable to fraud and misuse of their accounts.
• Comprehensive Financial Education: Parallel to digital literacy, comprehensive financial education is crucial. This includes basic budgeting, saving habits, understanding interest rates, the implications of debt, and the benefits of insurance. Education programs need to be tailored to local contexts, delivered in local languages, and often require innovative, engaging methodologies to reach diverse populations, including those with low literacy levels.
• Trusted Intermediaries: In many communities, trusted local agents or community leaders can play a vital role in educating and onboarding new users, bridging the trust gap between individuals and formal institutions.

7.2 Regulatory Frameworks and Consumer Protection

Striking the right balance between fostering innovation and ensuring market stability and consumer safety is a delicate and ongoing challenge for regulators.

• Adaptive Regulation: Traditional banking regulations are often ill-suited for the rapid pace of fintech innovation and the unique operational models of mobile money operators or digital lenders. Regulators need to adopt adaptive, risk-based frameworks, such as tiered KYC requirements (allowing for simpler onboarding for basic accounts), regulatory sandboxes (allowing new products to be tested in a controlled environment), and proportionate licensing for different types of financial service providers.
• Anti-Money Laundering (AML) and Combating Terrorist Financing (CTF): While simplified KYC is vital for inclusion, regulators must simultaneously ensure robust AML/CTF compliance to prevent illicit financial flows. This requires innovative solutions like AI-driven transaction monitoring and collaboration between financial intelligence units and financial service providers.
• Consumer Redress Mechanisms: Robust and accessible mechanisms for consumer complaint resolution are essential to build trust. This includes clear channels for reporting fraud, disputes over transactions, or unfair practices, and effective legal or ombudsman systems for redress.
• Market Conduct and Fair Practices: Regulations must address issues such as transparent pricing, responsible lending practices (to prevent over-indebtedness), protection against predatory practices by some alternative financial service providers, and clarity on terms and conditions.

7.3 Data Privacy, Security, and Cybercrime

As financial services become increasingly digital, safeguarding personal and financial data is paramount to building and maintaining user trust.

• Robust Cybersecurity Measures: Financial service providers must invest heavily in robust cybersecurity infrastructure to protect against data breaches, hacking, and unauthorized access to customer accounts. This is particularly critical in contexts where digital infrastructure may be less mature.
• Data Privacy Policies: Clear, concise, and enforceable data privacy policies are necessary to inform users about how their data is collected, stored, used, and shared. Users must have the right to consent to data usage, especially when alternative data sources are employed for credit scoring. Laws like GDPR or similar national privacy laws are becoming increasingly relevant in emerging markets.
• Mitigating Digital Fraud and Scams: Unbanked and digitally naive populations are often prime targets for sophisticated digital scams, phishing attacks, and fraudulent schemes. Continuous user education, strong authentication protocols (e.g., multi-factor authentication), and rapid response mechanisms for fraud detection are crucial.
• Identity Theft: The rise of digital identities necessitates strong safeguards against identity theft, which can have devastating consequences for individuals seeking financial services.

7.4 Infrastructure and Interoperability

While mobile penetration is high, underlying infrastructure challenges persist.

• Connectivity and Power: Reliable internet connectivity (or even consistent cellular network coverage) and stable electricity supply are prerequisites for effective digital financial services. Infrastructure gaps in remote areas continue to pose a challenge.
• Interoperability: The lack of seamless interoperability between different mobile money operators, traditional banks, payment gateways, and even government systems creates fragmented ecosystems, limiting convenience and utility for users. Efforts towards open APIs and national payment switches are critical to creating a truly unified and inclusive digital financial ecosystem.
• Agent Network Management: Managing the liquidity of extensive agent networks (ensuring agents have enough cash to meet withdrawal demands and enough e-money to facilitate deposits) is a complex logistical challenge, particularly in remote areas.

7.5 Sustainability and Viability of Inclusive Models

For financial inclusion efforts to be sustainable, the models must be economically viable for service providers.

• Profitability Challenges: Serving low-income, high-volume, low-value transaction customers can be challenging for traditional financial institutions due to high operating costs. Innovative business models, leveraging technology for cost efficiency, and tiered pricing structures are necessary.
• Investment in Last-Mile Infrastructure: Building and maintaining agent networks or digital infrastructure in remote areas requires significant upfront and ongoing investment, which may not yield immediate high returns.
• Responsible Lending vs. Commercial Pressure: Balancing the social mission of financial inclusion (e.g., providing affordable credit) with commercial pressures to generate profit can be a tightrope walk, particularly for private sector players.

7.6 Over-indebtedness and Responsible Lending

The rapid growth of digital credit, especially in a context of limited financial literacy, raises concerns about consumer over-indebtedness.

• Ease of Access to Credit: While a benefit, the ease with which digital loans can be accessed can lead to individuals taking on multiple loans or borrowing beyond their repayment capacity, pushing them into a debt trap.
• Predatory Lending: Some unregulated digital lenders may engage in aggressive collection practices, charge exorbitant interest rates, or use opaque fee structures, exploiting vulnerable borrowers.
• Importance of Credit Bureaus: Developing robust credit information infrastructure, including data on digital loans, is crucial for financial institutions to assess a borrower’s total debt burden and for regulators to monitor market trends. Consumer education on responsible borrowing is also vital.

Many thanks to our sponsor Panxora who helped us prepare this research report.

8. Conclusion

Addressing the pervasive needs of the unbanked and underbanked populations is not merely a philanthropic endeavor but an economic imperative for fostering truly inclusive economic growth and establishing more equitable societies. The journey towards universal financial inclusion is complex, marked by deeply entrenched barriers spanning economic, geographical, social, cultural, technological, and regulatory dimensions. However, the remarkable progress witnessed over the past decade, largely propelled by the synergistic application of supportive government policies, groundbreaking financial technology innovations, and the enduring commitment of development organizations, offers compelling evidence that this ambitious goal is increasingly attainable.

A multifaceted and adaptive approach is demonstrably essential to effectively integrate these marginalized populations into the formal financial system. This comprehensive strategy must encompass:

• Enabling Policy Frameworks: Governments must continue to champion national financial inclusion strategies, simplify stringent Know Your Customer (KYC) requirements, and foster regulatory environments that encourage innovation while safeguarding consumers. Policies promoting digital literacy and financial education are equally critical to empower users.
• Leveraging Technological Innovations: The continued responsible deployment of mobile banking, digital wallets, and agent networks remains foundational. Furthermore, harnessing the transformative potential of digital identity systems, advanced digital credit scoring methodologies leveraging alternative data, and the nascent capabilities of blockchain technology holds immense promise for reaching the hardest-to-reach segments and creating new, efficient financial pathways.
• Tailored Financial Products: Financial institutions, including both traditional banks and fintech disruptors, must design and offer products that genuinely meet the unique needs and income patterns of underserved populations. This includes low-cost accounts, flexible micro-credit, affordable micro-insurance, and seamless payment solutions adapted to informal economies.
• Building Trust and Capability: Addressing the deep-seated lack of trust in formal institutions through transparent practices, robust consumer protection, and effective redress mechanisms is paramount. Simultaneously, sustained investment in financial and digital literacy programs, delivered through trusted community channels, will build the capability for individuals to confidently and safely engage with digital financial services.
• Collaborative Ecosystems: The path forward necessitates intensified collaboration among diverse stakeholders: governments, central banks, commercial banks, fintech startups, mobile network operators, international development organizations, and civil society. This cross-sectoral synergy is vital for sharing knowledge, pooling resources, developing interoperable systems, and scaling successful initiatives.

As the world increasingly embraces digital transformation, the imperative to ensure that no one is left behind in the financial mainstream grows stronger. By persistently overcoming existing barriers and strategically embracing emerging trends like embedded finance and AI-driven personalization, the global community can truly unlock the full socio-economic potential of billions, paving the way for a more prosperous, resilient, and equitable future for all.

Many thanks to our sponsor Panxora who helped us prepare this research report.

References

• Alliance for Financial Inclusion. (n.d.). Retrieved from en.wikipedia.org
• Consultative Group to Assist the Poor (CGAP). (n.d.). Various publications and data on financial inclusion. Retrieved from www.cgap.org
• CoinLaw. (2025). Unbanked Population Statistics 2025: Demographics, Challenges. Retrieved from coinlaw.io
• IDEMIA. (2020). From unbanked to cardholder – the path to economic growth. Retrieved from idemia.com
• Iskenderian, M. E. (2025). Mary Ellen Iskenderian’s mission to ensure one billion women have bank accounts. Reuters. Retrieved from reuters.com
• Lumin Digital. (n.d.). Banking the Unbanked Population: Building Financial Inclusion Through Fintech. Retrieved from lumindigital.com
• Pradhan Mantri Jan Dhan Yojana (PMJDY) Dashboard. (n.d.). Official data from the Government of India. Retrieved from pmjdy.gov.in
• Retail Banker International. (n.d.). How ‘unbanked’ is the world? Retrieved from retailbankerinternational.com
• The World Bank. (2012). Three Quarters of The World’s Poor Are ‘Unbanked’. Retrieved from worldbank.org
• The World Bank. (2021). The Global Findex Database 2021: Financial Inclusion, Digital Payments, and Resilience in the Age of COVID-19. Washington, DC: World Bank.
• Wikipedia. (n.d.). Financial inclusion. Retrieved from en.wikipedia.org
• Xing, E., & Ma, Y. (2020). Credit Scoring for Good: Enhancing Financial Inclusion with Smartphone-Based Microlending. arXiv preprint arXiv:2001.10994. Retrieved from arxiv.org