Promoting the use of financial services by individuals requires that market distortions—such as information asymmetries or the abuse of market power—preventing the widespread use of financial products be addressed, ways be found to deliver services at lower costs for suppliers and consumers, and consumers be educated and protected so they use products that meet their needs and avoid costly mistakes. Governments can confront market failures and enhance inclusion by developing an appropriate legal and regulatory framework, supporting the information environment, promoting competition, and facilitating the adoption of business models by providers to enhance financial inclusion.
Technological advances hold promise in the expansion of financial inclusion. Transaction costs become an obstacle for financial inclusion if providers cannot profitably serve lowincome consumers. Innovations in technology, such as mobile banking, mobile payments, and the biometric identification of individuals, help reduce transaction costs. Which technology is appropriate for financial inclusion depends on the development of the traditional banking sector; market size, structure, and density; and the level of development of supporting infrastructure.
Product designs that deal with market failures, meet consumer needs, and overcome behavioral problems can foster the widespread use of financial services. Certain business models and delivery channels can also enhance inclusion by reducing the cost of using financial services. The regulatory stance of governments can influence the product designs and business models of financial institutions. Hence, governments should strike a delicate balance between financial stability concerns and supporting innovations in product design and business models that allow for greater financial inclusion.
How best to strengthen financial capability, that is, financial knowledge, skills, attitudes, and behaviors, remains a focus of research and discussion, but some lessons are emerging: the importance of using teachable moments to deliver financial knowledge, the value of social networks (such as between parents and children or between remittance senders and receivers), the relevance of psychological traits such as impulse control, and the possible benefits of new delivery channels such as entertainment education and text messaging.
Evidence points to the role of government in setting standards for disclosure and transparency, regulating aspects of business conduct, and overseeing effective recourse mechanisms to protect consumers. To avoid conflicts of interest, prudential regulation may be separated from the regulation of financial consumer protection. Competition is also a key part of consumer protection because it creates a mechanism that rewards better performers and increases the power that consumers can exert in the marketplace.
Governments can also subsidize access to finance and undertake other direct policies to enhance financial inclusion, but more evidence on the effectiveness of these approaches is needed. Financial exclusion is often a result of high debt levels, especially in rural economies. Debt restructuring may be preferable to unconditional debt relief to minimize the incentives for moral hazard and restore financial inclusion.