What is financial inclusion? | McKinsey

A diverse group of hands holding up US dollar banknotes of various denominations on light blue background.

Would you be able to buy a car or a house without taking out a loan? Most of us wouldn’t. What about paying for emergency healthcare without insurance? Same story. For those who don’t have access to financial services, it’s almost impossible to save enough to pay the bills, much less build the kind of wealth that can be passed on to the next generation.

Financial inclusion is a major issue around the world. Nearly a billion and a half people living in emerging economies don’t have access to formal savings and credit. They pay for everything in cash, have no secure way to save and invest their money, and rely on informal lenders and personal networks for credit. And just because the United States is one of the world’s wealthiest countries doesn’t mean the situation is any better there. A recent McKinsey survey of 25,000 Americans found that only half would be able to cover expenses for more than two months if they lost their job. What’s more, millions of Americans are underbanked—that means you have a bank account, but to manage your finances, you still rely on things such as money orders, check-cashing services, and payday loans, which are relatively expensive to use compared with credit cards or traditional loans.

But, while the overall global wealth and income gap has narrowed since the 1980s, inequality has actually increased within advanced economies. The difference between financial inclusion and exclusion in the United States frequently comes down to race (although rural, immigrant, LGBTQ+, and less-educated communities also tend to be underbanked). Black communities, in particular, have been the targets of exclusionary financial practices and strategies for generations, including limited access to federal mortgage lending, imposed geographic barriers such as redlining, and the absence of physical bank branches in Black-majority communities. As of 2016, the average Black American family had only about one-tenth the wealth of the average White American family. This is a symptom of the racial wealth gap but also a cause: without access to financial services, it’s difficult to turn income into wealth.

That’s because financial inclusion is more than just the ability to open a bank account, make a payment, or get a loan. It’s also a means to an end. Financial inclusion can bridge the divide between economic opportunity and economic achievement. Our current moment presents a meaningful opportunity to counteract centuries of marginalization—and create opportunities for overall economic growth.

Read on to learn more about what financial inclusion means and why it matters.

Learn more about McKinsey’s Financial Services Practice.

How can mobile providers help increase financial inclusion globally?

There’s a huge opportunity for mobile providers (particularly in emerging markets) to improve financial inclusion for the billions of unbanked people, as well as to create immense value by tapping into a huge and largely untouched market. In 2018, McKinsey projected that digital finance had the potential to reach more than 1.6 billion new retail customers in emerging economies, and to increase the volume of loans extended to individuals and businesses by $2.1 trillion. At the time, McKinsey projected that the providers of these products stood to increase their balance sheets by up to a total of $4.2 trillion. While this was several years ago, a significant opportunity remains: according to the World Bank’s 2021 Global Findex report, up to 38 percent of adults in developing countries remain unbanked.

But an untapped market of this size is a landscape of unknowns. To help understand how digital-payments providers can capture opportunities and improve financial inclusion, in 2018 McKinsey analyzed proprietary and publicly available data from East Africa, West Africa, and Southeast Asia. The findings were clear: while there was great opportunity, providers needed to invest significantly, for the long term, in new kinds of partnerships. Ultimately, we determined, profitability relied on scale—but to achieve the scale necessary to break even, we estimated that providers would have needed to spend enough to see $2 billion or even $3 billion in annual transaction value. Such scale would have required significant and long-term IT spending, as well as personnel and real estate costs.

Learn more about McKinsey’s Financial Services Practice.

What is open financial data and how can it improve global financial inclusion?

Open financial data is a critical enabler of financial inclusion. The phrase “open financial data” refers to the ability to share financial data through a digital ecosystem in a way that requires limited effort or manual intervention. A 2021 McKinsey Global Institute analysis found that broad adoption of open-data systems could confer up to a 1.5 percent gain in GDP by 2030 in the United Kingdom, European Union, and the United States, and as much as 5 percent in India.

Open financial data can create economic value by benefiting financial institutions, individuals, and small and midsize enterprise customers. For consumers, benefits include the following:

• Increased access to financial services. Open data sharing can enable customers to buy and use financial services they might not be able to otherwise access. For example, limited data in some markets might disqualify customers from accessing loans. Open data can help assess the creditworthiness of potential borrowers by sourcing rent, phone, and utility bill payment history.
• Greater user convenience. Data sharing can save time for customers in their interactions with financial-service providers. For instance, open access to data on available mortgage products can allow customers to apply for loans without needing to go through mortgage brokers.
• Improved product options. An open-data system could make it easier to switch accounts from one institution for another, helping customers get the best yield.

Open-data initiatives are increasingly common globally. These include the UK’s Open Banking Implementation Entity, the EU’s second Payment Services Directive, Australia’s new consumer protection laws, Brazil’s drafting of open-data guidelines, and Nigeria’s new Open Technology Foundation (Open Banking Nigeria).

What role can financial institutions play in closing the US racial wealth gap?

The racial gap in the United States has persisted for decades. The median Black family has about 13 percent of the wealth of the median White family, and nearly half of Black households are underbanked. Black Americans are also more likely to be served subprime financial products, such as loans with higher interest rates that increase over time, which can be harder to pay off than regular loans.

The financial-services sector has a critical role to play in addressing these disparities. In 2022, McKinsey convened leaders across the ecosystem to discuss how the industry can improve its service to Black communities.

Learn more about McKinsey’s Financial Services Practice.

How would greater financial inclusion benefit the US economy?

Increased inclusion of Black Americans in the financial system would benefit the entire economy: Black families with better access to financial services would have more opportunity to reinvest and grow their wealth, and thereby support increased economic activity. The McKinsey Institute for Black Economic Mobility estimates that addressing the racial wealth gap could lead to an additional 5 percent of GDP growth in the United States.

Leaving aside the moral imperative for financial inclusion, greater inclusion of Black Americans in the financial system would create opportunities for financial-services companies. If Black Americans had the same access to financial products of White Americans, financial institutions could realize up to approximately $2 billion in incremental, additional revenue. Further, if Black Americans and White Americans achieve full wealth parity, financial-services companies could realize up to $60 billion in additional revenue from Black customers every year.

What are five key aspects of financial inclusion for Black Americans?

In the United States, nearly half of Black households are unbanked or underbanked. Here are five key aspects that denote full financial inclusion, along with why achieving them is a struggle for many Black Americans:

1. Be able to make everyday transactions through a safe and affordable transaction account. Even seemingly mundane financial actions, such as depositing or accessing monthly paychecks, are significantly more costly for the average Black American family. Many Black Americans rely on check-cashing services due to a lack of bank storefronts in majority Black or Brown neighborhoods. These typically charge a fee of about 3 percent. What’s more, Black American families pay on average $40 per month in bank fees and penalties—for using ATMs or falling under the minimum-required balance.

2. Have access to credit. Lack of access to credit has far-reaching consequences for many Black Americans. For example, car ownership is essential for many Americans to hold down a job. But owning a car is more expensive for Black Americans. Research shows that Black and Brown car shoppers who are more qualified than their White counterparts are 62.5 percent more likely to be offered a costlier pricing option. And Black Americans are twice as likely to be denied credit compared with White Americans.

3. Hold insurance against risk. There are huge disparities in the types of insurance products available to Black and White Americans. Whereas 73 percent of White families have private health insurance, only 57 percent of Black families can say the same.

4. Be able to save for big goals or rainy days. A cushion of readily available liquid assets lets families pay for college, save for retirement, or deal with unexpected financial events. Black families are less likely to have such a cushion: the average White family has 31 days of liquid savings on hand, whereas the average Black family has only five.

5. Ultimately accumulate long-term wealth. Buying a home is typically a key step in building family wealth. Homes appreciate in value over time, add to net worth, and become a key asset to pass down to future generations. But for Black Americans, homeownership is a much harder goal to achieve. Black Americans are denied loans at more than double the rate as White Americans (28 versus 11 percent). And they are offered higher-cost loans compared with White borrowers with similar credit scores.

These different financial experiences have compounding effects. Just 8 percent of Black families leave inheritances to their children, compared with 26 percent of White families.

Learn more about McKinsey’s Public Sector Practice—and check out job opportunities related to financial inclusion if you’re interested in working at McKinsey.

Articles referenced:

• “The role of financial services in improving racial equity in the US,” July 8, 2022, JP Julien, Munya Muvezwa, and Tawanda Sibanda 
• “Financial inclusion and sustainable, inclusive growth in action,” May 19, 2022, André Dua
• “Future of Asia: The future of financial services,” October 21, 2021, Jonathan Woetzel, Renny Thomas, Sonia Barquin, and Tiago Devesa
• “Financial data unbound: The value of open data for individuals and institutions,” June 24, 2021, Olivia White, Anu Madgavkar, Zac Townsend, James Manyika, Tunde Olanrewaju, Tawanda Sibanda, and Scott Kaufman
• “The case for accelerating financial inclusion in Black communities,” February 25, 2020, Aria Florant, JP Julien, Shelley Stewart, Nina Yancy, and Jason Wright
• “Inequality: A persisting challenge and its implications,” June 26, 2019, David Fine, James Manyika, Pal Erik Sjatil, Karim Tadjeddine, Tilman Tacke, and Maggie Desmond
• “Mobile money in emerging markets: The business case for financial inclusion,” March 12, 2018, Philip Osafo-Kwaako, Marc Singer, Olivia White, and Yassir Zouauoi
• “Global Financial Inclusion,” Fall 2010, Jonathan Bays, Alberto Chaia, Tony Goland, and Robert Schiff