Voice of the Industry

The many faces of financial exclusion in the developed markets & who is at risk

Friday 15 July 2022 11:04 CET | Editor: Oana Ifrim | Voice of the industry

This article provides an overview of the root causes of financial exclusion in the developed economies and the implications for those at risk

Who is financially excluded? 

When it comes to financial exclusion, people with low incomes are more affected by it than others; of course, single parents, the unemployed, or the disabled face the same difficulties. Senior citizens also face a high degree of financial exclusion. Indigenous and ethnic minorities are exposed as well to banking exclusion. Black, Latino, Hispanic, American Indian, or Alaska Native communities rate high in underbanked and unbanked charts.

People with bad debt are also prone to financial exclusion; if they fail to reduce their overdraft, they often find their account closed and then have to go through the hurdles of opening a new one. Australia registered an over 10% rise in the number of people with debts equal to or larger than 75% of their assets, growing from 12.6% in 2003-2004 to 23.3% in 2017-2018; this doesn’t include the pandemic and its effects on personal finance.

Financial exclusion is also tied to other elements such as age, geographical location, and digital access. 

Financial exclusion is influenced by more than just personal characteristics and economic background. Certain communities showcase a higher propensity to be financially excluded. Living in rural or deprived areas increases the rate of financial exclusion. This is reflected by the scarcity of financial services in these communities. Also, if people have family or friends who are financially excluded, it is more likely that they are or will be excluded as well. Geography also plays a role in financial exclusion; for example, if cash is more prevalent in a certain region, it could explain the lack of incentives to use financial services. 

There is a direct connection between the unbanked and lack of education, as financial exclusion affects less educated individuals more than others. For example, 1 in 10 people with only primary education is unbanked, a higher rate than in the case of people with secondary education.

Research has also shown that migrants, refugees and asylum seekers, and people who are overindebted are also likely to be excluded.

Other categories included:

  • Self-employed
  • Women
  • Homeless
  • Students
  • Roma
  • Prison inmates
  • Released prisoners

The determinants of financial exclusion

The causes for financial exclusion can vary from high fees and lack of information to low-income consumers whose needs aren’t met by financial products. Cultural and geographical barriers, disability, and self-exclusion are other important factors to consider.

People might not use formal financial services due to not having enough money, financial services being too expensive, having to travel too far to reach a bank, or not trusting financial institutions. People might also choose to not access financial services because another member of their family has an account or perhaps their religious beliefs prevent them from doing so.

As many roots as they are for the financial exclusion conundrum, the fact remains that the degree and concentration of this type of exclusion can differ across the globe. Bank branches are closing down, governments require enhanced identity checks, bank accounts come with dense terms and conditions, different cultures have different approaches, and we must not forget about psychological barriers – all of these are obstacles that prevent people from being financially included. External factors such as banks outright refusing to open an account and the way social security benefits and pensions are provided by the government are also important factors. 

Refusal by banks

People located in areas of sparse population and low-income levels represent too high a risk as customers for financial institutions, which then avoid geographical areas where these groups of the population live. 

Banks can refuse to open transaction bank accounts for certain groups of people, such as those with a bad credit history, no credit history at all, employment instability or those who are not able to provide the documents required by law as proof of their identity and place of residence, as they are assessed as a high risk.

In France, many people are denied access to an account as a result of over-indebtedness, while Italian banks are charging high interest rate. In the UK there are no transaction charges, but proof of identity is a particular problem. People facing difficulties in proving their identity in some context and sometimes with complex positions (with reference to residence, job positions, marital status, and others) are not attractive customers for banks (this is a debated case in Great Britain and Ireland)

In Sweden, one of the most technologically advanced nations on the planet, predicted by some to become the world's first cashless society by March 2023, the general move to internet-based banking is denying the use of transaction accounts to those who lack access to the internet. 

In some markets, such as Canada, as a result of their exclusion from mainstream financial services, low- and moderate-income Canadians who are unbanked or underbanked must turn to fringe credit providers which charge very high interest rate. Fringe lenders are spatially concentrated in certain areas within cities, typically low to moderate income neighbourhoods with greater concentrations of racial and ethnic minorities.

Pawn shops, instalment loan services, and payday loan shops constitute fringe banks. This sort of financial institution provides high-fee financial services that come with steep interest rates when compared to financial institutions such as banks and credit unions, which have to be regulated. Their offerings can range from small loans, cashing checks, and pawnshop transactions to auto title loans, rent-to-own financing, and income tax refund anticipation loans. Although their services might vary, all fringe lenders offer incredibly steep interest rates and charges alongside their business transactions

Little immigrant status protections/immigration policy/asylum system

Studies show that Singapore hosts the largest amount of migrant workforce with up to 1.4 million people. Primarily, the migrant workers come from South Asia-based countries that offer less high-paying opportunities (Indonesia, Philippines, Thailand, or Vietnam).

An Experian report found that one third of foreign domestic workers in Singapore hold debt of on average 4.5 times their monthly salary, taking an average of 28 months to clear. Over a third of this debt is from the unstructured sector, composed of unlicensed lenders such as loan sharks.

The most common reasons for debt are inflexible and high migration fees (associated with migration for work, such as travel, accommodation en route, visas, work permits, medical certificates, and training) and costs by employment agencies broker, migration fees, leading to 73% of foreign domestic workers being in debt before they even arrive in Singapore. Of these loan-holders, 73%  receive loans from employers or the unstructured sector; only 38 % receive from commercial banks, as reliance on formal institutions like banks is correlated with bank account ownership.

Migrants will usually be charged USD 7,000-10,000 in fees by a recruitment agent in their home country, equivalent to more than a year of their basic salary. 

The lack of access to mainstream forms of credit forces them to raise unfavourable loans from their job broker, friends, or family to cover the costs, often getting caught in a debt trap which could haunt them for years. Also, the debt burden they carry from excessive recruitment creates a restrictive debt cycle that can leave workers in situations of debt bondage, a form of forced labour in which a person’s labour is demanded as means of repaying a loan, trapping the individual into working for little or no pay until the debt is repaid.

Moreover, migrant workers left without employment incurred additional debt and lost savings covering basic living costs for themselves and their families or in the process of attempting to return home.

According to industry research, many MWs (migrant workers) lack of bank accounts also leaves them vulnerable to abuse, particularly in salary mispayment. As of 2019, half of foreign domestic workers in Singapore did not hold a bank account, largely due to the barriers of opening one.

The lack of a bank account also puts asylum seekers in a vulnerable position The UK asylum system is quite strict and complex. According to Home Office figures, the percentage of main applicants refused at initial decision reached its highest point at 88% in 2004. After that the percentage fell to 59% in 2014, before increasing and then falling again to 28% in 2019 – the lowest annual rate since 1990. During the asylum process, asylum-seekers are mostly excluded from financial services and are only allowed to have a basic bank account (the Immigration Act 2016 introduced measures that mean asylum seekers are unable to open current accounts (ILPA information sheet Aug 2016)) with no right to work and a weekly allowance of GBP 40.85 on which to survive. In the case of their claim for refugee status being refused, asylum-seekers are categorised as illegal under the Immigration Act 2016 and are denied access to services including banking or housing.

Refusal by credit companies

Another important reason behind financial exclusion is credit companies turning down people due to low credit reference data, bad debt history, or a low score card due to unemployment, low income, and other personal issues. It often happens that people do not apply to credit because they believe they will be refused. In Italy, France, and Spain 16% had their credit application turned down while other 6% expected a refusal and did not apply.

Without access to affordable credit, people have to divert large amounts of their income to repayments, when applying to loans from high-cost lenders. People without bank accounts are deprived of discounted prices connected to direct debit payments. Save the Children and the Family Welfare Association discovered that low-income families pay approximately GBP 1000 per year on ‘poverty premium’ which, after housing costs, amounts to 9% of their income.

Poor families also face financial discrimination, being forced to resort to loan sharks. Single-parent families who are in debt are served poorly by banks, having to deal with high interest fees on loans or credit refusals, having to access sub-par credit (pawnbrokers or doorstep loans).

The use of accounts

Many banks charge their account holders on shortfall in maintenance of minimum balance in customers' accounts or failure to initiate any activity over a period of time (dormant account).

In Belgium, for example, accounts have been deactivated by banks because customers either use them too little or withdraw the money in the account immediately after it has been deposited. One of the UK's major factors behind financial exclusion has been formal current accounts lacking the safeguards that prevent unintended overdrawing. Low-income people often discover their accounts overdrawn by small amounts of money for a couple of days due to cheques taking a long time to clear or electronic transfers not happening when they were scheduled. This leads to unauthorised overdrafts, failed direct debits, or bounced cheques. As a result, consumers must handle hefty overdraft charges.

Identity requirements 

In regions where identity cards aren’t mandatory, low-income and homeless people, alongside refugees, have a hard time with supplying the proof of identity required by financial institutions to open bank accounts. This has been accelerated by governments and banks trying to fight financial crime and terrorisms through various actions. Financial institutions now often need both photographic identification and proof of home address prior to opening a bank account. For this, driving licences and passports are usually the most widely accepted. People lacking either one of these must face the difficulty of finding an alternative suitable for banks and regulators.

People unable to satisfy identity requirements also find it difficult to open an account. This applies especially to migrants but can also affect a wider group of people who do not have the standard forms of identity required. 

Bank and fintech charges 

According to financial experts, people experience an inclusion-exclusion paradox; this happens when people who have previously been financially included suddenly become unbanked. When they become banked (gaining access to savings, credit, and deposit services), people become excited and preach the new formal financial lifestyle to their peers, who become attracted as well. Banks and service providers see this as a chance to profit from the resulting growing market and start to add various fees which might be seen as deterrents (fees for account maintenance, using an online platform or other financial products, and so on).

There are a range of other charges that have a disproportionate effect on people with low incomes. 

  • Fees for failing to maintain a minimum balance in an account
  • Higher fees for over-the-counter transactions 
  • Monthly lump sum fees, which discriminate against those who make few transactions
  • High fees if the number of free transactions is exceeded
  • Race-based fees: According to 2020 survey data from Bankrate, minorities, millennials, and Northeasterners reported paying higher bank fees. The data showed that the average checking account holder at a bank or credit union paid USD 8 per month in fees, including routine service charges, ATM fees and overdraft penalties, but fees paid varied by race. White checking account holders reported paying the lowest amount in monthly bank fees, USD 5, compared to USD 12 for Black account holders and USD 16 for Latino or Hispanic account holders.

Fees imposed for using financial services can become burdensome to low-income customers, poor customers, and customers that receive little or no account inflows. Financial services can come with burdensome fees imposed to poor and low-income customers. The charges attached to financial services and products can deter low-income and poor customer from joining the formal financial sector. This can result in a frustrated customer who can either refuse to utilise formal financial services again or quit the entire financial sector as a whole.


According to a report by Citizens Advice Scotland, young people were much more likely than other clients to hold overdraft debts (59% of young clients), catalogue debts (41%), and hire purchase agreements (18%). The proportion of young clients with overdraft debts has almost doubled since 2004. 

This issue isn’t limited to the UK. In the US, credit access is also incredibly difficult for young people. Compared with the national average of 701, millennials had an average FICO® Score of 665 in the fourth quarter of 2018, according to Experian data.  

Moreover, according the Consumer Financial Protection Bureau, there are 26 million adults in the US without a credit record. This amounts to 11% of US adults. 

The older population also experiences financial exclusion despite being employed for much of their lifetime. A survey by Financial Conduct Authority reveals that Brits over the age of 50 are most at risk of a bleak financial future, with one in three UK retirees having to rely on just their state pension.

Financial exclusion in the senior population continues to rise as many cannot comprehend the digital shift to modern financial services. As more and more banks make their services available on the internet, the number of physical bank branches continue to close as well. Unfortunately, seniors are the most affected by this digital divide as 3.7 million people in the UK over the age of 65 have never even used the internet. Understandably, most citizens in this age group rely on cash for their daily transactions, while only 30% of them use online banking.

Physical access problems caused by bank branch closures

UK’s largest banks are closing branches in the lowest-income areas while expanding in wealthier ones.

Increased competition and the economics of international banking have led to programmes of bank branch closures across most developed countries. Technological developments (internet banking in particular) have accelerated this trend. These closures tend to hit harder the poor urban neighbourhoods and small rural communities. Obviously, the lack of physical access to a bank branch is an important barrier to financial inclusion and access to financial services.

From 2010 to 2021, the US lost over 15,500 bank branches. By 2021, majority Black census tracts were much less likely to have a bank branch than non-majority Black neighbourhoods. A high number of banks are clustered in the city’s central business district, but immediately outside that area,  there are bank deserts (with few to no bank branches).

Last year about 60 UK bank branches closed every month with a total 736 bank branches shut in 2021. This year, Barclays has announced that another 15 of its branches will close, with a total of 132 to shut by 2023.

More than 300 bank branches will close in 2022  with high street names like Lloyds, HSBC, TSB and NatWest all affected. This leaves hundreds of thousands of people without access to basic banking services. 


Ethnicity is one of many factors that influence access to finance. These include a person’s level of income, their net worth, education, employment status and age. Yet in advanced economies, the financially excluded include a disproportionate number of ethnic minorities.

Some credit applicants may be excluded because they do not fulfil the minimum economic criteria (such as insufficient income, net worth and so on). But there may also be discrimination on non-economic grounds.

In the UK, in total 1.2 million adults (2.3%) were unbanked in February 2020, which is not significantly different from 1.3 million in 2017). The percentage of these who are classified as being from Black, Asian, and Minority Ethnic groups (BAME) is reported to be twice as high when compared to the overall and white populations (FCA, 2020).

Financial vulnerability amongst BAME households is also reported to be higher when compared to the wider population and has increased due to the COVID-19 crisis. Three in eight adults (38% or 20.0 million) have seen their financial situation overall worsen because of Covid-19; 15% (7.7 million) have seen it worsen a lot. Groups that have been particularly hard hit include: the self-employed, adults with a household income of less than GBP 15,000 per year, those aged 18-54, and BAME adults.

In the US, in 2019, 12.2% of Hispanic households were unbanked, compared to 2.5% of white ones, according to the FDIC’s latest survey. Black households had a rate of 13.8%.

Financial exclusion has been widely researched in the US. Studies show that ethnic minorities, in particular African Americans and Hispanics, not only have lower access to mortgage funding, but they pay more for mortgages when they get them and are more likely to be subject to predatory lending practices. 

This is also an issue in the UK. Research illustrates economic disparities manifesting themselves in terms of minorities living in poorer-quality housing, worse health and being disadvantaged when it comes to job opportunities. These structural disadvantages faced are most likely fed through into poorer access to finance and financial services.

Research has shown varying levels of disparity between White and BAME communities and their access to financial services. 33% of White people have no savings, compared to 60% of Asian or Asian British people and 63% of Black or Black British people.  In 2006, NDC data found that whereas 37% of white groups had contents insurance, Black groups (16%) and Asian groups (19%) were only insured at half that level.

Black African, Black Caribbean and Bangladeshi groups are more likely to be denied a loan respectively compared to White groups.

There is also evidence of direct discrimination against even wealthy African-Americans who are rejected by mortgage and mortgage refinancing lenders at much higher rates than poor white Americans and who have been much more likely to get a sub-prime mortgage.

Lack of financial education and education attainment

Financial inclusion is also based on how financially literate people. This happens when customers have the necessary skills and knowledge to adapt to a financial marketplace where all people can make good choices regardless of what makes them unique. Both developed and developing countries have to tackle the financial literacy conundrum, although it differs from economy to economy. Developing countries’ consumers lack the standard literacy skills, while, in the developed countries, people have a hard time adapting to innovative, complicated concepts related to savings and pension planning, for example.

According to researches on financial literacy, basic concepts consisted of inflation, interest rates, or risk diversification are still not completely comprehended by the majority of consumers. Being financially illiterate has people become vulnerable and, eventually, they will have to deal with problems such as debt, personal bankruptcy, and financial exclusion.

Low-income households with lower educational attainment are more likely to experience multiple types of exclusion. The digital exclusion rate substantially declines as educational attainment increases. The FDIC survey’s digital exclusion rate declines from 70% for households with no high school diploma, to 52% for households with a high school diploma, to 29% for households with some college or a college degree

Financial exclusion, together with financial illiteracy, can result in a negative vicious spiral. Migrant workers with no access to financial services have a low motivation to obtain financial skills and, without these, migrant workers can be overlooked by financial providers. According to ADBI’s 2020 study, digital finance adoption and financial literacy in Vietnam were tightly connected. People who used e-transfers, digital banking, or digital payments had 13% higher scores when their financial literacy was tested. Besides the instinctive connection between being financially literate and using financial services, studies also show that actually using financial services leads to an increase in financial literacy.

Globally, only 30% of women are financially literate. That is because women have to face gender-specific obstacles when they wish to make a financial decision. Female migrant workers have a particular vulnerability to make sub-prime financial decision which can affect them personally and socially. Migrant workers are separated from their families and because there is a lack of coordination regarding household finances, it is hard to coordinate spending. According to research, better financial decisions can be reached as a result of a greater financial knowledge. We yet have to find out if financial literacy trainings are indeed effective in helping people with their borrowing, financial planning, or savings.

Self-exclusion - psychological, religious, and cultural barriers 

According to studies, many low-income customers feel detached from banking. The aforementioned barriers go a long way in proving them right regarding banks not really wanting to address their needs, and the services they receive are not fully meeting their needs. Consequently, self-exclusion is prevalent in many countries, especially where banking exclusion ranks higher. Here, low-income people are affected more by self-exclusion than by banking exclusion. Self-exclusion happens for a variety of reasons, one of them being cultural barriers. For example, the native populations in Canada or Australia are prevented from accessing banking services due to cultural and psychological barriers. In the UK, religious barriers occur in front of the Bangladeshi and Pakistani communities. Under Sharia law, transaction accounts exposed to overdrawing risk are strictly forbidden.

Voluntary financial exclusion on faith and cultural-based reasons is a scenario where the financially excluded are not necessarily unbanked or uninformed but rather they choose not to take advantage of existing financial facilities because its mechanisms contradict with their religious beliefs. This is one of the most difficult and prevalent deterrents holding back the unbanked communities. In Australia and Canada, for instance, they are prevented from using banking services due to psychological and cultural barriers. Similarly, the Pakistani and Bangladeshi Muslim communities in the UK are excluded from banking as transactions can cause them to become inadvertently overdrawn and thus incurring interest, which is forbidden (haram) under Shariah law.

The lack of Shariah-compliant products is the major reason behind the broad financial exclusion that exists among various Muslim communities in many parts of the world. This refers to financial products and services that comply with the principles of Islamic law (Shariah) as Muslims are prohibited from accessing any finance involving the payment and receipt of interest (Riba). In Australia, for instance, The Muslims communities are financial excluded mainly due to their faith and religious beliefs, because Islam prohibits Riba (interest) which is widely practiced in conventional banking and finance operations.

Psychological factors that deter some people from accessing financial products. For instance, less educated people feel that banks are not for them and therefore they mistrust them and seek other means of handling their finances. Also, elderly people generally feel uncomfortable using modern technology, such as the internet, and prefer traditional ways of managing their finances. Some are worried about losing their money should the bank go bankrupt as witnessed in some parts of the world, including some Western countries. Apart from the elderly people, the middle-aged group of people are also concerned about employing modern technology to manage their finances, such as internet banking, due to the fear of financial loss through on-line identity theft or some other type of fraud such as internet hacking. 

Conclusion at a glance

Financial enclosure is crucial to fostering economic progress and welfare of households, easing poverty and enhancing the quality of lives.

In order to build and develop inclusive financial systems, the policy makers should articulate national strategies that touche upon market regulations, legal framework, and financial market infrastructure, financial awareness and education, and protection of the rights of lenders and borrowers to be able to measure the positive outcomes of financial inclusion.It should address the different stakeholders of financial services and the current level of financial market’s development, all while identifying the financially excluded groups.

Also, poverty reduction policy and programs must be prioritised and more investments should be directed to financial awareness education and campaigns and supporting financial technology mechanisms.  Furthermore, financial institutions should offer better tailored services to deal with clients with limited financial literacy.

About Oana Ifrim

Oana Ifrim is a Lead Editor at The Paypers. Her research, industry engagement, and content-related activities revolve around Banking & Fintech innovation, Open Banking, Open Finance, embedded finance, Banking-as-a-Service, B2B fintech. Oana is involved in diverse tasks ranging from content editing, planning & carrying interviews with key experts, representing The Paypers at various banking & fintech events to content research & production and strategic planning and coordination for large-scale, industry-specific research, reports, and projects. She can be reached out at oana@thepaypers.com or on LinkedIn.

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Keywords: financial services, financial inclusion, financial exclusion, banks, fintech, regulation, banking
Categories: Banking & Fintech
Countries: World
This article is part of category

Banking & Fintech