When we think about the concept of financial inclusion and more particularly about underbanked and unbanked populations, we often picture developing countries where access to banking services is limited. However, it might surprise you to learn that even in developed European countries, where banking services are abundant, a sizable portion of the population remains excluded, falling into the category of the "underbanked".

The term "underbanked" refers to individuals or businesses that lack access to the financial services they require to help them manage their money and improve their economic well-being and this at a reasonable (acceptable) cost.
This issue is more prevalent than commonly acknowledged and extends beyond financially disadvantaged individuals.

There are four primary causes of being underbanked:

• Niche Needs: Some customers have highly specific requirements, rendering the market too small to support dedicated services or products tailored to their needs.

• Risk Considerations: Certain customers carry a level of financial risk that surpasses what financial institutions are willing to bear at an economically viable cost.

• Compliance Complexity: The enormous burden of regulatory compliance, such as Anti-Money Laundering (AML) or Know Your Customer (KYC) requirements, can make it impractical for financial institutions to serve certain customers in a cost-effective manner. The enormous penalties associated with non-compliance only amplify this challenge.

These exclusions have become more pronounced, driven by increasingly stringent regulations and the fact that financial institutions are increasingly monitoring the individual profitability of each customer. If a customer’s profitability is negative or falls below a certain threshold, institutions are more inclined to deny service. Moreover, when one financial institution makes the math, others will follow their example.

Let us have a look at some illustrative examples:

• People with a history of cancer or advanced age seeking life or medical insurance.

• Individuals with a history of accidents or traffic fines pursuing car insurance.

• Residents of high-risk regions facing difficulties obtaining a car or bike insurance.

• Elderly who do not have sufficient digital skills to use all digital tools offered by the financial institution.

• People not having proper access to the internet or a smartphone, e.g. those who live in rural or remote areas.

• Politicians encountering regulatory or ethical barriers due to their status. This can be for regulatory reasons, as PEP (Politically Exposed Persons) individuals have severe additional KYC and AML requirements, but also for ethical/sustainability reasons, when it concerns politicians of more extreme parties. Cfr. the recent stories of Coutts (private bank owned by NatWest) closing the banking account of Nigel Farage or Jeremy Hunt being refused to open a banking account at Monzo.

• Freelancers and gig-workers grappling with income instability impacting their creditworthiness.

• Immigrants, regardless of education and income, facing credit history gaps.

• Individuals who defaulted on past credit struggling to access credit in the future.

• Residents of high-risk countries or nations with additional regulatory demands, e.g. US citizens, facing additional regulatory efforts under the FATCA regulation, even when residing in another country.

• Workers in certain industries such as sex work, pornography, tobacco, or soft drugs.

• Individuals with criminal records

• Companies with owners who faced a bankruptcy in the past

• Businesses with intricate structures, making owner identification complex.

• Companies with subsidiaries in precarious countries.

• Companies dealing in phone and gift cards.

• High-risk sectors like Horeca and construction prone to financial instability and money laundering.

These rejected customers could potentially form a niche market for specialized financial institutions, yet turning a profit with this demographic is more difficult than with clients accepted by the mainstream institutions.

If there is not a well-regulated alternative for those individuals and companies, they will be compelled to operate outside the financial system, resorting to cryptocurrency, payday loans, or cash transactions. Such practices can trap them in cycles of debt and financial insecurity. Moreover, this circumvention hampers economic growth, social mobility, and inadvertently fosters money laundering and unreported labor – outcomes that contradict the intent of stricter regulations set by governments.

This means financial exclusion can have profound consequences for individuals and companies and society as a whole. Governments must therefore undertake necessary corrective measures, which could involve streamlining counterproductive and resource-intensive regulations, mandating financial institutions to serve a minimum percentage of "underserved" customers, or providing subsidies to institutions that effectively cater to the underbanked. Simultaneously, governments and financial entities should improve financial literacy by offering education and awareness programs.

Addressing this issue is paramount for fostering economic growth, minimizing disparities, and elevating the financial well-being of individuals and society as a whole.