August 8, 2023
5 min

How Instant Payments Improve Financial Inclusion

Timothy Shin

Open Banking Expert

Financial inclusion focuses on providing quality financial services that meet the needs of financially underserved merchants and consumers to lead to positive economic outcomes. The United Nations Secretary-General Special Advocate for Inclusive Finance for Development clearly states that financial inclusion is “an enabler and accelerator of broad-based economic growth and resilience, improved financial health, job creation, and development” and that an “inclusive financial system is essential infrastructure in every country.”

Financial inclusion is essential for the propagation of a healthy economy both here in the US and globally. Instant payments improve the ability to achieve financial inclusion through its fundamental overarching goal of providing people with the means to send and receive money with minimal hassle, friction, and time. 

The State of Financial Inclusion in the Payments Landscape 

Payment systems are critical to supporting commerce. This is why it’s essential for payment system infrastructure to be as open and inclusive as possible to ensure that no merchant or consumer gets left behind. The current payments landscape reflects an air of inequity, as the lack of interoperability makes it challenging for smaller businesses and lower-income individuals to participate in the system.

Instant payment services provide fintechs the groundwork to foster the necessary competition to push the payments industry to innovate and find solutions to financial inclusion through the development of new financial services. Especially now, with the arrival of FedNow, the Federal Reserve’s newest instant payments rail, instant payments have a broader reach to provide financially underserved businesses and individuals with the ability to receive payouts quickly, eliminating the economic frustrations that come with waiting for money to settle and clear. 

Instant Payments Improve Financial Inclusion in Other Countries 

Across the globe, we can see several nations adopting instant payments to improve their financial inclusion. Take, for example, India. With government intervention and regulation promoting the usage of instant payments, India has created the Unified Payment Interface (UPI), which has allowed smaller merchants and the underbanked to participate in the economy. Instant payments have been so immensely popular that 89 billion transactions were processed in 2022 alone, making it the most popular and preferred payment method in the country.

In fact, the system is so inclusive that merchants without their own QR code to accept digital payments can simply use their neighbor’s to conduct business, essentially “the digital version of: I don’t have change, but will make it work with the help of my neighbor.” Instant payments have, in many ways, assisted in allowing smaller merchants and consumers to start actively engaging with the larger financial system in meaningful ways. 

Another country to look at is Brazil. Since their instant payments service, PIX, went live in 2020, there were 8.1 billion transactions in the first quarter alone compared to 4.2 billion for credit cards and 3.8 billion for debit cards. There are far more people regularly engaging in the economies of nations like India and Brazil with the introduction of instant payment rails.

Overall, if you consider the wide adoption of instant payments in other countries, it’s evident that financial inclusion has increased across the board. While instant payments aren’t a panacea that can solve every country’s financial inclusion problems, here in the US, it certainly has the potential to help the financially underserved in several ways. 

How Instant Payments Help Increase Financial Inclusion 

Instant payments help achieve financial inclusion through improved money management and decision-making, supporting those living paycheck to paycheck, and lower transaction costs when making payments.

Improved Money Management and Decision Making 

Instant payments powered through Open Banking technology allow for frictionless payments in real-time. This is useful because they allow both consumers and merchants to have a clear sight picture of their cash flow and finances, allowing for improved money management and decision-making. 

Instant payments settle in minutes, allowing for accurate and up-to-date account balances to be visible. There’s no need for guessing games, fearing over-drafting an account, or waiting for pending transactions to clear to get a sense of how much money you have. With better budgeting and financial decision-making through greater visibility of their funds, lower-income households and individuals can participate in the greater economy easier. 

With funds readily available, merchants can also make business decisions easier. With this improved financial transparency, a more inclusive environment is formed so that merchants without large cash reserves can manage their money accordingly and keep pace with larger enterprises. Dan Gonzalez, VP of Customer Relations at the Federal Reserve, discusses the positive impacts of instant payments for businesses, stating that they “will benefit by having better control over their funds” and will have “better opportunities to manage those funds in real-time with greater visibility.” This is especially true for smaller businesses as the greater visibility can help them significantly in improving cash flow and widening their budgeting options. 

Support for Those Living Paycheck to Paycheck 

According to a recent CNBC survey, 58% of Americans live paycheck to paycheck. With the rising cost of living due to inflation, it’s hard for people who live paycheck to paycheck to stay afloat. This is especially true for gig workers and freelancers who need prompt payment for the projects they work on to keep up with their financial obligations, make purchases, etc.

Instead of having to resort to tough short-term loans or payday loans, risk overdraft fees, and use high-interest credit cards, instant payments can improve payroll operations and allow fast disbursement of pay so that critical necessities and financial emergencies can get met in a timely manner. By supporting the financial capabilities of people who live per paycheck, financial inclusion increases as those currently living for the next payday can slowly start to grow the means to cover expenses and participate in the larger economy comfortably.

Lower Transaction Costs

PYMNTS reports that 70% of consumers that shop at retailers and 72% of consumers that dine at restaurants have a negative view of merchants that add card surcharge fees to cover processing costs, illustrating how detrimental card fees can be for merchants and the consumers that have to deal with them. Furthermore, PYMNTS continues to report that people with less purchasing power are more likely to have paid these surcharges, and merchants with fewer resources than larger enterprises often have to charge them out of necessity. 

Card processing fees are dreadful as card networks don’t offer many solutions and can set their interchange fees to however high they want. Regularly increasing card processing costs hurt financial inclusion by making it much more difficult for small businesses and lower-income consumers to keep pace with rising costs, creating a financial situation that’s inherently excluding smaller businesses that can’t just eat the cost of the fees like larger businesses can and lower-income consumers that can’t afford to pay surcharges for everything. 

Instant payments facilitate smaller businesses with fewer resources and lower-income consumers by providing alternative payment methods powered by Open Banking to avoid these costs, thus eliminating the need for consumers to over-rely on cards and merchants to accept forms of payment that don’t have to be subject to additional fees. This helps create a financially inclusive environment for small businesses and consumers that allow them to shop easier without having to worry about additional costs eating into the price tag.

Instant Payments Solutions Are Here to Help 

Instant payments are a growing solution to help increase financial inclusion. Financially underserved populations can rely on the benefits of instant payments to finally start bridging the gap towards a more inclusive economy. Are you ready to learn more about how instant payments can help your business become more financially inclusive? Check out Trustly’s Payout service and get a free demo today. 

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