Why FinTech Is Key For A Meaningful Financial Inclusion

FinTech will play a major role as it can digitize and lower the cost of the supply chain, reach populations in rural areas, provide people with a digital economic identity and so many other use cases.

Financial inclusion, or providing access to affordable financial products and services, is a global and pressing issue that has received a lot attention over the last 30 years from multilateral development banks, government bodies, and non-government organisations (NGOs). According to the World Bank, there are 1.7 billion people, or about a bit less than half of the global adult population, and 200 million micro, small and medium enterprises (MSMEs) that do not have access to formal financial products and services. With small transaction sizes and limited credit history, financial institutions view these individuals and businesses as too expensive and risky to serve. An additional challenge is that many of these potential clients are located in rural areas with limited infrastructure. The majority of them are at the ‘Base of the Pyramid” (BoP) earning less than US$2 per day, and rely on informal means to borrow money, such as pawnbrokers, payday lenders and loan sharks that are often extremely expensive and unreliable.

This situation gives rise to one of the greatest paradoxes in today’s world: the people with the most limited resources are the ones paying the highest fees for financial products and services. Therefore, providing access to affordable financial products to the unbanked has tremendous potential to help them improve their social and economic status. In fact, it has been widely studied and documented that financial inclusion allows households to expand consumption, manage risks and invest in durable goods, health and education, thereby reducing poverty and increasing economic development.

Financial inclusion is vital to improve the livelihoods of the poor and disadvantaged. Providing people in developing countries with access to financial services, such as payments, savings, insurance and credit, helps them to manage their financial obligations and build better futures for their families while also supporting broad economic growth, development and poverty reduction. This is achieved:

i. By making individuals less vulnerable by allowing them to save so as to increase their resilience, and invest in their education, health and micro-businesses.

ii. Financial inclusion can make the management of daily life far more efficient: electronic payments allow people to pay for essential services without taking time off work to pay the bills in person.

iii. Inclusion enables the shifting of financial risks from individuals to the financial system where these risks can be socialized and diversified, for instance, insurance against severe illness of the family breadwinner(s) can prevent people from falling back into poverty.

iv. Financial inclusion supports economic growth by expanding access to financial resources that support real economic activity, particularly for individuals and micro, small and medium-size businesses (SMEs).

v. It also supports broader economic growth by underpinning a local currency based financial system in which local savings fund local investments. This is a particular, longer-term benefit as the less a financial system is dependent on foreign debt, the less it is exposed to external shocks.

FinTech is a new term for a long-standing phenomenon: the application of technology in finance. With the advent of cloud computing, smartphones and high-speed internet, the sector has expanded dramatically over the last decade. Today, FinTech describes a new era of digital finance around the world that extends from the application of artificial intelligence and machine learning to big data, and from the use of biometric identification to blockchain technology. What types of FinTech innovation will have the biggest impact on those who remain financially excluded?

One of the most obvious answer is mobile money — the provision of e-money on mobile phones — where the greatest success story was in Kenya with Vodafone’s M-Pesa product. However, the real opportunity FinTech affords is the development of an entire digital financial ecosystem that meets the needs of both individuals and SMEs.

How to best solve the financial inclusion problem? The answer may lie in advances in digital technologies. Mobile phones, cloud computing, big data analytics, artificial intelligence (AI) and blockchain, are making it possible for any individual to access financial products and services for the first time, wherever they are and whenever they need them, in faster, cheaper, more transparent and efficient way than traditional banks. Mobile technology can lower the cost of providing financial services by 80 to 90 percent, enabling banks and financial institutions to potentially serve the BoP in an economical way.

Therefore, the mobile phone has become a key tool to access financial products for the unbanked and MSMEs.

How do you implement these new technologies to drive financial inclusion? Innovative fintechs (startups) hold the key to driving higher financial inclusion in emerging markets. A small subset of these fintechs is taking the lead in doing it through innovative products and business models. A good example which is often quoted is M-PESA, a Kenya-based startup founded in 2006 that uses the mobile phone to transfer money domestically, and make payments. M-PESA was able to grow very quickly, but one question comes: What are the key factors that make M-PESA so successful?

The prominence given to mere access of financial products and services as the main benefit of financial inclusion has led to a pessimistic thinking that the concept might not be one of the best tools to fight poverty and inequality after all.

The sin committed by advocates of financial inclusion — that has probably created a septum with the real world — is the way all attention has been extorted from all other benefits financial inclusion can accrue to an individual besides mere access and drive usage to financial products and services.

Much emphasis has been placed on the narrow definition of financial inclusion as access to financial services. This is something that has been fortified by the basic indicators used to measure financial inclusion which largely focus on access. For example, financial inclusion has largely been measured by the percentiles of bank accounts or mobile money accounts per total adult population. In this context, issues such as usage, security and reliability are overlooked.

Financial inclusion in its rightful terms is the easy access and sustainable use of financial products and services in an environment that ensures security and reliability for continued usage. More importantly, financial inclusion is not an end in itself but an important enabler of developmental progress. Perhaps, it summarizes why financial inclusion is not a stand-alone Sustainable Development Goal but a driver for all development goals. One notable point is that, mere access to financial services which has been the reference point as far as financial inclusion is concerned, does not qualify to be an enabler of development progress. It is often amalgamated with other aspects of financial inclusion like usage, reliability, and security that drive the developmental progress.

In other words, a meaningful financial inclusion can achieve the following:

i. Sustainable usage – The financial zone is largely made up of two extreme ends, the surplus unit and the deficit unit. It is through usage of financial services that a surplus unit is able to save whilst accruing a reward in the form of interest. On the other hand, the deficit unit through usage can find means to cover their position by accessing credit.

So, convergence of the two units in the same marketplace, which is the financial system, has already provided for a mechanism that enables each unit to seek the custom service they need to cover their positions. Apart from creating a platform for people and entities to save, financial inclusion ultimately drives the habit to save, which is important for the economy.

Reliability through financial technology is persistently seen as having a correlation that follows an iterative process. Mobile money growth has powered financial inclusion as more and more people can use their mobile devices to access and use financial services. This has helped a lot of people, particularly those in marginalized areas that are not covered by bank branch networks.

FinTech has proved to be reliable and convenient as users have the ultimate control on all activities and transactions they perform through those platforms. Through FinTech platforms, financial inclusion has reduced the reliance people have on cash holdings. The cash economy is much risky to any economy because it stifles the financial system, which is the main driver of economic growth, as cash demand drives a lot of funds out of the banking ecosystem. This is why a key factor of success is the ability to “intercept” cash directly at the entry points: payroll, government disbursements, micro-finance institutions; and to target particularly underserved sectors such as the agro industry.

ii. Security – Mediums that drive financial inclusion like banks, regulated micro-finance houses and FinTech platforms, ensure security on both ends. This is a vital element that can even drive the financial sector growth because once security is guaranteed, there is room for continued use of financial services and products through formal channels.

There are many other endless benefits of financial inclusion which include access to essential services like health insurance, secured funds transfer and reduction of income inequality. Perhaps, the most enthralling observation made by most researchers is the ability of financial inclusion to drive the empowerment of women.

In conclusion, beyond access, financial inclusion enables sustainable usage of financial services in a reliable and secure ecosystem. It is important that advocates of financial inclusion emphasize on these other elements that are driven by access. Financial inclusion is meaningless unless it is able to drive value for people, reduce inequalities through facilitating the transfer of funds from surplus to deficit units and reduce poverty overall.