Financial inclusion is the timely and affordable access to services such as savings, loans, and insurance.
Individuals and communities that don’t have access to these services are referred to as “unbanked.”
According to the World Bank there are 1.7 billion unbanked adults worldwide.
A majority of these are women. Financial inclusion is a necessary enabler for achieving the global strategic development goals (SDGs) for 2030.
Fintech is playing an important part in improving financial inclusion in the regions where it is most needed.
A most basic banking service is savings. Without access to some form of savings it is very hard for unbanked individuals to be self-sufficient. They are highly prone to economic shocks. Being unbanked leaves individuals ill-equipped to address healthcare issues in the family.
With access to basic banking the same individuals have better control over their money and their lives. They are better poised to cope with uncertainties. Availability of micro credit and micro finance helps individuals become self-reliant and significantly improve their living standards.
A bank account is akin to a lifeline that helps escape the clutches of poverty. The UN Capital Development Fund (UNCDF) reports notable success rates with micro-finance programs targeted towards women. Economically empowering women gives them the power to make decisions.
The long term effects of access to banking can lead to economic stability, and the uplifting of entire communities out of poverty. Productive communities contribute to government revenue and GDP growth. All of this can be achieved simply by overcoming the initial challenge of making basic banking accessible to unbanked communities. However, this has not proved to be an easy task.
Fintech is synonymous with innovation. New technologies enable fintech firms to explore opportunities which are simply unviable for traditional banks. This involves trying new things and taking risks. Fintech products and services that become successful can spur large scale financial inclusion. For example Ria Money Transfer, one of the world’s favorite remittance services, has more than 350,000 agents in 149 countries. Unbanked recipients collect incoming remittances from their closest agent locations in cash. Remittances are often the only source of income for unbanked millions in remote areas.
Another example where banks failed and fintech succeeded in spreading financial inclusion is M-PESA. It was introduced in Kenya in 2005 by Vodafone in public-private collaboration. Initially M-PESA was designed to be a mobile based payment service for the unbanked. Because of the high profusion of mobile phones and low penetration of banking in the country the usage of M-PESA exploded.
Eventually a range of basic banking services including micro-finance were linked to the application. The service has since expanded to several countries and brought millions of unbanked Africans into the economic fold. Since its inception M-PESA has lifted hundreds of thousands of Kenyans out of poverty.
Future Role of Fintech
Implementation of new products is at the core of fintech. Innovations fundamentally change the design of financial services. Banks also evolve their offerings, but usually do this in a slow and incremental fashion. Fintech innovations are disruptive. They may not always be successful, but when they do succeed, they end up changing the game.
The World Bank, along with the Committee on Payment and Settlement Systems (CPMI) published a report on the payment aspects of financial inclusion (PAFI). PAFI provides frameworks for implementing country-level financial action plans to achieve global goals. The PAFI report cites several studies to highlight the fact that fintech can help greatly improve access to banking products and services.
A substantial profusion of mobile phones in the developing world has created conditions for this to become possible. Fintech can also be used to increase the last mile accessibility of micro finance. It can help improve user awareness about available financing options and how best to exploit them. Increasing financial inclusion can pump billions of dollars into the economies of developing nations annually. It helps alleviate not just poverty, but inequality.
Finally, it is worth noting that fintech innovations come with risks. These include the establishment of monopolistic models, marginalization of some communities, data security challenges, and others. Effective and up-to-date legal and regulatory frameworks are necessary to ensure holistic and inclusive outcomes. Successful fintech innovations demand close cooperation between banks, fintech firms, governments, and regulators.
About the Author:
Hemant G is a contributing writer at Sparkwebs LLC, a Digital and Content Marketing Agency. When he’s not writing, he loves to travel, scuba dive, and watch documentaries.