Making banking services affordable and accessible to everyone has accelerated post-COVID-19, from sending/receiving funds, making payments, and accessing micro-loans, to embedding open finance APIs, says Ryan Jason.
Fintech or financial technology refers to leveraging the latest cloud and AI-based technologies to compete with traditional financial firms, such as banks, in providing financial services.
This includes opening new digital accounts, transferring funds, and paying bills without going through manual KYC paperwork.
World Bank dataOpens a new window shows a movement from a cash-flushed to a cashless economy. Sweden, Norway, and other Scandinavian countries have a 0% unbanked population, and more than 95% of the transactions are carried out using digital mobile accounts and banking apps.
Key Noticeable Trends:
- High internet and smartphone penetration has enabled fintechs to fill the gap where traditional banks couldn’t
- Fintechs help in reducing social inequality and improving the economic well-being
- 71% of adults in emerging economies now have access to a bank account, up from 41% in 2011.
The primary purpose of fintechs is to assist the unbanked population in opening a bank account and making transactions within minutes. This avoids people, the hassle of visiting the bank and going through the entire procedure manually.
Developing countries such as Morocco, Pakistan, and Egypt, have an unbanked population rate higher than 50% of the total population.
What is the Unbanked Population?
According to the Oxford dictionary, an “unbanked population†is “a person having no access to services of a bank or financial firm.†This is specifically true for rural areas where the lack of internet and banking services is still an obstacle to increasing the adoption rate of banking services.
Is Fintech the Answer To Financial Inclusivity?
The World Bank sees fintechs as an essential pillar of economic growth. Here are the key impacts of fintechs on financial inclusivity:
- Reducing social inequality
- Improving gender equality
- Improving economic well-being
- Reducing the cost of remittances by 50%
But the question is, “Do fintechs have the technology and the means to improve financial inclusion?â€Â
The short answer is a resounding yes. And there is data to support this claim.
Numbers from World Bank’s Global Findex SurveyOpens a new window show that 76% of the global adult population with a bank account, compared to 51% in 2011 and 68% in 2017.
The developing countries are increasingly catching up in numbers too. 42% of adults in emerging economies had a bank account by the end of 2011. Fast forward a decade, and this figure stands at 71%.
The Penetration of the Internet
Access to the internet is the fuel fintechs require to accelerate their growth. Over the last few years, fintechs have enjoyed phenomenal success and continue to do so, thanks to increased internet adoption in far-flung and remote areas.
Internet penetration is now increasing in Southeast Asia as more and more broadband and telecom operators expand their networks to rural areas.
As of July 2022Opens a new window , Malaysia led the pack with the highest internet penetration at 93.8%, followed by Singapore, the Philippines, and Thailand at 92%, 91%, and 88.3%, respectively.
The Role of Fintechs
Fintechs play a critical role in fueling economic growth. Here are some primary roles of fintechs.
Allowing users to make transactions with a digital wallet
High penetration with low access to financial services means that people now have access to merchants, service providers, and online businesses. This is where fintechs have helped in enabling people with access to the internet to make purchases online through prepaid debit cards and payment mechanisms using a digital wallet.
Providing fast digital loans
Fintechs solve real-life problems such as sending/receiving payments, remittances, salaries, etc. But beyond enabling users to make seamless high-risk transactions, many fintechs are now operating as authorized lenders.
This allows fintechs to fill a gap of offering micro-loans to users who otherwise may not get from traditional banks and credit unions. Banks, unlike neobanks, perform background checks by looking at the borrower’s credit rating, history, and projections on the ability to repay the loan based on current and past income.
There is a lack of research in this area for fintechs, with insufficient evidence to support whether the same checks are performed as done in traditional financial institutions.
This leads to the “dark side of fintechs,†as pointed out by an IMF report. Regulators are getting increasingly concerned about the following:
- Exclusion of certain groups, such as women, the aged, and the poor in society to be able to get micro-loans
- Predatory lending practices with a short repayment time but a high-interest rate
- Inability to repay loans, leading to permanent bans from using the digital wallet
Allowing open finance and embedded APIs to pay bills
Leveraging the power of open finance and APIs allows people to make online transactions without needing a traditional bank.
An embedded open finance API is an interface allowing any business to integrate with an embedded finance provider. This will enable easy and fast access to banking-as-a-service without obtaining licenses or building the infrastructure.
Open finance and embedded APIs allow users to pay utility bills through digital wallets or transfer funds to any account in the country. This allows users to get rid of the hassle of waiting in long queues outside banks.
Many of today’s most successful challenger banks have built their operations using APIs from so-called “banking-as-a-service†providers such as Stripe, Paypal, Solarisbank, etc.
What about Financial Exclusion?
Fintechs’ primary role is to increase financial inclusivity, but at times, there could be exclusions in the following scenarios:
- The lack of access to smartphones and the internet.
- Not having enough financial and digital literacy.
- Lack of trust as banks have physical branches for complaint resolution, but fintechs don’t.
Key Learnings
Fintechs have proven to significantly impact financial inclusion in developing economies and emerging markets, such as Malaysia, the Phillippines, and Thailand, as evident from the data.
Here is how fintechs can improve their services:
- Provide a quick and easy method for opening, escalating, and resolving a financial dispute from the smartphone app
- Optimized customer experience by having an intuitive user interface
- Allow seamless inclusion of businesses
- Offer free debit cards for withdrawing cash
While the primary purpose of a neobank is inclusion, fintechs now need to focus on removing biases from the systems to bridge the gap between exclusion and inclusion.
Which key factors will create an impact on financial inclusion in 2023? Share with us on FacebookOpens a new window , TwitterOpens a new window , and LinkedInOpens a new window . We’d love to hear your thoughts!