It is undeniable that technology is shaping the way we live, come together, grow and thrive as part of a global society.
Fintech is an important part of this modern digital reality. According to Accenture, investments in fintech leaped from $3.2 billion in 2012 to $42.1 billion in 2020 as fintech has made increasing traction in creating real change in the real world.
Financial inclusion has been an important part of this. From early wins such as providing the ability for the rural unbanked in Africa to send funds via mobile telephone or the wisespread use of e-wallets in China, fintech is helping more of the global population participate more meaningfully in the global economy.
What is financial inclusion?
“Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way” – The World Bank.
Across the globe, more than 2 billion people are still unbanked, with no access to a bank account or any banking services, while 2.5 billion are underbanked, still relying on alternative financial products such as money orders, check-cashing services and payday loans. In the United States, one of the strongest economies in the world, an estimated 22% of its citizens are either unbanked or underbanked.
After Covid-19 erupted last year with its disastrous effects on our economies, causing business closures, lockdown and tourism prohibitions, helping people from both emerging and developed countries to access all economic support available became paramount.
In the midst of it all, digital financial services greatly helped this critical situation by providing cashless options to people who were living under social distancing measures, and facilitating Government payments as an effort to alleviate the effects of the virus on our economies. Use of digital services across the board soared, and finance was at the centre of it all.
In this way, fintech companies are using a problematic reality as an opportunity and are striving not only to provide equal access to financial services for individuals, indiscriminate of nationality, age or race; but also, to bridge a gap and to include those societies around the world, who have been underserved by banks or still haven’t had the chance to access banking services at all.
Here are a few reasons why fintech companies are the biggest driver of financial inclusion:
Accessibility
One of the main obstacles that prevents people from accessing banking services is the long distances they need to travel to reach their local bricks-and-mortar banks. It’s been many years since the first provider successfully provided a mobile financial service and this type of offer continues to see enthusiastic uptake.
A great example is one of our portfolio companies, MyMy, a successful Malaysian based digital financial services provider that aims to support financial inclusion by offering easy, useful and friendly digital payments, and banking solutions to all, including those that were underserved by traditional banks before.
Customer-focused strategies
In the developing world, simply having a bank account massively improves individual and community safety by preventing people and families from having to carry and store cash. Additionally, it helps people send or receive money without wasting energy and time going to a physical location.
For example Jai Kisan, a fintech company built by graduates from Texas A&M University, works to empower farmers in India by providing low cost and sustainable options to finance their agricultural equipment and other rural yield-generating assets. A key part of this product is enhancing the ability of financial institutions to provide credit, by offering a more accurate assessment of the data around each farm.
Reduction of fees
Sending and receiving money between international banking institutions used to be long and tedious, and remains broadly expensive when sending money overseas. However, companies such as Transferwise (now Wise) have shown how the fintech industry is changing these paradigms. For instance, in the case of Mexicans working in the United States, sending over remittances to their families used to be a big problem, due to overpriced and unreliable services.
By managing two accounts, one in the sending and another in the receiving country, Transferwise reduces the transaction costs. It also encourages people to open a bank account themselves, as it is necessary to do so to use this service.
Less regulations = less bureaucracy
Traditional banks are strictly regulated by governments and rightly so. However, by renting parts of the banking system, fintechs are able to take advantage of this safe foundation to create the kind of innovative solutions banks are unable to offer themselves.
However, while fintech companies are indeed beginning to play a major role in financial inclusion, there are other variables that must be taken into consideration to guarantee their success in an emerging market.
Political leadership
Working to gain the support of the local governments and central banks is essential for a fintech company to be successful in a developing country. It is vital to create clear communication channels with these institutions regarding the importance of the service provided and its positive effects on society.
Having stakeholders working as a team
It is paramount to convince all the parts involved to unite their efforts in order to facilitate progress. Banks, financial supervisors, telecom companies and regulators each have their own agenda and ways of functioning. This is why it is important to share a common goal and to work on finding a mutual understanding between them.
International community needs to be involved
Based on M-Pesa, a successful fintech company that offers people in Kenya and Tanzania the possibility to send and receive mobile money, international foundations such as Bill & Melinda Gates and companies such as MasterCard have played a vital role in its development. This is a great showcase of how organisations may be willing to help fintech companies by funding the necessary digital infrastructure for a successful implementation.
We live in times of great inequality but also of great opportunity. It is necessary to start including those vulnerable populations around the world into the digital economy, enabling them to enjoy benefits that are now commonplace for those in developed societies, such as having a bank account, sending and receiving money, and making online purchases.
Many fintech companies are taking a step forward in this process by offering new alternatives to millions of people. There is hope that, with the collaboration of governmental and private institutions, a better world will start becoming possible for many more.