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The rapid adoption of mobile phones and financial technology is helping more people benefit from access to financial services, but 1.4 billion people globally still lack access to a bank account.

Financial inclusion – which aims to ensure access for all to financial services, such as payments, savings, credit and insurance — has improved rapidly as financial technology has developed and spread. In developing countries, 71% of people had a bank account in 2021, up from 42% a decade earlier, found a World Bank report last year.

How fintech is driving financial inclusion-figure2

The expansion of digital access to financial services reduces poverty and inequality by expediting business and giving people a secure way to build and protect wealth. It also acts as a catalyst for economic growth by facilitating access to credit to support small businesses and smooth consumer spending, as International Monetary Fund executive Ratna Sahay underlined during a presentation to CFA Institute members.,

Increased accessibility to financial services, however, raises important issues around the role of regulatory oversight and the need for financial education to protect vulnerable populations from exploitation.

Digital payments: the starting point

The fundamental driver of the improvement in financial inclusion has been the growth of digital payments, which surged during the COVID-19 pandemic. The proportion of adults in developing economies making or receiving electronic payments grew from 35% in 2014 to 57% in 2021, driven by reduced physical interaction and increased wariness of handling physical cash.

Large developing countries have been the keenest adopters of digital wallets: these services are used most in China, India, and Brazil, in that order – significantly ahead of other markets.

Use of digital payments has a catalytic effect: most adults who receive digital payments also make them, and are more likely than those who do not to save, borrow, and store money.

Mobile money

Digital payments are of course fundamental to mobile money – storing and managing money in an account linked to a mobile phone – which facilitates business in more remote or rural areas.

Such services reduced the extreme poverty index by 42% in Bangladesh by giving urban migrants the ability to send income back to their households in rural areas. Between 2008 and 2014, they helped lift 194,000 Kenyans, or 2% of the population, out of poverty.

In 2021 one-third of adults in Sub-Saharan Africa had a mobile money account — the largest share of any region in the world and over three times the global average of 10%, estimates the World Bank. Beyond making payments, mobile money accounts have also become an important method to save in Sub-Saharan Africa, where 15% of adults – the same share that used a formal account at a bank or other financial institution.

How fintech is driving financial inclusion - figure 1

Accessing credit

Financial inclusion is also about facilitating financial support. Technology can help provide access to short-term financing to people who typically wouldn’t be able to get credit.

To generate credit scores to facilitate loans, lenders would typically rely on information on credit card usage, loan repayments, and mortgage history. Where this is difficult or unfeasible, fintech firms may often also – or instead – look at alternative data like rental payments, asset ownership, utility payments, and even usage of social media or streaming services.

Using alternative data can be particularly positive for so-called “invisible primes” – borrowers with low credit scores and short credit histories but also a low propensity to default, shows US government research. Funding loans like these leads to better economic outcomes for the borrowers and higher returns for the fintech platform.

Investment management for the masses

In addition to expediting payments and broadening access to credit for the general public, fintech is also democratizing investing. It is doing so by bringing new tools and services that appeal – and are affordable – to a broader range of investors.

Low-cost passive investment, for instance, has been a huge growth market in recent years, via exchange-traded funds (ETFs). Easily accessible via digital platforms, these products provide quick, diversified access to different asset classes, geographies and sectors.

Fintech can help further simplify the investment process. For example, some apps automatically invest users’ spare money from purchases into a diversified portfolio of ETFs. Robo-advisors, meanwhile, make trades on an investor's behalf using survey responses and algorithms.

Insurance against financial shocks

Access to insurance – viewed as a fundamental service by many individuals in developed markets – is also being transformed by fintech, or in this case insurtech.

Unanticipated shocks, like illnesses or injuries, can be a major setback. Yet tens of millions of Americans are uninsured, while only around half of adults in developing countries say they can access extra funds for an unexpected expense within 30 days.

Insurtech businesses are helping to address key issues, particularly in emerging markets, including:

  • lack of accessibility to insurance – for example, by using mobile technology to increase access to insurance for those living in rural areas;
  • low affordability – by using data analytics to reduce insurance costs;
  • slow access – by utilizing artificial intelligence to streamline the underwriting procedure, allowing individuals to get insurance more quickly and easily.

Obstacles to overcome

Financial inclusion may have seen major advances in recent years, but there is still a long way to go. Globally, some 1.4 billion remain unbanked. Insufficient money, documents, or digital footprints are some of the main reasons people don’t have accounts.

Fintech helps address the obstacles to financial inclusion, but it also lowers the barriers to entry for financial service providers, especially in markets with less stringent regulation. That can mean, for example, that borrowers are more vulnerable to potentially unscrupulous lending practices, such as overcharging or failure to properly consider risks and underwriting costs.

If the digital financial services ecosystem expands without sufficient oversight and risk controls, it could harm those it is supposed to help. In short, there must be adequate protection for those who use digital platforms to make financial transactions.

All this underlines the crucial importance of financial education, even in advanced economies, if more people are to build up, manage and protect their wealth effectively. Financial service providers – and other organisations – are increasingly recognising the importance of financial education, even in advanced economies. Globally, 28 banks signed up to a new project launched in December 2021 by the UN Environment Programme Finance Initiative to encourage the banking sector to embed, set and report on targets related to financial inclusion and financial health.

The fact remains that some two-thirds of adults globally are very worried about at least one area of financial stress, whether it’s paying medical bills, paying school fees, paying regular monthly bills or having enough money for old age.

If financial inclusion, with the help of fintech, continues to advance, that proportion can surely come down substantially.


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