The Rise of FinTech: Unlocking Financial Inclusion for the Unbanked

Introduction

Financial Technology (FinTech) has made significant strides in the financial landscape, particularly in enhancing financial inclusion. Financial inclusion can be defined as the provision of affordable and accessible financial services for all, and it is also the foundation for equitable economic development. Many barriers have led to large segments of the population from accessing financial services leaving them unbanked and unable to participate in the global economy. FinTech is challenging this legacy by leveraging digital technologies to create an inclusive financial ecosystem. This article will delve into: What is FinTech, and how has it evolved to address the issue of financial inclusion? Who are the unbanked and underbanked, and what challenges do they face in accessing financial services? How have FinTech innovations like mobile banking and digital payments solved these challenges?

What is FinTech? How has it evolved to benefit Financial Inclusion?

Jacques Crouse defines it as the integration of information technology and finance. It includes various tools designed to automate financial services such as digitising transactions, credit, insurance and wealth management.

FinTech has majorly progressed through 3 eras:

Although this concept was introduced to automate financial transactions and enhance efficiency The global financial crisis of 2008 exposed vulnerabilities within traditional banking systems, transforming FinTech into a necessity for creating more buoyant and inclusive financial solutions. Fintech plays a vital role in facilitating financial inclusion. Technologies such as mobile banking, blockchain, and data analytics have made banking accessible to the deprived by providing financial services. FinTech succeeded in reshaping the face of the financial world through financial services offered directly through mobile devices, thus a no requirement for physical branches.

Who are the Unbanked & Underbanked? What challenges do they face?

The terms unbanked and underbanked depict the segments with a lack of access to formal financial services. As per the World Bank, data indicates that nearly 1.7 billion adults around the globe remain unbanked, where South Asia, Latin America and Sub-Saharan Africa are bearing the repercussions of financial inclusion.  The unbanked segments comprise adults with no bank account and thus do not have a credit history, making it challenging for them to gain access to credit, loans, or savings accounts. Even though the underbanked segments can gain access to formal financial services through limited-service options or high fees, they rely on informal financial mechanisms, including payday loans.

These segments encounter several challenges:

·      Lack of Physical Access:

There is limited infrastructure in rural areas which prevents access to brick-and-mortar financial institutions. Much capital is needed to keep the physical bank branches in less populated areas making them financial deserts where such services are near null.

·      High Transaction Fees:

Traditional financial institutions impose hefty fees that are unaffordable for low-income individuals. For individuals surviving on minimum wage, transaction costs, minimum balance requirements, and account maintenance fees make banking services prohibitive. The FDIC National Survey of Unbanked and Underbanked found that 21.7% of unbanked households cited minimum balance requirements as the main reason for not having a bank account.

·      Limited Credit History and Documentation:

Many individuals in developing economies lack formal identification which is a prerequisite to access any financial service. Hence, individuals cannot build credit scores or qualify for loans.

·      Financial Literacy Gaps:

There is a lack of understanding of financial products in underserved populations, resulting in individuals not engaging with financial services even if they are accessible. According to the FDIC National Survey of Unbanked and Underbanked, 18.1% of unbanked households use nonbank financial services compared to 47.7% of banked households. This indicates that unbanked households are less likely to engage with financial technology and may rely on alternative financial services.

These barriers sustain cycles of poverty, as these segments are prone to financial shocks and hence limited opportunities to participate in the global economy.

How have financial innovations addressed these challenges?

The benefit of FinTech is mobile banking and digital wallets as essential tools for financial services, truly making a difference in financial inclusion. Unbanked and underbanked individuals can gain the benefits of direct financial services on their smartphones by eliminating traditional banking obstacles such as geographical distance and inflated costs.

Example: M-Pesa in Kenya

M-Pesa, a FinTech platform launched in 2007, came to be, offering an easy means by which users could avail banking services without necessarily having to hold an account in a bank. In 2021, more than 60% of Kenyan adults reported at least once having used M-Pesa, leading to high penetration in underserved populations while providing the user with the capacity to store funds, make transactions, and take microloans. M-Pesa plays a vital role in building millions of underserved individuals into Kenya’s financial system.

FinTech has also moulded credit availability in the era of availability through non-traditional lending models that derive credit scores through non-conventional data.

Example: Tala in Kenya and the Philippines 

Tala lends data-driven microloans via mobile device data, social behaviour, and other metrics by providing power to those who lack conventional credit histories and thus opens the access to finances for people who are credit-invisible. Using data from 250+ points for creditworthiness and loans up to $500 available to credit-invisible people, it opens access to credit for less developed populations who have been left behind or excluded from formal banking systems.

The adoption of blockchain technology in FinTech is fairly new, yet promises to provide secure and transparent transactions. In areas where trust in financial services is low, blockchain-based solutions can be beneficial to mitigate this fear.

Example: BitPesa in Africa

BitPesa, a blockchain-based platform, assists African businesses in cross-border payments, and currency exchanges affordable by eliminating the intermediary.

Conclusion

FinTech has introduced financial services to millions of people who could not previously have access to such services due to conventional financial services. With FinTech, the gap between the formal financial sector and underserved populations can be bridged by providing them with the tools to enhance economic empowerment and break vicious circles of poverty. The real indicator of Fintech’s effectiveness will rely on its ability to not only reach unbanked individuals but also offer them the necessary financial tools to survive in the digital economy.