Financial inclusion is of growing importance in today’s society, affecting all countries. Financial inclusion has the power to ignite the global economy by boosting economic growth and supporting innovation. The imminent need to “bank the unbanked” has been a key priority for Fintechs, especially during the pandemic which forced many to turn to digital services. Fintechs are setting up a “digital portable identity” stored in phones and used across border, in order to facilitate customer identification – the first step of financial inclusion. Thus far, fintechs are contributing to the larger goal of financial inclusion through meeting the needs of those who are commonly overlooked by traditional banking systems.
What is Financial Inclusion?
According to the IMF, it is estimated that 1.7 billion adults globally are deprived of access to financial services. Access to financial services is the most important driver of economic development, facilitating day-to-day living, strengthening the availability of economic resources and building the concept of savings to the unbanked population. Financial inclusion thus encourages the access to formal finance services at affordable costs, boosting the growth and welfare of an economy. Financial inclusion affects all countries, with 22% of the population in the USA being unbanked. There are many inhibiters of financial inclusion, from the lack of access to credit for SMEs, to the lack of access to understandable financial services for a segment of the population. Such countries are now realising that an efficient way to increase financial inclusion is through the use of fintechs.
How do Fintechs Drive Financial Inclusion?
The pandemic has created an immediate need for safer and efficient banking experiences, enhancing the adoption and use of fintechs. As aforementioned, the objective of fintechs is provide and serve the unmet needs of the segments of the population that are not the main targets of traditional financial services, contributing to the larger goal of financial inclusion. COVID-19 has showed that when informal cash-out services become unavailable people are able to turn to digital services. According to a McKinsey Global Institute Report, by the end of 2025, digital finance would reach $3.7 trillion to emerging economies’ GDP. Whilst fintechs are banking the unbanked, providing accessible and user friendly services, the key issue with adoption of digital services is trust. Many physical services have been replaced both pre and post-COVID by digital ones, making it harder for the unbanked to use and trust them. The State Bank of India has avoided this obstacle by employing 61,000 agents to connect with customers to enrol them in a convenient manner, lowering costs and increasing trust.
Regulation has prevented traditional banks to innovate and keep up with this new shift to digital, with high compliance creating barriers to entry for banking services, preventing banks from lending and supporting the economy. This has created an ideal environment for fintechs to get ahead, innovating the industry, lowering both transaction and service costs. Whilst traditional banks provide loans for longer durations to larger companies, fintechs provide them to SMEs providing technical solutions to a niche market. Fintechs are able to fill the gaps that traditional banks have created, giving access to credit for SMEs and lowering household transaction costs.
Traditional banks are now realising that in order to compete with fintechs and expand their services, they need to partner up with fintechs. Partnering up with fintechs allows traditional banks to develop a framework that supports digital banking, shifting their services to a digital one, broadening the scope of financial inclusion. Financial institutions need to forge a fintech partnership as opposed to forging their own strategy. The reason being is that institutions lack the resources and capacity to focus on fintech efficiently and effectively. Furthermore, fintechs are outsourcing their technologies as it is, and are thus able to solve specific financial problems.
