The role of fintech in promoting financial inclusion
According to World Bank estimates, a staggering 1.4 billion people were still unbanked in 2021, with the number representing 30% of adults in developing countries. That said, the figure was a monumental decrease from around 1.7 billion people in the previous year, which also dropped from around 2 billion in the previous five years.
The World Bank attributes the growth in account ownership to the coronavirus pandemic, with 76% of the global population and 71% of adults in developing countries now having access to financial services thanks to the digitisation of payments. The World Bank also reported that while more than half of the unbanked are women, the gap in account ownership between males and females has decreased to six percentage points from nine percentage points.
Over 50% of the world's unbanked adults live in seven countries – 17% in India, 9% in China, 8% in Pakistan, 7% in Indonesia, 5% in Nigeria, 4% in Egypt, and 4% in Bangladesh. As already mentioned, women account for more than half of the world's unbanked population, at 740 million, or 13% of all adults globally, and 54% of the unbanked, while unbanked adult men account for 11% of the world's population.
Why financial inclusion matters
Inequality remains one of the most notable challenges in a post-pandemic world, with its effects being more profound in developing economies. The case above illustrates how fintech solutions can help the world's remaining unbanked population access financial services, creating a more financially inclusive world.
A pre-pandemic estimate by consulting firm McKinsey & Company shows that improving access to financial services for the unbanked can help promote growth in global gross domestic product by up to $3.7 trillion by 2025, which will be accompanied by 95 million new jobs worldwide, $110 billion annual reduction in government leakage, $4.2 trillion in new deposits, and $2.1 trillion in new credit.
A study conducted by Tavneet Suri, an economist at the Massachusetts Institute of Technology, and William Jack, her counterpart at Georgetown University, shows that using fintech to improve access to financial services for the unbanked and underbanked can help a population increase its per capita consumption by 6%, "enough to push 64 (or roughly 4%) of the sampled households above poverty levels."
Suri and Jack noted the improved access to financial services had a more profound effect in female-headed households, with per capita consumption increasing by about 18.5%, extreme poverty among female-led households decreasing by 9.2%, and overall poverty decreasing by 8.6%. These improvements were accompanied by an increase of around 22% in savings, as a notable percentage of the population shifted from farming to retail occupations.
What can be done?
Imane Adel, executive vice president of strategy at Paymob, argues that the digitisation of payments is one way to solve financial inequality. Digitisation of financial services can help providers cut costs and reach more people, providing improved access to the unbanked and underbanked.
With the risk of coronavirus infection forcing the world to adopt contactless methods to transfer funds, such as digital payments, many of the previously unbanked people came to embrace fintech solutions to store, save, and borrow money. Around 40% of adults in developing countries made their first digital payments during the early days of the pandemic.
Adel recommends several fintech firms can take to improve access to financial services for the unbanked and underbanked. Some of the steps are as follows:
● Conducting a thorough market analysis:
This step concerns understanding the users in a financial service provider's target market, which requires taking into account their financial needs, habits, and challenges. For example, the unbanked in Muslim-majority countries such as Bangladesh may be reluctant to open accounts with a financial service provider over fears that they are not shariah-compliant.
Therefore, providing a shariah-compliant service may help reach populations in Muslim-majority economies. With Muslim-majority countries continuously expanding their finance sectors, "Islamic finance is a $2 trillion (£1.5 trillion) industry, so for fintech to have a meaningful impact on its growth, we need lots of investment," said Mohamed Damak, head of Islamic finance at S&P Global Ratings.
● Prioritising user experience:
User-friendliness is among the factors that help a financial service provider attract and retain users. According to Statista data, PayPal was the most-used online payment method in the UK in 2019. A survey by Attest in the same year showed that 49% of shoppers preferred using PayPal to make purchases. Many attribute PayPal's success to its user-friendliness.
● Ensuring accessibility:
Providing accessible services to users from all levels of literacy is one of the keys to attracting the world's remaining unbanked population. As demonstrated by the aforementioned study by Suri and Jack, providing access to the less digitally literate can help them escape poverty. Launched by Vodafone and Safaricom in 2007, M-Pesa is a mobile phone-based money transfer service that allows users to store, send, and withdraw funds, as well as make purchases and access credit and savings through a cellular phone using PIN-secured SMS text messages.
● Collaborating with relevant stakeholders:
Partnerships with relevant stakeholders such as local financial institutions, governments, and other relevant organisations can help fintech service providers reach more people in the population and better understand their financial needs, habits, and challenges.
● Adhere to regulations and standards:
Adhering to industry rules and standards, including Know Your Customer and Anti-Money Laundering regulations, is crucial to the longevity and popularity of a financial service provider, as it promotes trust and ensures legitimacy.