While fintech innovations such as mobile banking and digital wallets have transformed developed economies, these technologies also can potentially change millions of lives in the developing world. Governments and international organizations such as the World Bank and the United Nations have discussed the ability of fintech applications to address financial exclusion.
What Is Financial Exclusion?
Nearly 2 billion people do not have access to essential financial services, including savings and checking accounts and personal loans. While every country has financially excluded individuals, these populations are concentrated in nations with underdeveloped infrastructure.
Financial exclusion has several causes. For example, people may live in remote areas without access to banks. Other factors include financial products that are inappropriate for a population’s lifestyle. Banks that only service large business loans cannot support small-scale farmers who need more targeted microloans.
Certain demographics are at higher risk of financial exclusion than others. Women are more likely to be financially excluded in cultures where they are denied financial and ownership rights. Similarly, people from marginalized backgrounds or who are low income are also much less likely to have access to financial services.
What Are the Consequences of Financial Exclusion?
People and populations who are financially excluded can face negative consequences. Individuals who do not have access to bank services in highly digitalized societies experience difficulties in routine tasks, such as receiving income or paying bills. They may also be excluded from government benefits that require a bank account.
In societies where financial exclusion is more prevalent, people are more at risk of financial precarity. For example, people may not be able to save without a bank account, which increases vulnerability to food insecurity in times of crop failure.
On a wider scale, financial exclusion can stifle economic growth. Business owners do not have access to capital that could help them scale and increase local employment opportunities.
How Fintech Can Close the Financial Inclusion Gap
Expanding access to financial services by building brick-and-mortar banks in remote areas is not financially viable. However, smartphone penetration rates are on the rise across the world. Fintech technology can connect smartphone users to basic services without a large upfront investment in traditional financial infrastructure.
Fintech firms can take advantage of pre-existing mobile data purchasing and remittance networks. Individuals can go to local markets to transfer cash onto their mobile accounts. They can also send and receive money completely online. Many web-based financial institutions also offer savings accounts and loan options directly through their mobile apps.
Governments can support fintech development and access by aligning their financial regulations to global standards and expanding Internet infrastructure.
Fintech technology can also improve quality of life and financial stability through the following strategies.
Improving Financial Literacy
Many fintech apps include educational components that can increase user financial awareness and literacy. Fintech apps are flexible enough to work for high and low-literacy populations.
For example, some apps introduce automatic savings schemes that help users build emergency funds. Other apps allow users to buy insurance products that would otherwise be inaccessible.
More advanced users can use fintech apps to access advice previously only accessible through a financial professional. Apps can create visual projections for loan payments, investments, and savings goals that help users make informed financial decisions.
Equalizing gender parity
Fintech lowers the access barrier for services that exclude the most vulnerable populations. For example, due to disparities in the workforce and lifelong earnings, women are much less likely to hold investments than men. Women who do invest have much lower savings than men.
Fintech allows women to overcome barriers to traditional investing, such as large minimum investments. Fintech apps are also designed to be beginner friendly. Apps walk users through the investing process in a low-stakes and supportive manner.
Facilitating remittances
The remittance market processes more than $700 billion in money transfers every year.
In some countries, foreign remittances make up around 4 percent of their gross domestic product.
The traditional remittance process requires multiple middlemen. The sender will deposit cash at an agent, which is then transferred to an agent in the receiver's country. Once there, the receiver must travel to the agent and pick up the cash. This process can be time-consuming and delay fund transfers.
Sending remittances through agencies is also expensive. Fees average between 7 to 20 percent of the total deposit. Currency conversion rates can also reduce the amount of cash that reaches the receiver.
Fintech applications such as mobile wallets can smooth out the remittance process by allowing senders to transfer money directly into the receiver’s account. Depending on the fintech application and the receiver’s country, funds are accessible instantaneously.
Thus, fintech can eliminate extraneous fees and delays. Furthermore, senders can be more responsive to financial emergencies by sending money immediately when needed. This prevents minor financial setbacks from escalating into more serious situations.