Fintech: financial inclusion for the tough times ahead

The increased cost of living affects people who not only lack financial means, but who struggle to access money. Using technologies, fintech companies have been able to deliver financial products and services in ways that traditional companies cannot. They have become part of the financial inclusion agenda. Terence Tse and Andrea Maria Cosentino argues that the burden of expanding financial inclusion should not be borne by private companies alone. They say that governments also have a role to play in promoting financial services to sub-banks.

No matter where you are while reading this article, it is likely that you will already have to endure higher inflation than has been the case over the last ten years. In the UK, where we are both based, it has been suggested that as much as 40 per cent of the population may fall into fuel poverty this winter: almost 14 per cent of UK households struggled to afford food in April 2022, and this is on the way up. A subgroup of the population is likely to suffer even more from the increased cost of living, and this is because they not only lack financial means, but also struggle to access money.

Basic economics

Historically, people who lack financial resources are the least well-off of the financial industry. They suffer from a lack of financial inclusion. “Financial inclusion” refers to giving individuals access to useful and affordable financial products and services, regardless of their background or income. For example, in the United States, in 2019, about 25 percent of households were without a bank (meaning they do not have access to traditional financial services at all) or a subbank (they do not have access to affordable financial services). More than half of non-bank households said they did not have enough money to have in an account, while 30 per cent claimed that they did not trust banks and 9 per cent reported that the banks were in an impractical place. One can ask questions about whether the use of financial services really matters. In many economies, it is actually important because not having access to financial services means paying more, which is especially important for anyone who is financially underprivileged.

A telling example is offered by Pierpaolo Barbieri, founder of Ualá, a financial technology company, or “fintech”, in Argentina. He mentioned that people used to sell Netflix subscriptions to Mercado Libre, an eBay equivalent in that part of the world. This is the case even when Netflix rates its services in these geographic areas at $ 4 or $ 5 a month. For many low-income earners, being able to use Netflix is ​​a way to keep their family entertained and happy. Nevertheless, they also tend to be those who do not have access to a payment mechanism. Ultimately, many of them have to resort to paying higher prices to buy Netflix subscriptions by paying those who can pay online on their behalf on the auction site.

On the other hand, in a world of digital money first, we should think of all those businesses, like small local producers or Sunday market vendors, who miss out on sales opportunities due to their inability to accept digital payments. Entrepreneurial individuals may not be able to access the e-commerce service provider because they do not have the tools to receive payments online and do not have access to loans – the basic financing to get their ideas started. It is clear that the effect of financial exclusion goes beyond economics – it has extensive social consequences.

We need more economy and technology

In recent years, fintech has become a central part of the financial inclusion agenda. Using technologies, these companies have been able to deliver financial products and services in ways that traditional companies cannot. Take, for example, a product called Huabei by Ant Financial, a major fintech in China: through this lending product, a borrower can take out a loan with a size as small as RMB20 (GBP2,40 / USD3,11) for as short a period as three months. It is difficult to imagine that traditional banks with such a small loan size would be able to cover the cost of lending. Fintech has repeatedly shown that they are able to offer a wider range of financial services and products at lower prices, in addition to better customer service than traditional players.

However, the burden of expanding financial inclusion should not be borne by private companies alone. Governments also have a role to play in promoting financial services to sub-banks. This is coming more critically than ever before. As our energy and food bills grow, the economic situation of many in our society will only become more precarious. Some food bank users are now rejecting items such as potatoes. Why? This is because they can not afford the energy to cook them. The sky-high cost of living will push vulnerable groups to the brink of extinction. We are about to enter a financial crisis that could easily turn into an economic crisis. But the underbanked and those without a bank will most likely suffer disproportionately more because not having access to any interest-paying account or investment product has prevented them from being able to counteract the erosion of purchasing power caused by inflation. Those without a bank may need to take time off work to take care of their transactions in person, at a time when every penny earned counts.

Financial inclusion should be able to help with the cost of living crisis.

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Note: The mail gives the views of the authors, not the position USAPP – US policy and politics, not even from the London School of Economics or the IMF, its Executive Board or its management

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About the authors

Terence Tse – Hult International Business School
Terence Tse is a professor of finance at Hult International Business School and co-founder and CEO of Nexus FrontierTech, an AI company. He is also one of the founders of Excellere, a think tank with the goal of helping people explore and unleash their potential through new technology. He has worked with more than thirty corporate clients and intergovernmental organizations in advisory and training capacities. He has written over 110 articles and three books, including The AI ​​Republic: Building the Nexus Between Humans and Intelligent Automation (2019).

Andrea Maria Cosentino – Valentia partners
Andrea Maria Cosentino is the senior manager of Valentia Partners, a London-based fintech and banking strategic consulting company. He is also a co-founder of Impact Foundry, a London-based Angel and VC that specializes in power and innovation across industries, focusing on FinTech. He is also a guest lecturer at ESCP Europe Business School.