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 argue that the burden of expanding financial inclusion should not be borne by private companies alone. They say governments also have a role to play in promoting financial services to underbanks.

Wherever you are as you read this article, it is likely that you are already enduring higher inflation than has been the case in the past ten years. In the UK, where we are both based, it has been suggested that as much as 40 per cent of the population could 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 subset 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 means are the least well served by 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 unbanked (meaning they do not have access to traditional financial services at all) or underbanked (they do not have access to affordable financial services). More than half of unbanked households said they did not have enough money to keep in an account, while 30 percent claimed they do not trust banks and 9 percent reported banks are in an inconvenient location. One can question whether using financial services really matters. In many economies, it actually matters because not having access to financial services means paying more, which is especially important for anyone who is economically underprivileged.

A telling example is offered by Pierpaolo Barbieri, founder of Ualá, a financial technology, or “fintech,” company in Argentina. He mentioned that people used to sell Netflix subscriptions on Mercado Libre, an eBay equivalent in that part of the world. This is the case even when Netflix prices its services in these geographies at USD4 or USD5 a month. For many low-income earners, being able to use Netflix is ​​a way to keep the family entertained and happy. Yet they also tend to be those without 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 digital money-first world, we should think about all those businesses, like small local producers or Sunday market vendors, who are missing out on sales opportunities because of 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 cannot access loans – the basic funding to get their ideas off the ground. It is clear that the effect of financial exclusion goes beyond economics – it has far-reaching social consequences.

We need more finance and technology

In recent years, fintech has become a central part of the agenda for financial inclusion. With the help of 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: via this lending product, a borrower can take out a loan 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 costs of lending. Fintech has time and again shown that it is able to offer a wider range of financial services and products at lower prices, as well as 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 comes more critically than ever before. As our energy and food bills increase, the financial situation of many in our communities will only become more precarious. Some food bank users are now turning down items such as potatoes. Why? This is because they cannot afford the energy to cook them. The soaring cost of living will push vulnerable groups to the financial brink. We are about to enter a financial crisis that could easily turn into an economic crisis. But the underbanked and the unbanked are likely to suffer disproportionately more because not having access to any interest-paying account or investment product has prevented them from being able to counteract the purchasing power erosion caused by inflation. The unbanked may need to take time off work to handle their transactions in person, at a time when every penny counts.

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

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Notes:

• This blog post represent the views of the author(s), not the position of LSE Business Review or London School of Economics.
• Selected image of Nathan Dumlao on Unsplash
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