How Fintech affects financial inclusion

Jakob Rost, CEO, Ayoconnect.

According to the World Bank, financial inclusion is one of the most important ways to monitor progress in reducing social inequality, the global spread of economic well-being and related issues, such as gender equality.

The Washington-based institution provides statistics on the issue via its Global Findex Database every three years. The latest edition reports that 76% of adults globally have an account at a bank, other financial institution or with a mobile provider – up from 68% in 2017 and 51% in 2011.

Around the world, however, there are discrepancies from country to country. In the US, 94.95% of people aged 15 or older have an account, while the number is 51.76% and growing in Indonesia, powered by one of the most dynamic economies in the world.

Does fintech contribute to improving financial inclusion? In short, yes. A recent study by the Cambridge Center of Alternative Finance (CCAF), the World Bank Group and the World Economic Forum, based on data from 1,448 fintechs operating in 192 areas worldwide, reports that many fintechs are making progress in financial inclusion in their customer base.

The study found that many customers are women, from low-income households or small and medium-sized enterprises (SMEs) – groups that face challenges when looking for financial services. In fact, women and low-income households exceed half of fintech companies’ total customers.

What role does fintech play in financial inclusion?

Southeast Asia has very high levels of smartphone penetration. In Indonesia, for example, 179 million people have smartphones, a number expected to increase to 239 million by 2026. The country ranks fourth in the world for the most smartphone users, behind only China, India and the United States

Overlapping the high penetration with relatively low access to banking means that many people have access to online shops and services – but not necessarily the ability to pay for what they find. Because online shopping usually offers the lowest prices, this can exclude people from finding the best deals.

Fintech, in the form of open finance and built-in APIs, is what makes it possible to pay on smartphone apps using digital wallets (which don’t require bank accounts) or online-to-offline payments, where buyers pay in cash on offline outlets. Fintech also improves convenience. Automated payments such as direct debit remove the need to remember to pay on time and avoid wasting time paying manually at a bank.

Embedded Finance (EF) makes payments easy and accessible in everyday apps from suppliers people trust. Many of today’s most successful challenger banks have built their business using APIs from so-called “banking-as-a-service” providers such as Stripe, Solarisbank and hundreds of others.

Sharing account data with an open economy also creates opportunities for companies to serve customers faster and better. For example, lenders can make faster, more informed decisions about whether to lend by accessing customers’ accounts and using AI to assess risk. Often this enables lending to individuals or small businesses who were previously unable to obtain loans using conventional methods of credit scoring. As the scope of open finance expands, other new financial products and services are likely.

Although this solution is not fully developed, the EF may also be able to form the basis for other new services such as Sharia-compliant buy-now-pay-later that will further expand the acceptance and use of financial services in large areas of the world.

What about small and medium-sized enterprises?

The unbanked debate is usually framed as a consumer issue, but also applies to SMEs, particularly around growth finance.

According to the World Bank, small and medium-sized enterprises are particularly important in the economies of developing countries. They are the largest source of business globally, generating jobs and contributing up to 40% of GDP in emerging economies. If we add informal SMEs – unregistered family-run businesses or sole proprietorships – this figure is significantly higher.

Access to finance is the second most cited obstacle to SMEs growing, referring to the estimate by the International Finance Corporation of a $5.2 trillion annual financing gap faced by formal micro, small and medium enterprises (MSMEs) in developing countries. This challenge is faced by 65 million enterprises or 40% of formal MSMEs. As the CCAF study referred to earlier shows, fintech plays a significant role in breaking down this barrier to financing for SMEs and MSMEs.

Key learning

Digital financial access, aided by smartphones, is increasing globally. That includes the surprisingly large share of the unbanked in markets like the US (4.5%) and those caught up in markets like Indonesia.

To continue these improvements, companies in the fintech space need to look at how new digital finance tools can help optimize the customer experience (CX). If you sell something – as a retailer, supplier or online market – you have more opportunities to incorporate digital tools than you think. There are many ways to offer this type of optimization – for example, including payment options such as direct debit, recurring payment management and “withdrawal”, which allow neobanks to offer cash withdrawal options from offline channels other than ATMs, such as supermarkets and post offices. offices.

Don’t feel pressured to develop all the software you need in-house. Building apps is slow and expensive, and the talent you need isn’t getting any easier to find. It may be your best bet to explore ready-to-use APIs that add value to existing customers while maintaining control of your core software with a small internal team.

Finally, optimizing CX is only a starting point. These tools can be used as the basis for new payment models for your business, with the potential to dramatically increase revenue. Offering credit options to previously excluded people opens up new demographic segments or territories for your business.

With these changes comes completely new business models – mainly digital transformation. Fintech, by addressing financial exclusion, creates entirely new business opportunities for those who are ready to respond, but they must be willing to prioritize these goals and understand how to serve future and existing customers.

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