How Fintechs Can Boost Financial Inclusion
Oct. 17, 2022, 2:04 p.m.
Fintechs are computer programs and other technology used to support or enable banking and financial services. Nowadays, a more inclusive financial economy is at the center of the fintech conversation. According to the last Global Findex Database, one-third of the world population, 1.7 billion people, remain unbanked. However, access is not the same everywhere. For instance, a Statista 2021 report highlights that while countries such as the Netherlands, Australia, and Canada have a 0% unbanked population, others such as Morocco and Vietnam have 70% and 69%, respectively.
Fintechs are trying to solve the financial inclusion situation by developing innovations such as fully digital banking services and new payment and credit scoring methods. Their products and services bring more opportunities for the unbanked, eliminating bureaucracy and providing digital products available from any smartphone.
Neobanks, for instance, are entirely digital banks, meaning they have no fiscal branches. In contrast to traditional banks, neobanks offer regular banking services at a meager cost in only minutes. Similarly, e-wallets also allow unbanked people to make online purchases or receive digital payments without needing a bank account. According to the last Global Payment report, digital wallets will comprise 48.6% of e-commerce transaction value globally by 2021 and will rise to 52.5% of transaction value in 2025.
At the same time, alternative payment methods such as Buy Now and Pay Later also offer credit invisibility, a new way of financing their purchases, despite not having a credit card. The “Global Buy Now Pay Later Market 2022-2026” handbook estimates that this payment method will grow worldwide by $41.83 billion during 2022-2026, accelerating at a CAGR of 29.36% during the forecasted period. This number reflects how people seek alternatives to manage their money outside the traditional system.
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Fintechs are also innovating in the subject of lending. New credit scoring based on alternative data and artificial intelligence has given trustworthy people access to new loan opportunities through a more complete and fair credit assessment despite their lack of credit history. Alternative information derives from multiple sources such as bills and app payments, social media, and eCommerce purchases. These are collected and analyzed through machine learning algorithms capable of predicting consumer behavior and thus creating more effective profiles. It is a new and effective way of validating those financially excluded.
These companies are mainly growing in emerging markets since they can provide solutions to an economic gap resulting from traditional institutions. A DB Invest and Finnovista study highlights that fintech in America and the Caribbean has grown 112% since 2018. A quarter of the existent global fintech is born in this region. The report mentions that although the segment with the highest number of platforms is payments and remittance, with 25% of the total, lending (19%) and crowdfunding (5.5%) verticals are starting to become relevant.
Fintechs have found a way to build an intelligent equation that includes reaching new markets at low risk with significant benefits. By tapping into the lack of financial access among the unbanked population, they developed the technology necessary to open up new business opportunities among those excluded.
tag: financial inclusion, Fintech,