Jakob Rost, CEO, Ayoconnect.
getty
According to the World Bank, financial inclusion is one of the main 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 76% of adults globally to have an account at a bank, other financial institution or with a mobile money provider—up from 68% in 2017 and 51% in 2011.
Around the world, however, there are discrepancies from country to country. In the U.S., 94.95% of people 15 or older have an account, while the figure is 51.76% and growing in Indonesia, fueled by one of the most dynamic economies in the world.
Is fintech helping to improve financial inclusion? In short, yes. A recent study by the Cambridge Centre 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 progressing in financial inclusion within their customer base.
The study found that many customers are women, from low-income households or small- and medium-sized enterprises (SMEs)—groups who face challenges when looking for financial services. Indeed, women and low-income households exceed half of fintech firms’ 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 U.S.
Overlaying that high penetration with relatively low access to banking means many people have access to online merchants and services—but not necessarily the ability to pay for what they find. Because online shopping typically offers the lowest prices, this can exclude people from finding the best deals.
Fintech, in the form of open finance and embedded 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 cash at offline outlets. Fintech also enhances convenience. Automated payments like direct debit remove the need to remember to pay on time and avoid wasting time paying manually in a bank.
Embedded finance (EF) makes payments easy and available in everyday apps from providers people trust. Many of today’s most successful challenger banks have built their operations using APIs from so-called “banking-as-a-service” providers such as Stripe, Solarisbank and hundreds of others.
Sharing account data with open finance also creates opportunities for businesses 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 people or small businesses previously unable to acquire loans under conventional credit-scoring methods. As the scope of open finance expands, other new financial products and services are likely.
Although this solution is not completely developed, EF may also be able to form the basis of other new services such as Sharia-compliant buy-now-pay-later that would further expand the acceptability and take-up of financial services in large areas of the world.
What about SMEs?
The unbanked debate is normally framed as a consumer issue but also applies to SMEs, particularly around growth financing.
According to the World Bank, SMEs are particularly important in the economies of developing countries. They comprise the largest source of businesses globally, generate jobs and contribute up to 40% of GDP in emerging economies. If we add in informal SMEs—unregistered family-run businesses or sole proprietorships—this figure is significantly higher.
Access to finance is the second-most cited obstacle facing SMEs when growing, which references the estimate by the International Finance Corporation of a $5.2 trillion annual funding gap faced by formal micro, small and medium enterprises (MSMEs) in developing countries. This challenge is being confronted by 65 million firms or 40% of formal MSMEs. As the CCAF study referred to earlier demonstrates, fintech is playing a significant role in breaking down this barrier to finance for SMEs and MSMEs.
Key Learnings
Digital finance access, aided by smartphones, is on the rise globally. That includes the surprisingly large percentage of unbanked in markets like the U.S. (4.5%) and those caught up in markets like Indonesia.
In order to continue these improvements, companies in the fintech space will need to look at how new digital finance tools can help optimize customer experience (CX). If you’re selling something—as a retailer, a utility supplier or an online marketplace—you have more options to embed digital tools than you think. There are many ways to offer this kind of optimization—for example, including payment options like direct debit, recurring payments management and “cash out,” which allows neobanks to offer cash withdrawal options from offline channels other than ATMs, such as supermarkets and post 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 is not getting any easier to find. It may be the best option to explore ready-to-use APIs that add value to your existing customers while maintaining control of your core software with a small internal team.
Finally, optimization of CX is just a starting point. These tools can be used as the basis for new payment models for your business, with the potential to dramatically expand revenues. Offering credit options to previously excluded people opens up new demographic segments or territories to your business.
With these changes comes entirely new business models—essentially digital transformation. Fintech, by addressing financial exclusion, is creating entirely new business opportunities for those ready to react, but they must be willing to prioritize these goals and understand how they can serve future and existing customers.
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