Is technology the answer to the financial exclusion problem?

By Viktoria Ruubel on Monday 20 November 2017

OpinionAlternative Lending

Viktoria Ruubel, Chief Product Officer, IPF Digital, takes a look at fintech's potential to help the unbanked.

Viktoria Ruubel, Chief Product Office, IPF Digital, takes a look at fintech's potential to help  the unbanked.

Access to financial services is something that many of us take for granted, but there are over 2 billion people around the world don’t have access to responsible credit and more than half of adults in the poorest households are unbanked.

Humans naturally seek security and social belonging. Being able to access mainstream financial services is an essential part of social progress as it allows individuals to insure, save and invest in their family’s immediate needs and future prosperity. Financial inclusion, therefore, is an important enabler of basic security, social inclusion, self-esteem and dignity.

Data from the World Bank show that, globally, 38 per cent of adults on the planet don’t use a bank for psychological, cultural, and educational reasons. This is hardly surprising, when there is little indication that banks and traditional financial institutions want to accommodate them as customers.

The limitations of the traditional financial model

The main reasons for financial exclusion include the rising number of low-income workers and the proliferation of the ‘gig economy’, low disposable incomes, bank indebtedness, high transaction costs and the inevitable closure of bank branches and post office networks in some areas. Non-bank lending in the form of home credit has provided a safe entry point for tens millions of consumers into mainstream consumer finance, but an increasingly digital world, it cannot meet the needs and expectations of those who want to borrow remotely through an agent-delivered networks.

And it’s not just the developing world where financial inclusion levels are low. The situation varies greatly within the EU where a total of 58 million consumers over the age of 15 are unbanked. Some EU countries have 90 per cent account-holding rate whilst others, like Romania with 39 per cent account-holding, demonstrate that the varying levels of inclusion co-exist within the same economic bloc.

Being banked is vital for low-income consumers and businesses based in poorer areas to be able to access credit. Credit oils the wheel of every economy, leading to investment in jobs, investment in equipment, investment in land, and tax receipts for local and national governments.

Just because an individual has no formal documentation and no official financial history, does not mean that they are not capable of being entrepreneurial, being able to grow a business, or being able to take on staff. Yet traditional finance institutions have been reluctant or incapable to give such individuals and their businesses a chance.

The increasingly important role of fintech

In recent years, fintech has taken its first steps towards providing financial services and banking for those disadvantaged by financial exclusion. Fast forward to today and mobile banks and alternative digital lenders are quickly widening financial inclusion through a mixture of innovation and technology.

Fintech companies are addressing the need for responsible products that are affordable and accessible and which protect underserved customers from the unregulated excesses of the ‘grey’ market where secured lending can lead to indebtedness and, in extreme cases, loss of assets.

They’re doing so by using the latest technology to build and launch full digital financial services. Integral to these developments has been the use of mobile technology and the application of non-traditional or alternative data and machine learning to assess customers’ creditworthiness.

Big data and machine learning use traditional and non-traditional data, for example mobile phone payments, data from social media or the way in which a person interacts with a website, to judge creditworthiness making it possible to serve customers with little or no financial history. Furthermore, these new technologies reduce the opportunity for fraud, improve the assessment of risk, and they provide better and more suitable options for individuals and small business looking to access credit.

From a commercial viewpoint, FinTech companies will see both their cost per customer acquisition and cost of handling customers reduce. This will further reduce financial exclusion and increase the range of financial products available to underbanked people and businesses.

The role of government

For the numbers of the financially included to continue to increase however, it can’t be just FinTech companies alone who are pushing for greater inclusion.

Governments, regulators and collaboration between financial and non-financial corporates will be essential, as will access to data and the correct means of interpreting it to develop financial services that meet the needs of both individuals and businesses.

For financial inclusion to succeed, governments must take a more proactive role. A good example is Kenya, where the government is actively promoting financial inclusion through innovation of financial services. The active role of government has allowed the market and regulators to partner and resulted in the development of appropriate products for the various market segments. As a result, financial inclusion is growing in Kenya, and fast. Kenyans excluded from any form of financial service dropped from over 40 per cent of adults to 17 per cent between 2006 and 2016.

A failure to act on financial exclusion means a slower ascent out of poverty in developing countries. It will also be a real denial of opportunity to citizens and businesses to boost overall prosperity and to share in it in developed countries.

What role can government play in financial inclusion?

  • The creation and adoption of digital IDs
  • Supporting healthy competition between traditional financial players, FinTech, and non-financial companies
  • Development of a simple, transparent, stable and prudent regulatory environment
  • Support for digitalisation by reducing reliance on paper documentation
  • Investing in financial and legal infrastructure to attract investment into the financial sector

Underpinning all these initiatives is central funding for financial literacy and education programmes; this latter point is important as better educated consumers will not only demand better products and service but give confidence to lenders that traditionally underbanked consumers are considered in their lending decisions, take their responsibilities seriously and are not, as many would like to think, addicted to credit and use it largely on impulse.

The role of regulators

Regulators must create space for experimentation and give FinTech businesses the green light to innovate as well as providing a fair playing field. For the ideal regulatory environment, regulators and especially supervisors who build regulatory framework for financial services must:

  • resist political pressures (whether from industry or government)
  • understand financially inclusive business models
  • fully understand the benefits of financial inclusion

However, regulation must be prudent and well thought through, requiring valuable input from the market, as frequently, well-intended regulation from central government can, on occasion, have the opposite effect; done badly it can regulate away responsible supply and drive financially excluded individuals towards unlicensed lenders who continue to meet this demand but in a manner that puts consumers at risk.

The way forward

Whilst there is no one-size-fits-all solution to improve financial inclusion, active and motivated stakeholders, including businesses, regulators, and governments all around the world can use the power of technology to materially improve the financial lives of people.

Undoubtedly technology plays a crucial role, but it needs to be supported by efforts and commitment from other actors in the public and private sector. Backed by proactive, innovation-friendly governments and supportive regulatory regimes, collaboration will drive financial inclusion forward as a commercial and political imperative. 

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