How Has Fintech Increased Financial Inclusion for Underserved Demographics?

With societies around the world becoming increasingly cashless, it is difficult to imagine living without a bank account — a account is usually needed to make purchases, pay bills, transfer funds, invest, and save. But that’s the reality for the many people. Some 1.7 billion adults around the world today remain unbanked.

However, that unbanked population shrank by 35% over the last decade, with 1.2 billion adults gaining access to financial services. The fintech industry played a role in this process.

By reducing the need for brick-and-mortar branches, fintech companies drive down costs and lower the barrier to entry for people to access financial services. Fintech apps increase the speed and accessibility of financial transactions and processes.

The Rise of Fintech

Short for “financial technology,” fintech is a catch-all term that describes all technology that is used to augment, digitize, or disrupt traditional financial services. The term refers to apps, algorithms, software, and other technologies for both mobile and computer-based tools. Fintech also incorporates hardware, such as virtual reality trading platforms, or smart piggy banks. Fintech platforms facilitate routine tasks, like paying bills or transferring money between accounts, and support more complex functions, like crypto exchanges and peer-to-peer lending.

By reducing the cost of providing financial services, the fintech industry has helped make them more accessible to the billions of previously unbanked individuals worldwide. Especially over the last decade, fintech has increasingly been helping consumers manage their money and streamlining processes to make banking faster and easier.

For example, fintech lenders are making the lending process faster and more accessible by operating entirely online and offering more flexible interest rates. Apps like Venmo, Cash App, and Zelle make it easy to transfer money to others, regardless of their bank, with a flew taps on a smartphone screen.

Personal finance apps like Mint enable us to budget, set savings goals, and track our financial health. Apple Pay has allowed us to pay with a tap of the phone rather than carrying around cash or credit cards. Companies like Acorns and Robinhood allow people to start investing by using robo-advisers, automatic transfers of spare change from purchase transactions, and other features that make investing more accessible to a wider swathe of the population.

Fintech plays an ever-increasing role in so many aspects of our daily lives. According to Ernst and Young’s 2019 Global FinTech Adoption Index, fintech uptake has increased significantly from 2015, rising from 16% of the global population to 64% today. According to the report, 75% of consumers used payment and money transfer solutions in 2019.

Different Categories within Fintech

As the industry has evolved, fintech has grown to include a variety of different niches and categories:

· Digital Banks: Operating online, without the need for brick-and-mortar branches, digital banks allow clients to complete deposits, withdrawals, and transfers on a website or app.

· Digital Payments: Innovations in payment technologies enable consumers to pay for goods quickly and easily, and avoid the expensive fees associated with international money transfers when paying non-US vendors.

· Blockchain and Cryptocurrencies: Serving as the backbone for cryptocurrencies, blockchain technology essentially creates a public, distributed, decentralized ledger of transactions or other records. The main benefit of blockchain is that it is extremely secure and resistant to tampering.

· Insurance: Insurtech is one of the newer branches of fintech. This industry category is increasing access to insurance for consumers with ultra-customized policies and dynamically priced premiums.

· Alternative Financing: Encompassing rewards-based financing, equity-based financing, donation-based financing, and debt-based financing, alternative financing enhances access to capital for entrepreneurs and small businesses, enabling business owners to establish and grow businesses that might have struggled to access funding through traditional channels.

Fintech in Developing Countries

Prior to the arrival of fintech, emerging markets faced considerable challenges on the road to increased financial inclusion. Thanks to innovative startups and brave investors, massive opportunities have opened up in fintech.

In developing countries, gaps in the banking system have limited business growth, stifled consumer demand, and impeded overall economic growth. By harnessing fintech, staggering business success has been achieved in numerous countries around the world, from China to Kenya.

Fintech has helped to advance a key goal for sustainable global development: financial inclusion. Financial technology has helped unbanked individuals access a range of payment platforms and services, including credit. In the process, this has helped to reduce inequality and alleviate poverty.

Although substantial progress has been achieved over the last 20 years, it is estimated that a third of all adults worldwide remain excluded from financial services. Experts estimate that widespread financial inclusion could lead to the creation of about 95 million jobs globally by 2025, which would increase the GDP of emerging economies by an estimated 6%.

Though there is still more work to be done, fintech solutions have already gone some way toward leveling the playing field, democratizing access to affordable banking services, and paving the way for financial inclusion for all.