Can FinTech Help Alleviate Poverty and Help Low Income Persons Achieve Financial Inclusion?

“It’s expensive to be poor - fintech can help to alleviate disproportionate burdens, a type of regressive taxes, on low-income workers and households.”

Highlights:

• The World Bank and IMF note that financial inclusion is the building block to reduce poverty and improve options for greater equality and distribution of the rewards of economic growth.
• China, India, and Kenya have demonstrated that fintech is the last mile solution for financial inclusion. ?Kenya’s MPesa, China’s Weixin (aka Wechat), and India’s Paytm provide financial services via smartphones to millions of families.?
• Fintech has reduced the cost of financial services, making once unobtainable services affordable to low-income earners. The Internets’ ever-increasing penetration, especially via mobile devices, has opened an entirely new consumer base: the under banked and unbanked. This has forced traditional banks to provide equivalent services or risk irrelevancy.?

1.7 billion adults, globally, were considered “unbanked” in 2017, according to the World Bank. This means no account with a financial institution or loan provider. ?China and India, which previously had large, underbanked populations, encouraged financial inclusion via fintech, investment, regulation, and adoption within their governments.

Many financial services business models evolved, including peer-to-peer lending, mobile payments, nano deposits, insurance comparison etc. The greatest beneficiaries have been those with meager means.

Figure Caption: Asia an early adopter of FinTech services.

Source: Statista (Dated: 2017)

In this article, we will explore how fintech is driving rapid change in financial services, reducing barriers to entry. Lowering the bar to be a customer will help to decrease high relative costs to low-income persons and open those households to basic but critical financial solutions to improve generations forward.

The Current Situation of the Poor and Payments

Those in poverty face poor access to financial services because of high costs, lack of credit, and perceived high risks and costs to financial institutions to service these persons. Fintech is changing the landscape by reducing the cost to acquire and serve clients. The marginal cost of mobile payments has fallen to effectively zero from what was traditionally a high fixed cost and high spread FX business. Digital lending and rural e-commerce has enabled farmers to get loans and secure higher prices for their produce. The access to financial services also helped many low-income earners get government subsidies and stimulus package during the pandemic.

Figure Caption: Key reasons why low-income earners don’t use financial services.

Source: World Bank (Dated: 2019)

Kenya is a great case study of fintech helping to pull two percent of the population from extreme poverty. Kenya’s M-Pesa mobile payment's system included 96% of families between 2007 and 2017. ?M-Pesa helped increased financial inclusion from 26% ?in 2006 to greater than 75% by 2018. Kenya experienced a proliferation of mobile lending between 2011 and 2018. Mobile lending overtook the formal banking system and took share from micro-finance banks.

Kenya and China ?saw that easy availability of low-cost financial services helps low-income citizens become entrepreneurs by starting micro-enterprises, which drove job creation. Traditional banks have been forced to play catch-up and embrace enhanced technology. Fintech helps low-income earners escape from a cycle of poverty.

The IMF and World Bank agree that fintech will lead the way to financial inclusion and have laid out 12 elements in a “Fintech Agenda” to embrace such platforms and service offerings.

Technological Advancement in Fintech

The investment of capital and intelligence into fintech services has driven rapid technological advancements. Southeast Asia’s fintech market is changing rapidly. According to a 2019 e-Conomy SEA report, digital payments have reached an inflection point. Growth will come next from lending, investment, and insurance service, expected to grow at CAGR of 20%+ through 2025. Digital lending will emerge as the largest revenue contributor to fintech firms.

A MicroSave Consulting report found that the rapid evolution of digital credit in Kenya has increased the number of non-performing loans. Digital borrowers are now caught in a mobile loan web where they are refinancing their loans from one digital lender to the other. This is unfortunate, but a natural part of growth.

Figure Caption: Asia an early adopter of FinTech services.

Source: MicroSave Consulting (Dated: 2017)

Digital lending is increasingly “automated” as loan officials are replaced by artificial intelligence (AI) algorithms. While this has increased efficiency, it has also led to AI failures, a vulnerability of the process. AI algorithm profile errors could result in over-lending and customer over-indebtedness. Borrowers face a risk that AI may automatically “blacklist” them from credit bureaus for minor delays or infractions. This chain of events, if unchecked, could be difficult and costly to rectify. Additional risks include data breaches, passcode hacking, and weak regulatory frameworks for borrower complaints.???

Fintech’s opportunities outweigh the risks. Policymakers and regulators need to embrace these new, technology enabled solutions and provide the necessary legal frameworks to address cybersecurity, information disclosure, consumer education, etc.

Financial Platforms for Low Income People

Many types of fintech platform operate in the market. Mobile payments, digital lending, and digital deposits are growing rapidly among low-income earners. These platforms are bringing the poor into the digital infrastructure by integrating digital payments with other products like e-commerce, ride-sharing, and food delivery services.

Much of Asia’s population is young and impoverished, but improving and optimistic. Fintech has proved an effective and powerful solution to fight poverty and boost economic growth.??

References:

1. https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf
2. https://www.mdpi.com/2071-1050/13/9/5225/pdf
3. https://www.dw.com/en/is-fintech-the-latest-weapon-in-the-fight-against-poverty/a-45920457
4. https://www.standardmedia.co.ke/financial-standard/article/2001309493/mobile-lenders-drive-microfinance-entities-to-early-grave
5. https://documents1.worldbank.org/curated/en/390701539097118625/pdf/130563-BR-PUBLIC-on-10-11-18-2-30-AM-BFA-2018-Sep-Bali-Fintech-Agenda-Board-Paper.pdf
6. https://www.bain.com/insights/fufilling-its-promise/
7. https://www.microsave.net/signature-projects/analytics-of-the-supply-side-data-to-evaluate-the-progress-and-challenges-of-the-digital-credit-sector-in-kenya/ https://www.grameenfoundation.in/as-india-transforms-financial-services-for-low-income-communities/
8. https://ssir.org/articles/entry/fintech_for_the_financially_excluded
9. https://www.cgap.org/blog/great-expectations-fintech-and-poor

Image References:

1. https://www.statista.com/chart/10012/fintech-adoption-rates/
2. https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf
3. https://www.microsave.net/signature-projects/analytics-of-the-supply-side-data-to-evaluate-the-progress-and-challenges-of-the-digital-credit-sector-in-kenya/