FINTECH FOR THE LESS-FAVOURED AND THE NEW GLOBAL ACTORS

Accessing to finance is one of major challenges of the disadvantaged (“unbanked population”) financial institutions ability to reach to these “un-banked population” it is also a challenge for them. In terms of facilitating the interconnectivity of both sides, financial and digital inclusion (FI) is the conceptualization of involving the financially excluded populations and businesses into the financial and digital services. As he new technology such as blockchain and DEFI applications helps populations to get into the finance world without traces or under scrutiny of the modern finance institutions, it also raises the dilemma of governmental and non-governmental focuses. When we look at the projects such as in China, "looking to boost blockchain innovation and application in enterprise and government across the country even as it clamps down on crypto. Its?latest five year plan, a planning document that outlines development goals, put blockchain on a par with artificial intelligence, big data and cloud computing. Key government projects like the Blockchain Services Network and?Xinghuo Chain or The European Blockchain Services Infrastructure (EBSI) that is a joint initiative from the European Commission and the European Blockchain Partnership (EBP) to deliver EU-wide cross-border public services using blockchain technology. The EBSI will be materialized as a network of distributed nodes across Europe (the blockchain), leveraging an increasing number of applications focused on specific use cases?follow an “open permissioned” protocol, which seeks to retain some of the benefits of decentralization while maintaining centralized control."

Whatever the main trigger mechanism for the new technologies, we need to comprehend that digital financial inclusion provides additional populations and new national/regional actors ability to access to finance and also to prospected politics.

As a result of technological advances in the accessibility and affordability of financial tools provided by digital financial services hundreds of millions of poor people are having the opportunity to be included in the system. By means of digital payment systems they are supported by remittances of relatives abroad, paying solar energy bills or asking for micro finance with a transaction history. But next to advantages it is also being questioned and discussed that the inclusion of poor people / new national actors to the financial/business systems brings the risks over debt, unexpected players that is not controlled by modern financial institution. being exploited in their terms and benefits are less than thought and digital financial inclusion of poor by technological tools cause delays at the macro financial stability and at the improvement of infrastructure under the responsibility of governments.

As the World Bank President Jim Yong Kim stated during an opening speech of G20 Global Partnership for Financial Inclusion (GPFI) “Universal access to financial services is within reach—thanks to new technologies, transformative business models and ambitious reforms... As early as 2020, such instruments as e- money accounts, and also low-cost regular bank accounts, can significantly increase financial access for those who are now excluded” (GPFI, 2014) And 3 years later of, 515 million adults worldwide opened an account at a financial institution or through a mobile money provider between 2014 and 2017. (Kunt et Al, 2017) And also blockchain secured non-banked accounts, along with pay cards without banking system and crypto wallets helps the financial base to expand.

For having a deeper understanding of the evolution of digital financial inclusion, we may need to go as early as 1990s. As internet enabling technologies led the digital cash possible through 1990s and 2000s with credit cards, mobile phones or no touch gadgets especially after global crisis, the initiatives for financial inclusion and awareness and political preparedness has geared up also with new financial tools possibilities.

As Brooks and Gabor summarized the story line of financial inclusion, policy initiatives such as Finance for All of World Bank took the lead by emphasizing the importance of finance with the term ‘inclusive markets with a focus moving from microcredit provided by microfinance institutions to improvement of financial inclusion, later Alliance for Financial Inclusion (AFI) in 2011 popped up with an approach magnifying a network of policy-makers and regulators from 90 developing countries, Maya Declaration as a shared commitment to ‘reach the world’s 2.5 billion unbanked’ put in place national financial inclusion strategies in partnership with private sector actors.

Under G20 umbrella Global Partnership for Financial Inclusion, the Better than Cash Alliance in 2012 aimed to digitalize social cash transfers. (Brooks & Gabor, 2016) Today we should also consider the new initiative by World Bank Universal Financial Access 2020 (UFA), aiming the usage of account by poor. The UFA2020 initiative envisions that adult worldwide -- women and men alike -- will be able to have access to a transaction account or an electronic instrument to store money, send payments and receive deposits as a basic building block to manage their financial lives. (World Bank, 2018) Another new initiative to be mentioned is UNCDF (United Nations Capital Development Fund) that offers a systemic value proposition to drive finance in more dynamic ways for poor people and excluded populations. UNCDF’s tools include supporting digital payments to enable key financial flows; boosting the capacity of local governments to accept and deploy funding quickly to meet local needs; and injecting targeted investment funds into small and medium enterprises (SMEs) to stabilize local economies and accelerate recovery (UNCDF, 2020)

Although at the global level there many initiatives and policy papers, there is still “globally about 1.7 billion adults remain unbanked — without an account at a financial institution or through a mobile money provider. Because account ownership is nearly universal in high-income economies, virtually all these unbanked adults live in the developing world.” (Kunt, et al., 2018).

Another aspect is the usage of accounts. Along with many initiatives and high number of unbanked populations the discrepancies at the same time bring opportunities for creating more effective ways of financial inclusion. The first enabler for the opportunities we should mention is advancements in the digital financial infrastructure that created its own ecosystem and fintech tools. With the prospect of reaching billions of new customers, banks and nonbanks have begun to offer digital financial services for financially excluded and underserved populations, building on the approaches that have been used for years to improve access channels for those already served by banks and other financial institutions. Innovative digital financial services involving the use of mobile phones have been launched in more than 80 countries (GSMA 2014).

At the literature financial inclusion is mostly criticized by the methods it has contacted with the poor but also rewarded the fintech that brought the transparency, speed, elasticity, and the finance conditions. As the focus in at the undeserved population the social welfare and the distribution of wealth are also put in the picture due to having account or being included in the payment system do not mean to be able to pay or use the account.

The process of harvesting digital footprints simultaneously involves the poor’s use of mobile technologies and the state’s increasingly digitalized social transfers, the latter in recognition that the state, through private digital entrepreneurs, can connect (poor) populations to algorithms. The practices of digital-based FI delineate ‘at-risk’ populations into categories of borrowers (Kear 2013, Kaminska 2015) Addition to delineation of population microfinance has also negative effects for strengthen the poor.

As the poor has low cash flow and challenges for selling and product cycle, microfinance (MF) mostly resulted for higher debt and caused failure to create financial sustainability. For that reason the critics idea about the financial inclusion was, ”poverty is understood as a new frontier for profit-making and accumulation” (Elyachar 2012, Roy 2012, Soederberg 2013). In Finance for All (World Bank 2008), the Bank side-stepped such pressing questions about the pitfalls of market-based financial sector development.

It redirected attention from specialist MF to mainstream financial institutions, and to the broadening of the definition of ‘pro-poor’ financial services to include savings and payment services alongside lending, targeting both households and small businesses.

Above all, interventions were to be entirely market-based. The Bank warned governments to avoid repeating earlier ‘mistakes’ with ‘market-substituting’ policies (subsidized lending rates or government ownership of financial institutions). Instead, the Bank insisted that governments focus on market-developing policies, including macroeconomic stability and financial deepening as supply-side interventions that would create instruments for risk diversification and thus allow banks to engage with higher risk consumers. (Bayliss Et Al. , 2010) FI is, therefore, a process not only of bringing the ‘un-bankable’ into the market, and making governable subjects more legible to the state, but also one of deploying the assets they generate for broader strategies of capital accumulation that are far from transparent (Roy 2012, Soederberg 2013). The digital revolution adds new layers to the material cultures of financial(ised) inclusion, offering the state new ways of expanding the inclusion of the ‘legible’, and global finance new forms of ‘profiling’ poor households into generators of financial assets. (Gabor & Broooks, 2016)

While the focus on the literature has still concerns about the financial institutions motives there is also the enabler concept of the fintech that focuses on the benefits that it brings to daily life. Regarding multi-layer of interpretations we would like to focus on the digital payment systems, new technologies that should be tracked and what can be done for a fair and effective financial inclusion

CONCEPTUALIZATION OF DIGITAL FINANCIAL INCLUSION

“Digital financial inclusion” can be defined as digital access to and use of formal financial services by excluded and underserved populations. Such services should be suited to the customers’ needs and delivered responsibly, at a cost both affordable to customers and sustainable for providers. (Lauer & Lyman, 2015)

While the fintech helps to revive up financial inclusion also serves to include the emerging markets rural areas to be included at the financial system where most of the population does not have a bank account. Surely digital technology is not the sole proprietor of financial inclusion. Hau et. Al quotes that (2019) to ensure that people benefit from digital financial services requires a well-developed payments system, good physical infrastructure, appropriate regulations, and vigorous consumer protection safeguards. And whether digital or analogue, financial services need to be tailored to the needs of disadvantaged groups such as women, poor people, and first-time users of financial services, who may have low literacy and numeracy skills. (Hau et Al, 2019)

The goal of financial services made available via digital means is to contribute to the reduction in poverty and deliver on the recognized benefits of financial inclusion in developing countries. Financial inclusion means the sustainable provision of affordable financial services that bring the poor into the formal economy. An inclusive system includes a range of financial services that provide opportunities for accessing and moving funds, growing capital, and reducing risk. Such services may be provided by banks and other traditional financial services organizations, or by nonbank providers. (ITU, 2016) However, the use of digital financial services may not bring only advantages but also carries the risk of financial illiteracy and the negative outcomes that cannot be expected by the poor.

To have a deeper understanding and create a framework for financial services, above we will use the ecosystem offered by the United Nations Digital Financial Services Ecosystem. As we can see the components above the digital inclusion has many actors and usage areas. The complexity of the ecosystem raises from broad concept of services and multilayered functions of usage areas by actors including the governments as well as consumers and businesses. For the comprehension of this ecosystem and how the financial inclusion benefits we may classify the functions of digital financial inclusion as providing safety and security, speed and transparency, increased flexibility, serving new ways of account usage for investment, spending saving and borrowing For all functions we will try to give some implementations through the world and as a conclusion we will try to summarize what can be further done.

Digital Payment System Technologies Functions

Although financial inclusion starts with having an account, its benefits come from actively using that account — for saving, for managing risk, for making or receiving payments. Just as there are opportunities to increase account ownership, so are there opportunities to help people who already have an account make better use of digitizing payments of wages and government benefits has the potential to increase both the ownership and use of accounts. Yet efforts to digitize such payments have suffered from shortcomings. A common complaint among those receiving government transfers as digital payments is that the payment products are difficult to use.

Recipients have reported long lines at bank agents and said that they struggle to get help when they have a question or a problem with their payments. Others have reported being targeted for fraud. Millions of unbanked adults around the world still receive regular payments in cash — for wages, from the government, for the sale of agricultural products. Digitizing such payments is a proven way to increase account ownership. (Kunt, et al., 2018). Globally, 9 percent of adults — or 13 percent of account owners — opened their first account specifically to receive private sector wages, government payments, or payments for the sale of agricultural products. The share is higher in many economies In the Islamic Republic of Iran, Malaysia, and Zambia nearly 20 percent of account owners opened their first account to receive such digital payments. The same is true for about 25 percent of account owners in Argentina, Peru, the Russian Federation, and Turkey — and for about 40 percent in the Arab Republic of Egypt and Kazakhstan. Governments make several types of payments to people — paying wages to public sector employees, distributing public sector pensions, and providing government transfers to those needing social benefits. Globally, about 100 million unbanked adults receive such payments in cash. These include 60 million women as well as 55 million adults in the poorest 40 percent of households within economies. These numbers suggest the potential for increasing account ownership by moving these payments into accounts. (Global Fintec Database, 2019)

Digital financial inclusion of new actors are not only essential for their situation of being banked but also by the FinTech tools they are able to store and manage value without needing to protect cash as a physical asset. Most of households, operate almost entirely through a cash economy. This means they have to save in physical assets, such as livestock or jewelry. Cash gets spent, animals die, and jewelry can be lost or stolen. What’s more, these forms of savings earn no interest and can actually lose value over time. To send money to family, those without a bank account have to rely on couriers or friends who carry cash by bus, which is expensive, insecure, and slow. To borrow money in an emergency, they must turn to moneylenders who charge notoriously high interest rates. (gatesfoundation.org, n.d)

There is academic evidence that financial inclusion models can support overall economic growth and the achievement of broader development goals. According to a report by the McKinsey Global Institute delivering financial services by mobile phone could benefit billions of people by spurring inclusive growth that adds $3.7 trillion to the GDP of emerging economies within a decade. The research finds that widespread adoption and use of digital finance could increase the GDPs of all emerging economies by 6 percent, or a total of $3.7 trillion, by 2025. This is the equivalent of adding to the world an economy the size of Germany, or one that’s larger than all the economies of Africa. This additional GDP could create up to 95 million new jobs across all sectors of the economy. The results of a long-term impact study on a mobile money service in Kenya, M-PESA, found mobile money has lifted as many as 194,000 households – 2% of the Kenyan population – out of poverty, and has been effective in improving the economic lives of poor women and of members of female-headed households. There is also growing evidence of financial inclusion creating more stable financial systems and economies, mobilizing domestic resources through national savings and helping to boost government revenue. (Manyika et, Al.2016) Digital financial inclusion in China, however, represents more than a payment instrument.

?It has been recognized as a new financial format, which includes three basic business: digital payments, digital investments, and digital financing. Unlike in Kenya, where M-PESA was unregulated for years, China is a country where regulators have tried to keep pace with innovation. In fact, there are already several government regulations and guidelines in place for mobile money, anti-money laundering (AML), combating financial terrorism (CFT), agents, and consumer protection that could foster transformational branchless banking models. At the same time, the pace of innovation is sometimes so fast in China that regulators may find it difficult to measure risks of new services offered on the market. Unlike Kenya, China already has an extensive banking sector that now serves over 60% of the population. The reach of this system could be even greater given the growing pilots of banking agents.

There are over 3 billion debit cards in China and over 40 percent of adults own a bank card. (Duflos & Shrader, 2014) In addition, digital financial inclusion is more than a payment innovation in China, which has a broad range of digital financial products and services, such as online banks, peer-to-peer (P2P) online lending, online fund sales, online crowdfunding, and online insurance. China’s estimated 890 million unique mobile payment users made transactions totaling around $17 trillion in 2017—more than double the 2016 figure. The number of people making mobile merchant payments is expected rise to 577 million in 2019 and to almost 700 million in 2022. Digital payments are becoming so dominant that the People’s Bank of China has had to forbid what it sees as discrimination against cash by merchants who accept only digital payments. This is even more remarkable because just two decades ago, China was basically a cash economy. (CGAP, 2019)

Another common practice of digital payment services is sending money to friends or relatives to other countries that offers opportunities for increasing account ownership. Both individual consumers and small- and medium-sized enterprises face high transaction fees, long delays and uncertainty in making cross border payments. Money Transfer Organizations including Western Union, MoneyGram, and Euronet Worldwide spent decades building franchise businesses across the globe. The size of the market is also considerable, with 2016 remittances estimated at over $601 billion. Today, the global remittance industry takes out $40 billion annually in fees.

Such fees typically stand around two to seven percent of the total transaction value, depending on the volume of the corridor, and foreign exchange fees represent 20 percent of the total cost. Bank wire transfers are even more expensive, with fees of 10 to 15 percent. Banks also tend to focus only on specific corridors with a strong branch network, leaving some corridors without access to the money transfer services they need. (IFC, 2019) Addition to unbanked accounts, domestic remittances, agricultural areas payments or unregistered workforce are executed in cash and about 300 million account owners worldwide work in the private sector and get paid in cash, while roughly 275 million account owners receive cash payments for the sale of agricultural products.

And roughly 280 million account owners in developing economies use cash or an over-the-counter service to send or receive domestic remittances — including 10 million in Bangladesh and 65 million in India. Many poor people, particularly those in rural areas, receive part of their annual income through domestic and international remittances. They may also reach out to their social networks in times of need to obtain additional funds. At times, these monies do not arrive at all or do not arrive in time. The transfer can be costly and it is not clear to the payers that their funds will be directed to the proper purpose. Digital financial services can reduce costs and increase the coverage of remittances transfers, making remittances of small amounts viable. (Kunt, et al., 2018).

Another digital financial system is Pay on Demand solutions of Mastercard, a new wave of digital and financial inclusion across Africa through connectivity Currently, prepaid connections are at 98.8% in Kenya, 97.5% in Nigeria, and 99.1% in Uganda with smartphone penetration in Africa projected to reach 66% by 2025, up from 36% in 2018. Pay on Demand applies the same principle for goods ranging from the next wave of inclusion by keeping people connected.

According to demonstrated impact report of Master card Pay on demand report “by giving customers the flexibility to pay for services via their mobile phones on terms that work for them, Mastercard’s research shows that Pay on Demand business models resolve real pain points. This can be the difference between being able to switch on electric lights in a home, and entire family living with paraffin fumes from a single lamp. The need for off-grid solar lighting products is particularly prominent in Sub-Saharan Africa. Sales of off-grid solar lighting products topped 2.25 million (937,618 through Pay on Demand) across the region between January and June 2019, higher than any other region in the world.” (mastercard.com, 2020)

The financial inclusion and fintech not only covers the poor but also it is related with small businesses. Capital is the lifeblood of small businesses who depend on credit to start operate and grow. Small business relied on banks to access capital but during 2008 financial credits markets froze the banks stopped lending even to business with good credit. After the recovery there was still gap in access to capital. Small business were hurt more because they have fewer financing options than larger firms. Banks do not provide loans to small business because they are not creditworthy. The availability of new and large sources of data is not just helpful to the small business owner in managing their business and predicting their credit needs. Big data also changing the way lenders make decisions. Small business big data artificial intelligence helps financial institutions to include the businesses also (Mills, 2020) FinTech credit expands the extensive margin of credit to borrowers of lower credit scores and faces a more intensive use of its credit lines from borrowers with lower credit scores.

Despite the benefits brought by digital financial services and the efforts made to increasingly digitize cash transactions, there are still significant challenges to quickly and effectively leveraging ICT to meaningfully enhance financial inclusion. The full potential of mobile money has not yet been achieved, with 2 billion people in developing countries still lacking a viable alternative to the cash economy and informal financial services. 1.7 billion of them have mobile phones, but the industry has found it challenging to launch and scale services for the unbanked because many policy and regulatory environments are not genuinely enabling yet.

Conclusion

Blockchain technology can drive efficiency in the process and reduce associated costs for financial intermediaries and customers by: (i) providing a cost-efficient process to establish digital identity and by extension Know Your Customer verifiability; and (ii) providing a digital fiat for currency conversion. With distributed ledger technology, the sender’s digital identity profile sufficient for banks and Money Transfer Operators. But economies with a history of frequent political turbulence or those with high currency risk and capital controls are also fertile ground for individuals and households to embrace a solution that permits them to bypass the system’s inefficiencies, overcoming fears of potential risks in the execution of transactions. (IFC, 2019)

Digital financial inclusion introduces new market participants and allocates roles and risks in different ways. Digitalization of payments in terms of inclusive market economics for the less advantaged also transforms the risk and puts those people under the scrutiny of operational risks, consumer-related risks, and financial crime risks, among others. Another systemic risk is the financial literacy problem. Although the technological advancement de-skills the need for the non- educated populations in terms of consumer protection and competitive forces the challenge will also pressure the markets against the users. Financial inclusion in that regards should be under the national and subnational actors so that the macro stability and the overall financial infrastructure can be innovated under a holistic approach. Modernization of payment systems should not be delayed due to non-governmental bodies inclusion and the poor communities should not be exploited under retail market applications such as solar system implementations or bill payments or micro credit finance with high interest rates. Understanding and mitigating these risks will be key to achieving the game-changing potential rewards of digital financial inclusion. And also, we should consider the fact that the penetration of digital technologies refers to having the capital. Although the poor may have accounts, the more important thing than financial inclusion is the consistency in the inclusion by having capital to use those accounts. So, the financial initiatives achievement is related with income generation policies at the same time.

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