Innovative FinTech Solutions Promoting Financial Inclusion In Developing Countries
What are our Future FinTech Champions learning at the moment? And what are their thoughts on the current development of FinTech? Read through this submission from one of our FFCs, Deekshita Bhantooa currently studying Banking and Finance @ Curtin Mauritius.
As per the most recent report from the World Bank Group, around 1.7 billion adults are unbanked globally, which means adults who do not use banking institutions in any capacity make up roughly 25% of the global population. There is broad consensus that access to a transaction account can help families and businesses plan for everything from long-term goals to unexpected emergencies. The lack of access to mainstream financial services impairs the ability of people to translate the income they earn into wealth and be financially secure. It is vital for everyone to be part of the formal financial system and have access to a transaction account to store money, send and receive payments, have access to loans and credit to manage their financial lives. As financial inclusion is a building block for poverty reduction and boosts prosperity by increasing the economic opportunities of the poor, it is by default critical to achieve inclusive growth which is a sine qua non for sustainable economic growth and development.
The majority of individuals without a basic transaction account cite the lack of funds as the primary reason, which indicates that financial services are unaffordable to poverty-stricken people. Geographical distance is also a major barrier as financial institutions usually set up their operations in urban areas while most of the unbanked individuals live in remote rural areas. Other reasons include the lack of personal identification documents as well as the lack of trust in financial service providers arising from a lack of understanding about how financial products and services work. Thanks to FinTech innovations most of the aforementioned barriers to financial inclusion can be eliminated.
What is FinTech and how can it spur financial inclusion?
FinTech is finance and technology coming together to offer new, innovative solutions to businesses to enhance their business operations or to help financial institutions better serve their customers by improving and automating the delivery and use of financial services using technologies such as artificial intelligence, machine learning, blockchain, smart contracts, biometrics, and data analytics to name a few. FinTech is revolutionizing the financial industry as the integration of the aforementioned technologies into the traditional financial sectors renders financial processes cheaper, faster, and more efficient. FinTech is set to disrupt and reshape the financial services industry by bettering the quality of financial services, slashing costs, and building inclusive financial sectors.
The positive contribution of the FinTech industry to financial inclusion is immense. While FinTech services in developed economies are focused on online customers, start-ups in developing economies are dealing with a wider market: mobile phone users. As per the International Telecommunications Union, an agency of the United Nations, around 95.5% of the world’s population have access to a mobile phone – which gives SMS a more considerable impact than the internet.
How is mobile money changing people’s lives?
Several phone-based peer-to-peer money transfer services have contributed enormously to positively alter the economic situation of unbanked and underbanked populations in various countries. M-Pesa, Africa’s most successful mobile money transfer service established in 2007 in Kenya by Vodafone’s Kenyan associate – Safaricom, offers a full suite of financial services to millions of Africans who possess a mobile phone, including those who are unbanked or underbanked. Today it is the financial service of choice for over 42 million people in 7 African countries -the Democratic Republic of Congo, Egypt, Ghana, Kenya, Lesotho, Mozambique, and Tanzania. M-Pesa provides people with a safe, secure, and affordable way to send and receive money, top-up airtime, make bill payments, receive salaries, and obtain short-term loans to name a few.
Real-time money transfer helps individuals to circumvent several difficult situations. Originally, urban dwellers had to travel for hours to give money to their parents or relatives who live in remote areas that are hundreds of kilometres away. Alternatively, they would choose to send neighbours or a public vehicle driver plying the route to deliver the cash. Thanks to M-Pesa, real-time domestic and international money transfers have been made possible. Consequently, urban residents can both save time and money as they no longer have to travel. M-Pesa also provides a secure alternative to traveling with relatively large amounts of cash. Furthermore, utility bills can be settled within seconds instead of commuting to a distant office with a fistful of cash and waiting in a long queue. Taxi drivers can operate their businesses in a safer way as electronic payments from their customers means that they do not have to carry fiat money. Shop owners no longer have to close their shop to travel to the bank, often based in urban areas to deposit cash, instead they can use M-Shwari which is a paperless banking service offered through M-Pesa. They just have to convert the cash into e money at the nearest M-Pesa agent and then move the e-money to their M-Shwari savings account where interest will be earned on the savings balance. Hence, innovative mobile money solutions allow small enterprises to operate efficiently which can in turn help local economies to prosper.
Moreover, mobile lending apps are now an easy source of credit for the unbanked who have no formal borrowing history. The applicant’s mobile phone use and in-app behavioural data are analysed to decide whether the latter is eligible for the loan. This includes viewing the SMS receipts by utility companies for bills paid in cash, noting the length and number of calls to estimate phone bills, and checking whether applicants scroll quickly or slowly through the loan’s terms and conditions. Using this data, the company’s machine-learning algorithms calculate individual risk. The application takes only minutes and money is either sent to the borrower’s mobile money account or other cash out options. Some FinTech start-ups providing microcredit in low-income countries using alternative credit scoring include LenddoEFL, Tala, Jumo and Branch. Microcredit enables poverty-stricken people to engage in self-employment projects which lowers the chances of the world missing out on countless new ideas, businesses, and innovations. It also supports the working capital needs of entrepreneurs without easy access to institutional finance. Consequently, microcredit promotes entrepreneurship and alleviates poverty.
Mobile Money – Statistics and Facts
In 2020, the number of registered mobile money accounts grew by 12.7% globally to 1.21 billion accounts – twice the predicted growth rate. This is no small feat for an industry that is just over a decade old. With 310 live services in 96 countries and over 300 million monthly active mobile money accounts, mobile money is entering the mainstream and becoming the route to financial inclusion in various developing countries. However, what these figures do not capture is the empowerment that comes with having a mobile money account. More women are using financial services, low-income households are accessing essential utility services and smallholder farmers are getting paid more quickly and conveniently. Meanwhile, millions of migrants and their families are experiencing the life-changing benefits of faster, safer, and cheaper international remittances and humanitarian cash assistance is being delivered more thoughtfully to those in crisis situations. All of this is unlocking new solutions to some of the world’s most intractable development challenges and highlighting the catalytic role that mobile money is playing in achieving the Sustainable Development Goals (State of the Industry Report on Mobile Money 2020). Successful mobile money deployments such as Telesom ZAAD in Somaliland, Dialog eZ Cash in Sri Lanka, Econet EcoCash in Zimbabwe, SMART Communications SMART Money in the Philippines, Globe Telecom GCASH in the Philippines and MTN Mobile Money in Rwanda opened a connection to the financial system for a large swath of the previously excluded.
People have different life goals and access to financial services can play a significant role in attaining them. This is the essence of building a financial system that works for everyone. The goal of financial inclusion is to have a financial system that drives the use of financial solutions so that economic opportunities are increased following which people will be better able to manage risks, step out of poverty and build a better life. It is undeniable that the ubiquity of mobile money and the ability to make immediate transactions are changing lives by facilitating inclusive growth, economic development and financial deepening.
Wrapping it up with an anecdote from the International Monetary Fund’s 2020 External Sector Report, “Somewhere remote in a low-income country, in the early hours of the morning, a woman wakes up and dials her cell phone. She is borrowing a very small amount of money digitally to buy vegetables in the local market. During the day, she will sell her inventory in her shop located in the outskirts of the town. Some customers will pay her using their mobile wallet, others with cash. She will transfer the cash onto her phone at the shop next door, where the merchant is also a mobile money agent. At the end of the day, she will be able to pay back her loan and keep her profit in her mobile wallet. She can use this mobile money to pay for the gas she uses to cook dinner, as the utility company has recently connected its payment system to the mobile money infrastructure. In her daily life, this is huge progress.”
The future is FinTech, cheers!
REFERENCES - PART 1
REFERENCES - PART 2
https://www.elibrary.imf.org/view/IMF087/25378-9781484371015/25378- 9781484371015/25378-9781484371015_A001.xml?language=en&redirect=true&redirect=true&redirect=true&redir ect=true&redirect=true&redirect=true&redirect=true&redirect=true
REFERENCES - PART 3
The FinTech Book: The Financial Technology Handbook for Investors by Janos Barberis
The Mauritius Africa FinTech Hub is a fast-growing ecosystem where entrepreneurs, corporations, governments, tech experts, investors, financial service providers, universities and research institutions can collaborate to build cutting-edge solutions for the emerging African market.