How fintechs are addressing the issue of financial inclusion in developed countries
Over 30 million Americans, that’s more than 10% of the US population, are underbanked. In the world, that number skyrockets to 23% — Africa and India have the greatest percentage of individuals that have little to no access to banking services.
In Central Asia, and parts of South America, huge swaths of adults live in extreme poverty, partly due to the fact that they don’t have access to banking services. Let's take a look at how Fintechs are helping to remedy these situations and what they are doing in order to give folks better and more affordable access to key financial tools.
The 2008 Financial Crisis
The 2008 Financial Crisis was a tipping point for most individuals, particularly Americans. After that debacle, new and far stricter regulations were imposed on banks and brokers. This meant that financial institutions had to reassess who their clients were and who they allowed on their platform. In many cases, this meant that banks started to run away from riskier retails and profiles. People with sub-par FICO scores, people with no credit history, folks with criminal records, immigrants, etc.
That year, millions of individuals found themselves being deprived of their banking options. Some accounts were closed altogether and people were handed their savings and told to go somewhere else. Oddly enough, it was also the year that saw the emergence of neobanks and Fintechs.
In the United States, these neobanks took up the slack and started to incorporate the disenfranchised into their platforms. They allowed folks to not only have access to basic banking tools – like a debit card and a bank account – but also gave them technological features that weren’t present, back in 2008, in most traditional banks. Features like budget management, daily expense audits, mobile money, etc.
Fintechs are now helping, not only in the US but on a global scale, in the following ways:
- They are allowing people to build up their credit score — providing different ways to calculate it. Using alternative data, like subscription services, in order to improve it. FICO score, for example, can be improved simply by informing the institutions that gather the data on your monthly expenses — things like rent, loyalty membership services, payment of utilities, cell phone service provider, subscription service. Your Netflix account, and the fact that you pay it regularly every month, can actually add a couple of points to your FICO score.
- They can help improve your financial literacy — one of the key areas most Fintechs are now investing a lot of their effort and money in is Financial Literacy. They are trying to teach their clients how to improve their money management skills. Teaching them basic skills regarding investing and budgeting. For example, did you know that 3 out of 5 Americans don’t know the difference between an asset or a liability? That same number has no idea what inflation means and how it will impact their bank account.
- Championing — another game-changing feature most Fintech and Neobanks are incorporating into their platform are social causes. They are partly piggybacking their platforms off social or environmental causes. This allows members to champion a cause. Some will give back to a non-profit, others might tell you what your CO2 emission is based on your spending.
The role of fintech in developing countries
Fintechs and neobanks are fast becoming the go-to financial option for most countries. In the United States, for example, nearly all financial institutions—traditional ones at that – have moved online and are now relying on technology to run their business. They had to change their paradigms and adapt to the competition.
Experts predict that in the future, the whole world will move to the digital space in terms of finances — the idea of physical money, banknotes, will cease to exist. It will all be 0 and 1, binary code. This will allow greater control, more features for the users, and will ultimately help financial inclusion initiatives in developing countries.
Fintech tools, like mobile money, have already proven to radically change the landscape and have allowed places like sub-Saharan Africa to prosper.
As more startups and fintech companies stop all over the world, what experts once predicted is fast becoming a reality.
Why are fintechs good news for developing countries?
The rapid advance of digital technology, not to mention the smartphone penetration in most countries – including emerging ones – is transforming the economic and financial landscape. Fintechs offer beer and more affordable opportunities not only to their clients but to governments. They make archaic and stale financial systems more competitive and efficient, braiding and areas access to under-served populations.
In Kenya, due to the creation of their mobile money platform, M-Pesa, the country managed to infuse the global market with the economic equivalent of Germany in the span of a year after the implementation of the service.
Where are Fintechs most needed?
Fintechs are most required in the least technologically advanced countries. Countries where financial services are still limited to physically going to a bank. These counties have a huge majority of unbanked and poverty is a rampant issue.
By implementing simple neobanks, mobile money accounts, or micro-financing platforms that operate through mobile or web applications, Fintechs can make a huge difference in these places — boosting not only the banking infrastructure but creating a stable technological platform that can later be adapted to other sectors.