Prior to joining Regenesys Business School, Dr Priyanka served as assistant professor of finance at Jaypee Institute of Information Technology in Noida, India. This followed a stint as a research associate and finance lecturer at the National Institute of Financial Management, which is closely linked to India’s Ministry of Finance. She is actively involved in research, with 15 publications to her credit, and is among peer-review website Publons’ top-ranked academic reviewers.
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Technology has brought a paradigm shift in the financial sector, increasing access to financial services in profound ways. The ultimate goal of every economy is to achieve sustainable development goals (SDGs), and financial inclusion is a key enabler in this (World Bank, 2022).
The spread of Covid-19 led to a significant increase in the adoption of fintech in the form of mobile-based applications (Fu and Mishra, 2020), creating new opportunities for the financial sector – particularly in emerging economies – and giving momentum to financial inclusion.
According to the latest World Bank report (Demirgüç-Kunt, Klapper, Singer and Ansar, 2021) 76% of adults globally now have accounts at formal financial institutions, compared with 69% in 2017. The surge in account ownership is attributed to the rise of mobile money, a pay-as-you-go digital transaction service offered by mobile network operators and agents outside the traditional banking network (as opposed to mobile banking, which simply permits bank transactions on a mobile device). In many economies, mobile money has created new opportunities to serve women, the poor, and other traditionally unbanked groups.
Where rising account ownership has been observed, gender disparity in access to financial services in developing countries has narrowed. Nonetheless, gender disparity remains (Adegite and Machethe, 2020). In 2021, 74% of men and 68% of women had bank accounts in developing economies (Demirgüç-Kunt, Klapper, Singer & Ansar, 2021).
This said, eliminating gender disparity and providing access to mobile money and financial services are not enough, alone, to be regarded as a panacea for poverty. Money management and technology skills are needed to help the poorest out of their situation, and offering this training should be part of the inclusive finance drive.
Just as the severe acute respiratory syndrome (SARS) epidemic in 2003 accelerated China’s digital payment and e-commerce development (Sahay et al., 2020), fear of covid contagion – which, post March 2020, kept people out of banks and made them wary of handling cash – hastened the adoption internationally of digital financial services such as mobile money and mobile banking. The IMF noted that digital financial inclusion increased in Asia and Africa between 2014 and 2017. India was among the countries that saw a surge in digital financial services, which expanded approximately 95-fold in five years (IMF, 2020).
Circumventing traditional supply-side obstacles
Fintech can provide people with real-time control over their finances (Brainnard, 2016). As reported in the IMF financial inclusion survey, supply-side factors such as stringent terms and conditions, lengthy documentation, long distances to bank branches, poor infrastructure, and harsh treatment from bank employees are key barriers to households to actively using financial services (IMF, 2020). But recent developments erode such obstacles. Digital services circumvent long and costly trips to bank branches and ATMs as well as the need to handle cash, and in addition help cut the risk of theft. Unified payment interface (UPI) applications such as BHIM UPI, Paytm, Google Pay, and PhonePe are excellent platforms for households to make payments for various services that provide attractive offers and rewards. Uptake of their services also creates a database for institutions to check the creditworthiness of customers.
Fintech has also been associated with GDP growth in China (Song and Appiah-Otoo, 2022), allied to third-party payments, credit and insurance.
While gender disparities in access to digital financial services shrank during the pandemic, the gap could widen again post-covid due to societal attitudes. But in the long term, covid has the potential to accelerate digital financial inclusion, as seen post-SARS in China.
Enabling digital inclusion
Several enablers are required for digital financial inclusion: customer identification, digital infrastructure, financial literacy, and a supportive regulatory environment. Reliable identification of customers to prevent fraud is the first step in promoting digital financial services. In India, which had no single, nationwide unique identification system for citizens until 2010, the introduction of Aadhar numbers to serve this purpose was a game changer.
Better digital infrastructure is vital to providing greater access. During the pandemic Jordan, which had relatively mature social security platforms (ILO, nd), turned to two organisations to relay emergency economic relief to disadvantaged households: the National Relief Fund and the Social Security Corporation. The money was sent to recipients’ bank accounts and mobile wallets (World Bank, 2021).
Some African countries are tackling their regulatory frameworks, urging banks and other financial institutions to waive or cut fees and increase daily transaction limits for electronic financial services (Machasio, 2020).
While regulatory frameworks are required to maintain a balance between information sharing and privacy protection, frequent changes in this environment can be a constraint. Other constraints to fintech development include a lack of technical expertise and of funding. Fintech startups are mostly funded through angel investors, crowdfunding, private equity, venture capital and hedge funds. Few firms are publicly funded and listed. According the World Bank (2021), what had been a slowdown in funding became acute during the pandemic.
There are three further factors to consider in the developing world: poor signal, poor technology literacy, and poor financial literacy. With regard to the last, easy digital credit – while convenient – creates risk for financially illiterate people (Kaffenberger, Totolo, and Soursourian, 2018).
Action required
The pandemic created an ideal opportunity for fintech companies to promote digital financial services in emerging economies. According to the IMF, better access leads to better financial services outreach. Governments, particularly in emerging economies, must invest in digital infrastructure such as internet connectivity and electricity provision to improve access to fintech, and financial and digital literacy must move up policy-makers’ and regulators’ agendas if they are to improve financial inclusion.
In addition, it is necessary to:
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- Make households digitally literate: To overcome barriers to financial services, more must be invested in digital literacy, as well as connectivity (Hunter and Rosenkranz, 2022).
- Kickstart account registration by requiring state social aid to be paid into formal accounts: According to the World Bank (2022), this is the reason 35% of low-income earners opened their first financial account. This measure should be incorporated into national financial inclusion strategies, along with regulations that support thriving, sustainable mobile money services.
- Encourage saving: Institute financial literacy programmes at school and adult level.
- Ensure interministerial co-operation: Draw financial and telecommunications regulators, education and competition authorities into a co-ordinated, long-term drive to support financial inclusion.
As governments may struggle to initiate and sustain these such initiatives, they would be well advised to consult the private sector to advise on them, and to consider forming public-private partnerships to implement them.
References:
Adegbite, O.O. & Machethe, C.L. (2020). Bridging the financial inclusion gender gap in smallholder agriculture in Nigeria: An untapped potential for sustainable development. World Development, 127, 2-10. https://doi.org/10.1016/j.worlddev.2019.104755
Brainard, L. (2016). The opportunities and challenges of fintech [conference presentation]. US Reserve Bank Board of Governors, Financial Innovation. https://ideas.repec.org/p/fip/fedgsq/928.html
Demirgüç-Kunt, A., Klapper,L., Singer, D & Ansar, S. (2021). Financial Inclusion, Digital payments and Resilience in the age of COVID-19, The Global Findex Database 2021. World Bank Group. https://openknowledge.worldbank.org/bitstream/handle/10986/37578/9781464818974.pdf
Fu, J. & Mishra, M. (2020). The global impact of covid-19 on fintech adoption. Swiss Finance Institute Research Paper Series. No. 20-38. https://ideas.repec.org/p/chf/rpseri/rp2038.html
Hunter, S. & Rosenkranz, P. (2022). Covid-19 is changing financial inclusion: Can policymakers keep up? Asian Development Blog. https://blogs.adb.org/blog/covid-19-changing-financial-inclusion-can-policymakers-keep
International Labour Organisation. (nd). Social Protection: Jordan. https://www.social-protection.org/gimi/ShowCountryProfile.action?iso=JO
Kaffenberger,M., Totolo, E., and Soursourian, M. (2018). A digital credit revolution: Insights from borrowers in Kenya and Tanzania [working paper]. CGAP. https://www.cgap.org/sites/default/files/publications/Working-Paper-A-Digital-Credit-Revolution-Oct-2018.pdf
Machasio, I. N. (2020). Covid-19 and digital financial inclusion in Africa. https://openknowledge.worldbank.org/bitstream/handle/10986/34637/COVID-19-and-Digital-Financial-Inclusion-in-Africa-How-to-Leverage-Digital-Technologies-During-the-Pandemic.pdf?
Sahay, R., Allmen, U., Lahreche, A., Khera, P., Ogawa, S., Bazarbash, M. & Beaton, K. (2020). The promise of fintech: Financial inclusion in the post-covid era. IMF Working Paper No. 20/09. https://www.imf.org/en/Publications/Departmental-Papers-Policy-Papers/Issues/2020/06/29/The-Promise-of-Fintech-Financial-Inclusion-in-the-Post-COVID-19-Era-48623
Song, N. & Appiah-Otoo, I. (2022). The impact of fintech on economic growth: Evidence from China, Sustainability, 14,(10) 6211. https://doi.org/10.3390/su14106211
World Bank (2022). Financial Inclusion. https://www.worldbank.org/en/topic/financialinclusion/overview
Dr. Priyanka Tandon
PhD, Financial Inclusion (Motilal Nehru National Institute of Technology, Allahabad, India); MBA, Finance (APJ Abdul Kalam Technical University, Lucknow, India); MCom (Sam Higginbottom Institute of Agriculture, Science and Technology, Prayagra, India); BCom (University of Allahabad, India). Prior to joining Regenesys Business School, Dr Priyanka served as assistant professor of finance at Jaypee Institute of Information Technology in Noida, India. This followed a stint as a research associate and finance lecturer at the National Institute of Financial Management, which is closely linked to India’s Ministry of Finance. She is actively involved in research, with 15 publications to her credit, and is among peer-review website Publons’ top-ranked academic reviewers.
