Fintech has revolutionized the financial industry. Ever since fintech companies began to flourish in the 90s, the financial industry has birthed new and exciting ideas aimed at improving user experience and helping financial institutions become more efficient and provide a better service.
Fintech and innovation are great tools to promote financial inclusion. In fact, between 2011 and 2014, the number of adult account holders in the world increased by 700 million and the unbanked population fell by 20%, mainly due to fintech. However, emerging markets struggle with several problems when it comes to financial inclusion.
Poor financial inclusion, especially in Africa, is due to several factors, including:
- high levels of informal employment
- strict documentation requirements to open bank accounts
- low financial product penetration
- very few credit information services
- low financial literacy
How can fintech help improve financial inclusion in Africa?
Democratizing access to financial instruments is key to ensure economic growth. Financial inclusion can also lead to a 30% increase in Gross Domestic Product (GDP) in countries such as Kenya, according to EY. It is also crucial for emerging markets, where accessible financial products at affordable prices can dramatically affect economic growth.
According to a World Bank report, nearly 2 billion people still do not have a basic transaction account. A previous report from this same entity stated that 17% of unbanked adults were located in Sub-Saharan Africa. Fintech is slowly but steadily finding ways to fill the gap. Some of the ways in which financial technology solutions positively impact financial inclusion in Africa are:
Lowering transaction costs
By developing e-payments and transfer services, fintechs provide accessible opportunities for low-income clients. In addition, individuals working from abroad can also transfer their earnings easily, quickly, and in a cost-efficient way through ebanking solutions.
Lower transaction costs can help consumers access other financial services such as risk management options and investments, helping households improve their financial stability and resiliency.
According to a Human Sciences Research Council (HSRC) survey, 76% of low-income consumers indicated that high transaction fees are major drivers of financial exclusion, which has led to a high percentage of Eastern Africans, to use mobile money, which is considerably cheaper than bank transactions, and available mainly due to fintech companies.
In countries such as Myanmar, Ghana, and Kenya, governments are lowering transaction costs and increasing the number of transaction limits to encourage consumers to use fintech platforms, helping accelerate the process towards digital solutions.
In Kenya, where digital salary payment and wage transfers have been implemented extensively, has led to travel and wait times reductions as well as an income raise of up to 30% for rural households.
Remittance is another great issue in this continent. In fact, according to The World Bank, annual remittances in Africa amount to $40 billion dollars, but the cost of the money transfers is the highest in the world. They also represent at least 3% of the GDP of 19 African countries, and in Liberia, it ascends to 31.2%, and employ over 800 million people in the continent.
Mobile wallets, also a fintech solution, have presented a great opportunity to lower the cost of remittances across the entire continent.
In addition, money transfers via established operators are extremely costly. In South Africa, for example, the cost for sending money is 14.6% of the total value sent, the highest in the world, according to the International Monetary Fund (IMF).
Through fintech, customers are able to access money from local agents like post offices or small businesses. Currently, more than 4.3 million people are registered mobile agents all over Africa, including in rural areas, which has led to new, reliable sources of micro-lending and micro-insurance.
By increasing competition with the few amount of banks in Africa, can lead to banks improving the efficiency of their processes and reducing operating costs. New competitors are generally smaller, which means they have less operating costs and can offer the same services at lower prices, which will ultimately benefit consumers.
Reducing credit market problems
Entrepreneurship is a key factor in economic growth in emerging markets, and yet, several small and medium enterprises (SMEs) are struggling to even start operating. The reason? Access to (affordable) credit.
Not having access to credit can severely hinder business growth. In the MENAP region (Middle East, North Africa, Afghanistan, and Pakistan), approximately 32% of companies consider access to credit a major constraint in growth (6% above the world average). In Nigeria, only 7% of businesses have taken out a formal loan, and most of them are generally not approved.
Trade credits are essential to day-to-day operations of small businesses, but due to the global financial crisis, provision is falling and access to trade credits is becoming increasingly more difficult. By adopting financial technology solutions, companies have found ways to democratize credit options for small businesses.
Credit risk assessment is also quite costly in Sub-Saharan Africa. By not having reliable sources of accounting and financial information on businesses and individuals, as well as the fact that there are no credit bureaus, it is extremely difficult for banks to grant loans.
By adopting fintech solutions such as big data and machine learning, the cost of credit risks assessments goes down. They can, for example, provide more information on individuals and businesses through their mobile phone usage data as well as payment data. For instance, in Uganda, where less than a third of the population has an account at a financial institution, lenders use First Access software to screen potential clients and match them with the right financial products.
Digital microloans are also becoming extremely popular as an alternative to family loans. In Nigeria for example, several fintech companies offer small loans of as little as $150 in 24 hours.
It’s not over yet…
New fintech solutions are developed every year to continue bringing financial products to users and addressing concerns from potential consumers. Some of the trends we expect to see in 2021 are:
- Autonomous finance: using the power of artificial intelligence (AI) and machine learning, fintech companies are looking to provide money management assistance to users, by evaluating the different options available to users and helping them select the most beneficial ones. This can help boost financial literacy.
- Robotic process automation: in the same way that AI can assist users, it can also provide useful tools to financial institutions, to help speed up backend office processes such as customer onboarding, credit card processing, security checks, etc. It will perform tasks more efficiently at a lower cost. By cutting waiting times and speeding up the process, consumers can start using the different financial products in no time.
- Blockchain: known mainly due to cryptocurrency, blockchain is an extremely versatile tool with thousands of different uses. Fintech companies are adopting blockchain technology to ensure transactions are extremely secure and that information can be stored safely, minimizing the risk of hacking or leaking. By providing a more secure option, confidence in e-banking and digital financial services can increase.
Fintech solutions have definitely altered the slow course financial inclusion was on in Africa, resulting in extremely positive changes, but there is still a long way to go. Fintech can be applied not only to finance, but translate into important changes in other areas, such as infrastructure, agriculture, development, and economic growth, which also impact financial inclusion.