By Elena Mesropyan for LTP
With around 2 billion people around the world not having access to formal financial services and certain catastrophic events in the Middle East have led to millions becoming undocumented migrants (there are >232 million undocumented migrants internationally), the matter of financial inclusion has become one of the most important goals and responsibilities for innovative companies working with financial technology.
Given the scale of the problem around the world and its particular depth in developing countries, a systematic solution has been required to change the situation and cover the gap created by the hallmarks of the formal financial system that has been inherently exclusive to the eligible population in developed countries.
As Reeta Roy, President and CEO of The Mastercard Foundation fairly noted in the recent press release by the Foundation, “Financial inclusion is essential to improving the livelihoods of people living in underserved communities, and for advancing a country’s overall economic growth and prosperity. Large numbers of people across the developing world need and want access to modern financial products and services that work for them. <…>”
Developing regions like Africa require substantial investments and effort, presenting, in turn, yet underestimated opportunity for entrepreneurs and institutional players for responsible innovation and inclusive growth. The scale of financial exclusion in markets like Africa is dramatic – according to some estimates, two-thirds of adults in Africa do not have an account at a formal financial institution.
Financial exclusion is a cancerogenic problem, it touches a great range of other aspects of families’ lives and has a tremendous effect on future generations. The Mastercard Foundation cites various researches that list such positive implication of inclusive growth as the boost of job creation and the growth of investments in education. In addition, financial inclusion directly helps people living in poverty to manage risk and absorb financial shocks.
Manuel Valadas Preto, the Founder of M-Eskudo, earlier this year shared his insights on the importance of technological solutions in the financial services industry in ensuring financial inclusion in highly unbanked markets.
As Preto commented, “Banks have understood that getting more out of the flat-growing existing customer base is quite difficult and erodes operative margins as they enter a price war. In highly unbanked markets, on the other hand, growth can be achieved by grabbing unserved customers and technology is the core tool to achieve it. <…> The potential for FinTech in developing markets is immense, as technology can more easily solve the issue of poor infrastructures while not having to cope with legacy systems.”
Indeed, some of the most important technologies that could dramatically change the situation in highly unbanked markets have emerged on the rise of FinTech – big data analytics, blockchain, mobile-centered solutions, biometric-centered solutions, etc.
Some of the ‘inclusive technologies’ we have emphasized before have been recognized by Preto, who listed the four technologies he believes to have an enormous potential if applied to the un- or underbanked segments in developing countries: blockchain for IDs, hybrid blockchain for reaching the unbanked, IoT for banking and payments, IT and big data for improvement of credit scoring.
Other professionals pointing out the importance of inclusive technological solutions in the financial services industry are emphasizing the diversity within FinTech itself in relation to the problem. Not all FinTech is equally inclusive and some would argue that the number of startups leveraging FinTech approaches to include the underbanked isn’t as large as in the developed world.
Even though inclusive growth has been one of the hallmarks of FinTech revolution, not all FinTech is born equal and some companies can be distinguished as a ‘pure breed’ in solving the core problem that has started the whole FinTech movement in the first place. Solutions developed by those companies have been specially tailored in response to the technological foundation of the developing markets and particular needs of the target audience. While PayPal has been thriving in the US, M-Pesa has been successfully solving the problem for people in markets where it matters on a different level rather than sending money to a friend for a pizza party or for sharing an Uber.
First appeared at LTP