The Need for Fintech in Developing Economies

1.7 billion people worldwide do not have access to a bank account. As most people living in high-income countries have access to bank accounts, almost all the unbanked reside in developing economies. Thus, 1.7 billion individuals remain locked out of both global and local financial systems to date. They cannot send or receive money easily, buy things without cash or get loans at competitive interest rates. As they struggle to inculcate healthy financial behaviors like saving and investing, they can’t reap the benefits of compounding either. For both these and the privileged alike, modern financial technology is a gateway to the digital economy. 

Unbanked adults are more likely to be women, have low educational attainment, belong to poorer households, and not be a part of the formal labour force. Hence, they are even more likely to remain excluded from the financial system and fall further behind today’s rapidly modernizing society.

For instance, China and India house a large share of the unbanked adults in the world despite having relatively high account ownership among developing economies. This is due to the sheer size of their populations. There are 225 million unbanked adults in China and 190 million in India. Of these, nearly 60% are women from poor households. Nearly 50% of the unbanked are self-employed. China, India, Pakistan, Indonesia, Nigeria, Mexico, and Bangladesh together account for nearly half of the world’s unbanked population. 

It is in such countries that Fintech companies can make the greatest impact. Through financial inclusion, they can help alleviate millions out of poverty and financial backwardness. From a business standpoint, developing economies, through their large (often untapped) market size and young populations, are prime customers. These advantages outweigh deficiencies like outdated infrastructure and less-than-optimal technology prevalent in developing countries.

Further, the emergence of Fintech companies will lead to the creation of employment opportunities in the economy, bolstering overall socio-economic development. Unburdened by a “requisite” brick-and-mortar presence and operating model across locations, these companies can significantly lower costs and improve the quality of services offered to customers. Unfettered by old systems, they can make optimal use of technology to develop new models to assess risk and forecast growth. 

The technology boom in the 21^st century coupled with advances in financial services greatly contributed to the development of financial technology across the globe. It helped developing economies like Venezuela and Kenya overcome massive hurdles in financial stability and inclusion. 

Venezuela has the largest oil reserves in the world. Despite this, it struggles with hyperinflation and a resultant unstable socio-economic climate. This can be attributed to certain poor economic and policy decisions that the government made post-1998. The Venezuelan economy began to crumble owing to the subsequent fall in oil prices, deficit spending, and the printing of excess money to cover government spending, amongst other things. Hyperinflation quickly eroded the real value of the bolívar, the official currency of Venezuela. For example, the price of a cup of coffee shot up manifold in the time people got their salaries and could go to buy the said cup of coffee.

The taxes collected were not enough to pour back into the economy as the bolívars had become almost worthless. People did not have enough cash to buy essentials for banks levied a limit on the number of bolívars that could be withdrawn per day. In 2019, Venezuelans switched to using the US Dollar as their currency. This, to some extent, helped stabilize the economy in the short run.  

Fintech has emerged as a savior for millions amidst this chaos, making Venezuela a leader in digital payments in Latin America. It fills in the gaps created by a collapsing currency and an inability to possess liquid cash or a bank account abroad. Fintech permits people to transfer payments digitally for otherwise inaccessible goods and services; on the supply side, it allows vendors to gain access to clients that they would otherwise lose.

Despite 40% of the Venezuelan population being unbanked, lending and payment via financial technology are widely used to buy things like candy and cigarettes too! Today Venezuela ranks third in the world for cryptocurrency adoption, surpassed only by Ukraine and Russia. 

Kenya boasts an extraordinary success rate with money mobile accounts; this success has been difficult to replicate in neighboring countries. A mobile money account is a type of money-holding account that doesn’t require its user to hold a traditional bank account.

With just a working mobile phone and a service provider, one can conduct transactions akin to those conducted using a debit card! Traditional online payment methods like fund transfers or even peer-to-peer payment apps (like Paytm) are connected to a regular bank account. Cash needs to be withdrawn or deposited through ATMs. Mobile money accounts, while based on a similar principle, are slightly different. They use human agents as ATMs; these agents are strategically positioned at certain locations for maximum access. One can approach them with cash (to deposit) and a mobile phone to get the money credited to one’s account. Similarly, one can deposit money into someone else’s account irrespective of location within the country.

The development and proliferation of mobile money accounts permitted people to send, receive and transact money even if they didn’t have a bank close to them without fear of losing it through theft, expensive or unsafe couriers! For the millions of Kenyans without access to a bank account, these accounts were a helping hand to financial inclusion. 

A study by economists Tavneet Suri and William Jack (2016) found that the Kenyan money mobile system M-PESA increased per capita consumption levels and lifted 194,000 households out of poverty. The impact was even more pronounced for female-led households. The study found that households with easy and early access to M-PESA agents fared better and received more remittances than did households who did not receive this easy access. For example, during economic shocks, households with easy access to agents showed a 12% higher increase in per capita consumption than their counterparts in the control group. Today, at least one person in 96% of Kenyan households owns a money mobile account!

While financial technology is no panacea for financial exclusion, it is certainly a sure-footed move in the right direction. Prone to data leaks and theft, fintech firms are developing methods to deal with concerns regarding the invasion of privacy and data security. The adoption of fintech also requires progressive and robust regulations that are equipped to deal with the ever-changing face of this industry. Finally, the adoption of financial technology in developing economies requires an increase in financial literacy and awareness among the population in these countries. While challenging, these hurdles are not impossible to overcome. 

Disclaimer: The insights expressed in this article are those of the author. This article was not written or edited by Empireweekly.com; it was published on July 12, 2022.