The Battle on Financial Exclusion: Digital Technology to the Rescue?

October 31, 2019

Financial exclusion hampers opportunities for people to grow their ambitions and hinders greater progression of economies. Financial inclusion allows individuals and businesses to experience greater economic benefit. According to the latest study by Global Findex , 1.7 billion adults across the world are affected by one or more of the problems below:

Problem #1 – The Poverty Trap

The poverty trap grapples informal economies around the world. According to the latest study by the United Nations , 1.3 billion people or 23.1% of the world lives in poverty daily. This hinders individuals in the following ways:

  • Upward mobility (social and financial) in the form of missed job and business opportunities.
  • Access to basic social services: health care, education and security.
  • Affording daily expenses: food, clothes, home and transportation.

These individuals trapped in poverty are unable to create substantial savings. All money is spent on expenses.  

Problem #2 – Individual and Business Growth

Consumer and business spending play a huge part in a country’s economic growth. The lack of flexibility in traditional financial services and regulations helps to prevent individuals and businesses from accessing credit facilities. According to a World Bank study , well-functioning financial systems can boost growth and reduce poverty. In contrast, a financial system riddled with holes that creates financial exclusion can:

  • Hinder individuals from raising their standard of living through active use of financial services and credit facilities to acquire loans for instance to pay for their children’s education.
  • Smaller or more vulnerable businesses with no credit are unable to expand operations and manage cash flow gaps in daily operations.

Problem #3 – Economic Woes

Financial exclusion not only affects individuals and small businesses, it affects countries on the macroeconomic level. According to a recent International Labour Organization report , over 60% of the world’s employed population are in the informal economy. This has the potential to even affect individuals and businesses that are financially included. Here’s how:

  • Informal economy: creates fiscal budgeting problems for governments.  
  • Cost-push inflation: Without consumer and business spending, businesses would be forced to raise prices of goods and services in order to survive.
  • Economic downturn/contraction: When there is low demand due to the large disparity between the formal and informal economy, suppliers have to raise prices to cover costs.

Digital technology is the Answer

Over several years, digital technology has been disrupting the way financial services are offered to the financially excluded. According to the 2017 Global Findex , 1.2 billion adults have obtained a bank account since 2011, including 515 million since 2014.

Benefits of Reducing Financial Exclusion

Financial institutions are utilizing digital technology to provide solutions to eradicate financial exclusion. Three pivotal benefits include:

  • Access to credit and digital financial services: Individuals and businesses can gain access to credit, to then receive various loans. Through cell phone use, individuals can access financial services to improve transacting and standardizing savings.
  • Reduced vulnerability: By increasing earnings and savings, financial services allow poor individuals to transition from survival to planning for the future. Parents are able to pay for their children’s tuition, better their living conditions, and fulfil basic needs.
  • Wealth creation: With increased income, financial services provide the means for financially excluded micro-entrepreneurs to acquire assets or expand their businesses.

Conclusion

Digital technologies applied to financial services will continue to evolve and find newer and better ways to reduce financial exclusion. FinTech companies will have to work with the regulators to educate them on the power of alternative data, the convenience of new disbursement channels, and the security of new systems in a joint effort to include more individuals and business owners into mainstream financial services and, ultimately, making their lives better.