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Fintech can help bridge socioeconomic divide, study finds

Glenn Freeman  |  07 Nov 2018Text size  Decrease  Increase  |  
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Financial products and services, and the technology that underpins them, can be powerful forces for good in less developed parts of the world, according to an academic study.

Technology is increasing the accessibility of financial services for billions of people around the world, a University of New South Wales study has found.

Here in Australia, financial products are often found to be overly-complex and opaque – especially in the context of the banking royal commission, senate inquiries and Productivity Commission reviews – essentially they're shown as bad for consumer health, in many ways.

However, new academic research highlights a link between financial inclusion and financial technology – suggesting such initiatives may actually be good for consumers. The findings are presented in the FinTech for Financial Inclusion report, which will be presented later this month at a conference in Luxembourg.

Commissioned by the Alliance for Financial Inclusion, the study identifies various ways under-served communities can get easier access to products, such as removing barriers to access where formal identification is lacking.

Digital payment infrastructure and open electronic payments systems is another of these pillars, along with electronic government services - such as for public transfers and payments.

The report notes that access to finance has long been a major policy objective for governments around the world. It finds that there has been substantial growth in the number of adults with access to banking services, but as of 2017, 1.7 billion people 16 years or older still did not have access to a bank account – which amounts to around 31 percent of the world's adult population.


Increased mobile phone penetration is a central part of greater banking accessibility

"The number of financially excluded are still disproportionately higher in developing and emerging market countries, but there has been substantial progress, as most of the 1.2 billion people who gained access to an account for the first time in the last eight years live in developing countries and emerging markets," the report says.

Emerging countries rising from a low base

Most of this progress has been made in East Africa, China and India. For example, in Kenya, such developments are enabling previously "unbanked" citizens to make payments, remit funds and save money using a mobile phone.

In China, rising rates of urbanisation have transformed a highly inefficient financial system into one of the world's most digitised financial systems. This has also seen the greatest decrease in poverty rates in global history.

Financial access has increased substantially in India, where about 350 million people opened bank accounts for the first time in 2017, whereby 80 per cent of adults now have an account.

"Mobile money" is a key part of these advances, along with the mobile phone, which the report highlights as "arguably the most powerful instrument of development in history".

Also referring to the East African example, the report says mobile money is usually led by telecom firms and focused on feature phones – relatively simple devices limited in their potential application.

While this is "useful and important", FinTech has "far greater potential to promote financial inclusion through transformative digital financial services and economic development". Mobile money is just one part of this. 

More strategic structural shifts are needed to create the biggest changes – along with policy and regulatory development.

The study also highlights strategy examples from Thailand, the Philippines, and Bangladesh.

More work to be done

Despite the progress, up to 1.7 billion people, and more than 200 million businesses still remain "financially excluded".

The report finds there are reasons for optimism, particularly for individuals and what it terms "micro, small and medium-sized businesses.

"It also supports broader economic growth by underpinning a local currency based financial system in which local savings fund local investments.

"This is a particular, longer-term benefit as the less a financial system is dependent on foreign debt, the less it is exposed to external shock," it says.

Along with several other broad financial inclusion and regulatory objectives in other parts of the world, the report notes that a "digital divide" within and between economies is a key risk, along with cybersecurity and data protection issues.

"In addition to digital divides emerging between countries, there are also divides within countries that are posing major challenges," it says.

For example, financial access often varies greatly between more affluent urban populations and those in poorer rural areas, and the elderly. It suggests these areas should receive greater attention in the future.


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Glenn Freeman is senior editor at Morningstar Australia.

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