Fintech companies have a leg up over the traditional banking
industry when it comes to assisting the financially disadvantaged, but there
are also pitfalls they must avoid.
Since financial technology entered the mainstream, the
sector has been plagued by complaints of inaccessibility and discrimination.
Fintech companies now have one unwritten responsibility: to bridge the gap and
provide easy access to financial services that are useful and affordable for
individuals and businesses alike.
According to the World Bank, there are 1.7 billion unbanked
people worldwide. The lack of a bank account effectively limits how much credit
a person or a business can access and hinders development in the small- and
medium-scale enterprise sectors.
Financial technology is a tool that can encourage inclusion
across the board: Wherever there is a mobile phone, banking and financial
service are possible. While fintech companies are mainly involved in mobile
payments, they encompass many other activities, including savings, loans,
investments and insurance.
A decade of change for fintech
In 2010, the G-20 and the World Bank started the initiative
for increased financial inclusion to help reduce poverty levels in emerging
economies (GPFI, 2010). To a large extent, however, the responsibility for this
advancement has fallen on the shoulders of these developing countries. At the
time, the Middle East and North Africa (MENA) region had only a handful of fintech
companies with limited access to capital. This has contributed to a slow
implementation of the goals of the UN and the G-20 — until recently. Over the
last decade, the investment landscape in the MENA region has seen a
breakthrough, especially for early-stage companies and tech start-ups, which
attracted significant interest from both regional and global VCs.
The MENA region is home to the largest youth population in
the world (with over 200 million people under the age of 25). According to
USAID, 43% of adults in the MENA region do not have bank accounts or are
underserved when it comes to accessing financial services, making for a
significant untapped potential market for fintechs. Some governments in the
region have been actively improving the regulatory environment, pushing its
agenda towards a cashless society.
Fintech stands out because it provides the financially
disadvantaged with easy access. Technology gives them the leverage to push for
inclusion at a faster rate. The wide range of services, better opportunities
and lower operating costs also contribute to fintech's irresistable package.
However, these advantages also come with some challenges and risks, and if
they're not handled properly, they can sabotage the drive for inclusion.
Fintech isn't without its challenges
Because of a lack of proper industry regulation, many
fintech companies, especially in the loan sector, offer loans to customers at
exorbitant interest rates. In many cases where these loans result in defaults,
the customers are blacklisted without warning. These practices serve to further
disenfranchise a large swath of the population and decry the urgent need for a
common-sense approach to fintech services. Other challenges include cyber
security, data breaches, overpricing and fraud.
Balancing the challenges and benefits of fintech should be
our focus going forward. In a bid to get the structures running, many fintech
companies lose touch with the customer base. These companies must prioritize
customer service, affordability and accessibility. Fintech companies should
redirect their attention towards becoming more instrumental in helping the
underbanked build a credit identity.
Additionally, fintech companies should provide their users
with productive liquidity intervention so they have a safety net in case
they're confronted with financial uncertainties. Access to liquidity stops the vulnerable from
having to sell passive-income assets and assists against a spiral into poverty.
Fintechs providing some sort of embedded insurance cover that protects users
from accidental and natural death and disability also tend to attract more
patronage from those in the financially disadvantaged bracket.
There has also been some argument against the
compound-interest payment pattern of most loan-issuing fintech companies. If
people are financially disadvantaged enough to require small to medium loans,
they will probably struggle with compound-interest repayment plans, and it may
only lead to a vicious circle of borrowing and increasing debt. To fight this
reality, some fintech companies have introduced a fee-based model, where users
have a stated fee per loan and not a compound-interest repayment package. This
model makes it easier to reward recurring users with lower fees and higher loan
limits while guarding against exorbitant debt.
It's clear that fintech has a leg up over the traditional
banking industry when it comes to direct access to users, especially the
financially disadvantaged. Still, unless financial inclusion rises to the
forefront of their mission statements, perhaps with the help of government
regulation, fintech companies will likely become profiteering institutions like
those before them.
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