How fintech impacts financial inclusion

Fintech (financial technology) has not only revolutionized banking. It also has enabled significant headway in global financial inclusion. Unlike traditional finance, fintech combines advanced technology with financial expertise to create innovative solutions to banking and finance that range from money transfers between individuals to investment and saving options.

If you’re considering a future in fintech, read on to learn how you can get involved, courses in fintech and which skills are needed for this career.

Fintech is the integration of finance and technology. Its purpose is to make financial services more efficient and accessible, especially to underserved populations. From online banking to cryptocurrencies, these digital tools are reshaping the way people handle their money.

Fintech traces back to the late 1800s when the telegraph and steamships allowed financial information to cross borders efficiently. Fast-forward to the 1950s when credit cards emerged, followed by ATMs and online banking in the late 20th century. Then, the 2008 financial crisis sparked a wave of fintech startups eager to disrupt the traditional banking system.

According to the World Bank, 1.7 billion adults worldwide lack access to a bank account and the financial services that come with it. That translates to 31% of the global population, with women and youth disproportionately affected. Fintech has the potential to bridge this gap in three main areas.

Mobile phones have become transformative tools in global banking. Digital accounts cost just a fraction of what it costs to establish and maintain a traditional bank account. This better positions low-income individuals and businesses to participate in the financial system.

Fintech has helped roughly 1.2 billion previously unbanked adults gain access to financial services over roughly the last decade, according to the World Bank. Sub-Saharan Africa, South Asia, East Asia and Asia Pacific are just a few global regions that have adopted mobile money accounts.

By 2025, improved access to financial services could add $3.7 trillion to the GDP of emerging economies and create up to 95 million new jobs.

The United Nations reports that fintech offers more affordable credit, savings and insurance products by minimizing the expense associated with traditional banking operations (e.g., transactional costs and payment services).

Plus, it offers the convenience of direct deposit and eliminates the need to travel to a physical bank. 

Mobile money apps have transformed economies in Africa and South Asia and allowed urban migrants to send funds home and boost savings.

This was explored on a small scale in a 2021 report from the Gates Foundation, which looked at the impact “mobile money” had on poverty in key regions of the globe. According to the report, mobile money reduced extreme poverty by 42% in Bangladesh and increased self-employment in northern Uganda by up to 6%.

One major fintech hurdle cited by the U.N. is the “digital divide.” While fintech has the potential to reach the underserved, many people in rural or remote areas lack reliable internet access and the digital means to use these services. Without bridging this gap, fintech may remain out of reach for many.

Fintech automation has streamlined financial services, but it could lead to job losses if displaced workers can’t find employment in other industries. It might also lead to increased demand for certain roles. Financial advisors, for example, who understand digital technology, cybersecurity and data analytics.

While fintech has the potential to reach the unbanked and improve access to financial services, many users lack the skills to navigate digital platforms safely and effectively. This leaves them vulnerable to fraud, scams and poor financial decisions. Plus, consumers could face privacy risks and possibly unethical business practices from companies using fintech tools.

Traditional credit scoring models lean heavily on historical data. This excludes individuals who lack formal credit histories but still manage their finances responsibly. Alternative models address this gap by tapping into nontraditional data sources such as rental payments, utility bills and even transactional data from bank accounts.

Additionally, advancements in machine learning enable more precise credit scoring and allow fintech companies to predict credit risk more effectively. When applied to real-time data, it outperforms traditional models, especially during economic stress.

Despite the benefits, data quality, privacy concerns and a lack of standardized practices still exist. But as more financial institutions adopt alternative data, they may be able to improve credit access and financial inclusion.

Microfinance and peer-to-peer (P2P) lending offer financial access where traditional banks often don’t. Microfinance provides small loans and financial services to individuals and small businesses lacking collateral or a solid credit history. This helps entrepreneurs grow their businesses, boost income and, over time, improve their quality of life.

P2P lending takes it a step further by connecting lenders and borrowers through online platforms and cutting out the banking middleman. As a result, more people can access credit with lower interest rates and flexible terms.

That said, lending and borrowing are not without risk, especially when it happens between two parties who may not know each other and for whom the terms and conditions are either new or not outlined. In addition to researching lenders for reputability, borrowers should watch for red flags like extra fees, higher-than-acceptable interest rates and the terms for defaulted loans.