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.