“ Financial inclusion is a building block for both poverty reduction and opportunities for economic growth, with access to digital financial services critical for joining the new digital economy” – World Bank
Lately, have you hired local workmen to do odd jobs? Last week, I hired a carpenter. What particularly raised my spirits was, for payment, he asked me to transfer money through BenefitPay, a Bahraini FinTech payments application. The transfer was instant with an electronic record of the transaction easily accessible by both of us. He received the money in his bank account and I had a record of the payment. Financial inclusion with digital payments working at its best! In the future, the carpenter will have a digital track record of transactions that may help him access cheaper bank credit to grow his business or to find investors. On the downside, the government can find a record of his transactions and appropriately tax him! So there are privacy issues with financial inclusion using digital payments.
Fintech payment applications are providing electronic payment system solutions to small local businesses across the globe. From the local laundry to the street vendor, Fintech applications are driving financial inclusion – that is providing small entrepreneurs as well as folks generally access to inexpensive and many times free, internet enabled banking and financial services. Financial inclusion has helped these small businesses and their owners to increase customer access, improve efficiency by reducing time spent chasing receivables and to plan for growth while saving for emergencies. A number of these entrepreneurs, particularly outside the developed countries, are first time users of banking services. As they become more confident and build a digital track record, they are more likely to use cheaper credit facilities and access insurance, look for investors, save for education, health and emergencies, thus improving the overall quality of their lives.
Financial inclusion is an enabler in 8 out of 17, 2030 Sustainable Development Goals (SDG) of the United Nations Capital Development Fund (UNCDF). As per UNCDF, financial inclusion is an enabling factor in driving economic growth and reaching development goals. McKinsey Global Institute has highlighted that digital finance can add $3.7 trillion to the Gross Domestic Product (GDP) of emerging economies by 2025, thus benefiting millions of people! One prime growth enabler is the rapid spread of smart handheld devices primarily mobile phones. Mobile phone penetration and internet access is growing fast. Payments using internet enabled smartphones can lower the cost of providing financial services by 80-90%, enabling providers to serve lower income customers profitably. The added benefit is the buildup of credit history through an electronic record of the transactions, thus helping banks to determine the creditworthiness and help small time entreprenuers to better manage their finances.
Financial inclusion data to determine how many small businesses have benefited from the Fintech revolution is patchy and mostly anecdotal. Some insights can be garnered from growth in banking services to the unbanked plus the increasing use of digital transfers. The 2017 Global Findex database highlights that 1.2 billion adults opened bank accounts since 2011. The growth trajectory of new account opening and thereby financial inclusion seems to be increasing with over 515 million new bank accounts opened since 2014. Between 2014 and 2017, adults with bank accounts rose worldwide to almost 70% from around 60%. Likely new account opening growth in the developing economies was higher though overall access is still well below developed country levels. More difficult is to assess how much of this growth is linked to Fintech providing easier access.
Post the 2019 Covid pandemic, the growth in electronic transfers and steady increase in access to internet enabled payment servies, continues. A new global report from ACI Worldwide (NASDAQ: ACIW) and GlobalData indicates the aggregate number of real-time electronic transfers in 2020 was over 70 billion, up 41% from 50.0 billion in 2019. Alongside, the real-time share of electronic transfers in 2020 was 9.8%, up from 7.6% in 2019 with an estimate that they will increase to 17.4% by 2025. The value of these electronic transfers was up by 32.8 percent from 2019, rising from $69 trillion to $92 trillion with an expected CAGR by 2025 of 12 %. The really interesting aspect of the data is that the top three countries by number of real-time transactions in 2020 were India, China and South Korea. Even though the value of each transaction in India is small, the volume of transactions is very high, resulting in over 25.5 billion real time payments being made! What the data seems to be indicating is that the developing economies are benefiting immensely from the smart phone linked internet driven Fintech revolution.
One of the earliest success stories of a Fintech application that changed peoples lives, is M-PESA. Vodafone’s Kenyan associate, Safaricom, established M-PESA in 2007. M-PESA is today Africa’s leading mobile money service with more than 430,000 active agents operating across the Democratic Republic of Congo (DRC), Egypt, Ghana, Kenya, Lesotho, Mozambique and Tanzania. Over 49 million customers are making over 15.2 billion transactions per year through M-PESA. A long-term impact study on mobile money showed M-PESA was being used extensively by Kenyan households. The study highlights that M-PESA increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty. A very laudable adjunct achievement seems to be that female-headed households have benefited most, driven by changes in financial behavior. This is an intuitive result – women with control over finances are more likely to directly improve the household’s access to education and health. Mobile money appears to increase the ability of the users to manage money in a more efficient way due to ease of access and cheap cost of transfer. The ultimate benefit is if the growing access to finance can help households move out of permanent poverty by changing occupations i.e. from farm labour to managing small businesses like chicken rearing or tailoring. Mobile penetration and Fintech has helped achieve this shift of labour thus reducing poverty in Kenya.
Similar impact can be seen across the developing world. In India, the digital revolution has completely transformed the lives of millions of Indians. India is today the largest user of digital transactions in the world with myriad services like digital wallets, instantaneous payments and small credit through mobile phone applications driving growth. Across the country you can see PayTM, PhonePe, Airtel Money, Jio Money amongst a plethora of applications being accepted by not only large shops but street vendors, auto rickshaw drivers, local help, tailors, barbers and more. One of the reasons for the success of these applications is the Unified Payments Interface (UPI), a real-time mobile payments system launched in April 2016. UPI facilitates inter-bank transactions and is regulated by the Reserve Bank of India. Most of the payment applications in use across India use UPI as their backbone thereby ensuring complete interoperability. India’s UPI system processed more than 1 billion transactions and over 100 million users in October 2019, just three years after its launch. UPI today processes in excess of 50% of all digital transactions in India. The well developed and regulated payments backbone has given consumers the confidence to transact on the peer to peer Fintech applications.
Brazil in 2020 launched PIX, a system set up by the Brazilian Central Bank to permit instant payments. PIX has already become Brazil’s most used payment method for Peer to Peer transactions with a growth rate much higher than the Brazilian Central Bank’s expectations. A study by consulting firm Bain & Company, as reported by Valor, shows that e-wallets should reach 28% of total payments made at points of sale in 2022, up 12 points from 2021 share of 16%.
Similar growth in Fintech payments translating into greater financial inclusion can be seen in the Philippines. The Philippines recorded a 3x growth in the number of real-time payments compared with 2019, primarily linked to the InstaPay system. InstaPay is an interbank funds transfer service under the National Retail Payment System (NRPS) of the Bangko Sentral ng Pilipinas (BSP) which allows clients to electronically transfer funds. Similar growth is now being seen in Vietnam, Thailand and other countries in South Asia.
If I look into the crystal ball and try to determine what is the future for growth of Financial Inclusion, the path seems to be clearly a smart phone internet driven growth story. More specifically, I believe that as folks globally and in particular in the developing countries get access to better, more reliable and cheaper data services, via 5G mobile phones for example, financial inclusion will become more ubiquitous. I also think that the growth of payments solutions will start filtering into other areas like increasing access to borrowing, insurance, saving solutions as well as increased access to medical support and education. The likely convergence of the various financial as well as non financial solutions into SuperApps is also imminent. Even as Google, PayPal, Square and others in the US rush to create SuperApps, in the more developing world, such apps are already household names like China’s WeChat and AliPay, India’s Paytm and JioMoney, Singapore’s Grab, Indonesia’s GoTo, Vietnam’s Zalo etc. Finally, the next big step has to be internationalization with SuperApps being able to provide services on a cross border basis.
From a Financial Inclusion perspective, the simple act of helping folks with limited financial resources or understanding access to a payments system, can be revolutionary. Like M-PESA in Kenya demonstrated, the positive impact of Financial Inclusion goes well beyond convenience by providing an important tool for poverty alleviation and empowerment. So, at TDN we are actively encouraging folks to use Payment Applications!
Sources and some additional reading:
Mark
/ 13 Sep 2022Thanks for your blog, nice to read. Do not stop.
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