Financial inclusion is a social and economic advantage for individuals, small businesses, and everyone involved. While several forces are helping drive accessible financial services, numerous challenges stand in the way also.
Imagine bringing together a room full of thought leaders from financial service providers, media and marketing agencies, regulatory bodies, and start-ups in four different markets and ask: "What will the future of financial inclusion look like?" The answers may take different shapes, but they would most likely point in the same direction– financial inclusion is essential.
In 2022, the numbers remain alarming: Over 1.7 billion people worldwide lack access to financial services. And to make things worse, over 70% of the world's population lives in countries where revenue differentials are broadening.
Most people understand the need to improve financial inclusion, but why is it so challenging, and what obstacles need to be addressed? Unsurprisingly, there is more than one of them.
The good news is that modern AI/ML-powered platforms, like the one offered by TSLC, can generate proprietary predictive analytics and allow inclusive, budget-friendly, and credit-led services, providing financial access for low-to-moderate salaried communities.
Below, I will discuss what financial inclusion stands for and the challenges to overcome it. I will also discuss how decentralized finance (DeFi) services play a crucial role in financial inclusion.
The alarming statistics of lacking financial access today
Financial vulnerabilities in one sector of the economy can impact others through multiple, equally reinforcing channels that connect to the economic wellness of households, companies, financial institutions, and governments.
COVID pandemic stands behind one of the harshest global economic struggles in decades, with developing countries receiving the hardest hit. Governments (some of them!) reacted with extensive financial programs that were prosperous for the short term. However, they worsened several pre-existing flaws that actively managed to thwart fair recovery.
1.7 billion people have no access to financial services worldwide, while those with access pay a hefty cost. On the other hand, there has been a rise in smartphone ownership and internet usage over the last few years. Out of the 1.7 billion unbanked adults, 1.1 billion own a smartphone. 86% of men own a smartphone in developing economies, while women stand at 79%.
For example, Brink News reports that CAREC natives prefer accessing their financial products or services through a digital gadget, with mobile phones topping the list.
Image source: Opportunity International
India's lack of financial inclusion percentage is 53.9%, while 11.7% is still unbanked.
Looking at smartphone ownership and internet usage with underserved individuals gives a glimpse of hope towards a lasting financial solution.
What financial inclusion represents
Financial inclusion, also known as inclusive finance, represents efforts to make financial services and products available and cost-effective to everyone, regardless of their personal net worth.
Financial inclusion aims to eliminate the barriers that prevent individuals from gaining access to these services and using them to improve their quality of life.
As the World Bank reports, financial inclusion "facilitates day-to-day living and helps families and businesses plan for everything from long-term goals to unexpected emergencies."
While the challenges to financial inclusion are not new, several forces are now helping drive valuable financial services. The financial sector is continually building new bridges to provide products or services to everyone.
The rising usage of financial technology (or fintech), for example, has provided cutting-edge tools to deal with inaccessibility to financial solutions and created new paths for individuals and businesses to access the services they need at affordable prices. Increasing usage of cashless digital transactions, low-cost Robo-advisors, a rise in crowdfunding, and P2P or social lending are examples of recent significant developments in fintech.
Social lending has proved especially beneficial to individuals in developing markets, which may be disqualified from services by traditional financial institutions because of their economic background or credit record.
Although these ground-breaking services have made the financial market more accessible to more people, a substantial proportion of the world's population remains underserved or underbanked.
Challenges towards financial inclusion (and how to solve them!)
While significant steps are being taken to bring essential financial services closer to these underbanked individuals, the financial world is confronted with several challenges to reaching this goal.
I. The fintech regulatory landscape
Historically, financial regulatory authorities have favored large financial institutions with more established business models. On the other hand, innovative financial service providers often have difficulty comprehending, let alone complying with, the relevant regulations– both within independent jurisdictions and across borders.
While many financial regulatory authorities have presented steps like innovation offices and regulatory sandboxes in recent years, several companies still deal with a load of demands from numerous agencies and significant uncertainty regarding the future incline of regulation.
In many countries, relatively small domestic markets require fintech firms to scale globally, yet the challenge of understanding and meeting regulatory demands usually happens when operating in multiple jurisdictions.
So what can be done? Open discussions and candid exchanges between regulatory authorities and fintech firms are essential steps toward addressing these challenges in each regional roundtable.
Having a regular dialogue is not groundbreaking, yet it can be massively efficient in establishing innovator-regulator relationships that educate evidence-based regulation.
II. Promoting digital and financial literacy
Despite the rise of smartphones and other modern technologies, digital and financial literacy both remain challenges to the broader and sustainable adoption of digital financial services.
Several studies discovered that different approaches could help lay the educational foundation for adopting digital financial services and protect consumers and investors. These approaches are usually categorized into two groups:
- A "top-down" approach is usually a national strategy involving the central bank, regulatory agencies, educational authorities, financial institutions, and fintech companies.
- " Bottom-up" strategies usually focus on private digital financial providers embedding instructional devices and releasing their products or services.
Effective partnerships between research and fintech firms are crucial to creating relevant, authentic, and engaging educational content, academic content, and experiences filling digital and financial literacy gaps.
III. Creating a digital financial infrastructure
Probably the most fundamental challenge toward financial inclusion is the demand to establish a more fit-for-purpose digital infrastructure that allows for the scaleable provision of digital financial services by fintech firms.
The digital financial infrastructure includes mobile and high-speed broadband networks to facilitate connectivity; along with digital identity, data standards and protocols are also needed to onboard customers, process transactions, and protect customer privacy.
Building a digital financial infrastructure is a cross-industry and societal priority. It hence calls for a collective initiative from governments, technology providers, and stakeholder groups within the fintech community.
Initiatives in this space are massive, including TSLC's partnership with Bangladesh’s Dhaka Bank, which aims to drive financial inclusion by offering budget-friendly, personalized, and swift loans to salaried millennials and Gen Z-ers.
IV. Customer protection
Although there has been an increase in financial services such as mobile social loans and digital currencies (or cryptocurrencies) designed to extend financial inclusion, customers lack trust regarding the security and integrity of these newly developed platforms.
To promote trust in these new payment services, governments need to create clear guidelines and regulatory standards to ensure the customers are sufficiently protected and have access to essential product information to make informed decisions.
But is this challenge worth taking?
Why financial inclusion is crucial
Financial inclusion offers unique possibilities to create a lasting financial environment. It drives growth in the open market and triggers overall economic development. The opportunities for the customers and the fintech companies are limitless.
Micro-insurance could be an essential system for decreasing risk. If the regulatory authorities can encourage trust in the product and reduce liquidity restrictions, this can help the population living in developing countries relieve their vulnerability risk. For example, micro-finance and social loan companies like TSLC boosted credit availability in India through the CASHe app.
Thus, there is a rise in agricultural productivity and other activities generating income and improving underbanked individuals' quality of life. Access to finance will further increase global market participants, increasing employment and business opportunities.
The introduction of the remittance feature is a massive opportunity for migrants from rural areas to exercise easy and affordable remittance transactions. Also, it opens up a possibility for these underserved individuals to improve their financial literacy and financial freedom.
Financial inclusion in a holistic sense provides secure savings and offers various other solutions like social loans, insurance coverage, entrepreneurial loans, payment services, and more. For institutions, financial inclusion presents an opportunity to drive the adoption of banking habits across different regions, genders, and income levels.
This is why financial inclusion matters.
Decentralized finance (DeFi)'s impact on financial inclusion
Decentralized finance, or DeFi, is an emerging financial technology based on distributed ledgers, similar to the ones used by cryptocurrencies.
By providing progressive financial services and products, the DeFi ecosystem removes intermediaries, gives financial control back to the customers, and redefines incentive models to reward users and empower communities. Below, I will go through some of the essential features DeFi has to offer:
- DeFi loans - A similar way that banks allow customers to access credit products and save money to earn interest, so does the DeFi market. Some DeFi platforms enable users to provide collateral for loans in crypto or fiat.
- Stablecoins - Those already banked may be hesitant to move to cryptocurrency because of the volatility, but stablecoins reduce this doubt by practically removing price fluctuations. Stablecoins are backed by collateral (fiat, cryptocurrency, or commodities), ensuring price stability.
- Derivatives - Derivatives are crucial components of any mature market as they provide excellent market stability and diversification by providing investors with long and short positions.
The solutions are available to everyone without having to hold any cryptocurrencies. Individuals with no bank account can take advantage of DeFi's solutions to avoid the limitations of traditional financial services and interact with finance on a global scale.
DeFi– as the next step in fintech evolution– ignores the limitations of existing infrastructures and instead applies decentralized technology for peer-to-peer (P2P) financial services that improve current standards and introduce entirely new financial solutions.
How TSLC is contributing towards a future of inclusive finance
Founded in 2016, The Social Loan Company (TSLC), is a global venture builder on a mission to make financial inclusion scalable for underserved digital natives in emerging and frontier markets.
TSLC's mission is to revolutionize money and cater to the financial needs of individuals that traditional economic and lending institutions otherwise overlook. In doing so, TSLC helps them unlock their financial potential and unravel economic advantages to millions of credit-thin, new-to-credit, and credit-invisible customers.
Using industry-leading Al/ML-driven tech, we aim to lower the barriers and democratize credit by bringing a paradigm shift in financial access, enabling cost efficiencies, transparency, and speed. We also partner with banks and other financial institutions to reach a wider audience and revolutionize the digital lending landscape in the market.
Through affordable credit scores through our disruptive source, lending, and distribution platform, TSLC promotes and encourages the financial inclusion of the underbanked.
Technology can help realize the vision of creating customized financial services and products for underserved customers. Emerging technologies empower financial institutions to go above and beyond to serve the underbanked or underserved market.
Increasing financial inclusion and doing it in a way that protects this segment of society is coming closer to reality with each passing day. It's everyone's human right to access financial services that meet their needs.
TSLC understands that financial inclusion improves the availability of funds and promotes the principle of savings amongst low-income citizens. Thus, we are on a mission to deliver inclusive financial services, redefine the digital lending landscape, and change the way customers access money, leaving no one behind.