The way individuals access and interact with money is undergoing a massive digital transformation. Innovations are drastically changing the way fintech companies run and how they embark on financial inclusion.
Financial inclusion– its effectiveness, importance, and urgency– is becoming one of the industry's biggest topics, and for a good reason. As a collective, we are more likely to push the agenda if we shed more light on it.
However, there is still an enigma over what precisely financial inclusion means. For some, it's linked intrinsically to demographics; for others, it has to do with politics.
There are many reasonable interpretations, and almost all are well intended, but perhaps the most popular and straightforward definition comes from the World Bank:
"Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs– transactions, payments, savings, credit, and insurance– delivered in a responsible and sustainable way."
Although noteworthy progress has been made in financial inclusion, there is still a long way. According to recent Findex data, close to 1.7 billion individuals worldwide are without access to essential financial services, and historically that figure has been even higher. Until just a decade ago, around half of the world was underbanked or unbanked and considered by most financial institutions as "not qualified" or "unbankable."
Source: TSLC consumer research across 500+ respondents in MENAT
Without this access to valuable and affordable financial products or services, people may not have a secure place to save money nor free and trustworthy ways of making and receiving payments– let alone get a personal loan when needed. Whether male or female, Gen-Z or millennials, income level, or ethnicity– inclusive finance is essential for everyone.
This article will talk about digitization in banking and the challenges it can help overcome. We will also discuss the impact of banking digitization on financial inclusion.
A brief introduction to banking digitization
Banking digitization, or digital banking, refers to financial services received from mobile devices, computers, the internet, or through cards linked to trustworthy digital payment systems.
A McKinsey report states, "digital finance is finance delivered through the internet, mobile phones, or cards. As per Gomber, Koch, and Siering, digital finance covers new financial products, money-related firms, software programs, and novel consumer communication delivered by fintech and innovative financial service providers.
While the term digital financing has not yet been precisely defined, it is generally agreed that it includes all products, services, innovations, and infrastructure that allow individuals and businesses to access payments, savings, and credit score systems. These financial services are provided online without visiting a brick-and-mortar branch or dealing directly with the financial institution.
Digitized banking or digital financial services aim to reduce poverty and promote financial inclusion in emerging and frontier markets. Ideally, a digital financial service should include these three essential components:
- A digital payment platform
- Retail agents
- A device-based platform (primarily mobile phones) to transact using a digital platform.
To make payments or to receive income through digital platforms, consumers must have a checking account (or a third-party account with approval to use it) and have funds available in their budgets to use the services.
The role of digitization in financial inclusion
Extending access to borrowers that are otherwise not likely to receive it is crucial to improving the financial wellness of a society. As a force multiplier, accessibility to credit is maybe the most important of all financial solutions.
Thus, innovative digital strategies and technologies allow lenders to access traditionally underserved individuals while protecting their interests.
The use of big data, artificial intelligence (AI), machine learning, and open banking-enabled solutions are increasing scope and potential. Geographical limitations are fading due to new products and rising internet usage rates.
More sophisticated data analysis tools have come online, allowing for easier credit-rating decisions, like TSLC, instead of traditional credit scoring systems.
This is especially true for lending in the Middle East and Africa, where access to physical branches is a struggle for many. Sopra Banking released a recent white paper that explains how the surge in mobile money users in Africa is a possibility and challenge that several financial institutions are yet to find solutions to.
Thankfully, this is changing. Several lenders are now inventing solutions that will allow them to provide their clients with digital loans swiftly and securely. Video KYC, account aggregators, and reliable alternative credit scoring systems have made it easier for lenders to access consumer data and make more informed decisions.
The digitization of the whole loan application lifecycle means that customers can request loans remotely, often with a tap of a finger, helping reduce financial exclusion and increase reach.
Let’s look at specific areas where digitization is impacting financial services.
Banking digitization on new-to-credit (NTC) customers
Historically, credit institutions have been cautious with new-to-credit or NTC customers due to the lack of credit scores to evaluate their likelihood of paying back. However, due to technological development, lending institutions can now more confidently lend to NTC customers.
They can do this by leveraging several of the above solutions, services that pay for new ways of analyzing data, predicting a consumer's creditworthiness, and evaluating the risk involved in lending. Analyzing mobile and social data makes it possible to offer loans to credit-thin and credit-invisible individuals and SMEs.
This practice has emerged over the past years and truly caught on in the Middle East and Africa, where fintechs, microfinance firms, and traditional financial institutions use SMS and social data to make credit decisions.
The influence of digitization on lending
Digital lending is neither new nor unknown, and banks understand the basic concept quite well. Nonetheless, as technologies develop and customer demands change, that concept becomes more complicated.
Consumers expect banks to process applications and provide decisions at lightning speed. Paperless services are now widespread, and financial institutions must offer customers digital lending services that go beyond the tried-and-true to keep pace.
Digital lending platforms vary by provider, and each includes its collection of particular and customer-specific features. However, any top digital lending platform should consist of the following:
- A user-friendly interface that facilitates front-to-back application completion and entry.
- Data verification software that verifies lender information through secure financial databases.
- Self-serve pre-approval technology that makes swift (or immediate!) application decisions.
- A software application that collects handles, and transfers credit information throughout all appropriate departments.
- A system that provides ongoing monitoring for potential red flags that might impede application approval.
How TSLC is using digitization and technology to ease financial inclusion
The Social Loan Company, or TSLC, is a financial wellness platform that aims to revolutionize money and cater to the financial needs of individuals that traditional financial and lending institutions see as “unqualified.”
In doing so, we help unlock the financial potential and unravel financial solutions for millions of credit-thin, new-to-credit, and credit-invisible consumers. Below are three essential ways our technology and digitization are helping us achieve that.
- Social Loan Quotient (SLQ) - SLQ is a scalable, alternate credit scoring system based on artificial intelligence (AI) and machine learning (ML). The system uses alternative data sources– mobile phone and metadata, social media footprints, education, career path, and income– to evaluate individuals’ creditworthiness.
- Goodness Measure (GM) - GM evaluates the liability of loan payback, helping accelerate the loan approval process. Our AI-based alternative credit scoring system evaluates each applicant on various attributes– instead of financial history alone– to give credit-thin, new-to-credit, and credit invisible users a better chance of accessing funds.
- Open Source - We use a unique open-source, cloud-native software that allows us to write fewer codes and reduce costs by not paying licensing fees. We write our own code whenever possible, growing our TSLC-owned intellectual property and accelerating our consumers’ experiences.
Technology can help realize the idea of creating customized financial services and products for underserved digital natives. Through industry-leading and affordable credit scores, lending, and distribution platforms, TSLC aims to promote and empower financial inclusion for everyone.
Bottom line: What does the future hold for digital financial inclusion?
People need and request credit for several reasons; getting married, planning a summer vacation in a foreign country, starting a journey as a social media influencer, or simply money to afford unexpected life events like medical emergencies– the list goes on and on. This is why financial inclusion is crucial.
Digitization is the conversion of data into a digital format with the adoption of technology and, as such, is essential for the fintech industry. By embracing digitalization, fintech firms can provide improved financial services, offer better customer experiences, and help save time. It also reduces human error and therefore builds consumer loyalty.
Ultimately, broadening accessibility to credit calls for careful planning and is more of a journey than a destination. An alternative credit scoring system like the one offered by TSLC is a promising solution toward this goal.
And every financial institution should strive for it, as it helps individuals and communities and drives financial growth. This allows digital credit to be responsible, inclusive, and affordable, providing individuals with financial means to spend according to their passions and aspirations.
With a lower cost base and increased reach and innovation, TSLC– including subsidiaries like CASHe– can simply do more with less, striving to make financial inclusion a reality.