Digital technology: the challenge and the opportunity for financial exclusion
Prior to the pandemic, digital transformation was a steady process in highly regulated industries like financial services. But COVID-19 and the restrictions to combat it rapidly accelerated the pace of digitalisation in several sectors.
During the months of lockdown, for example, digital payments soared and media articles proclaiming the end of cash and the beginning of a cashless society proliferated. While some may embrace that idea, there are others who are concerned that a cashless society will exacerbate financial exclusion. The charity Age UK has warned that “being cut off from cash and banking services is tantamount to being excluded from society, and is a risk for many more of us than is often assumed”. That risk applies not only to the one in five older people who still rely on cash for everyday spending, but for those who struggle to obtain bank accounts or lack access to digital services, often due to poverty.
This debate is a snapshot of a wider phenomenon – how technology has the power to both widen and close the financial gap. While digital bank accounts exclude those who don’t access to the internet, they have also included other swathes of society. Micro-lending and targeted lending services for smaller businesses, for example, have revolutionised the loan landscape for those who struggle to meet the criteria of larger banks. Prior to these digital services, those people may have had to resort to loan sharks or payday loans at exorbitant rates.
It is particularly when looking at the “poverty premium” that the potential benefits of FinTech innovation become clear. This is the idea that approximately 14 million people in the UK pay more for goods and services because they are poorer. For example, they may have to pay pre-paid tariffs for their energy, so they can’t access cheaper bills. They may not be able to pay for household goods, clothes or electrical items outright, so they have to take out loans or resort to hire-purchase for larger items.
Pay-later services, such as those provided by Klarna and PayPal, are an obvious example of a solution to some of these issues. For larger clothes purchases, such as buying school uniforms at the start of the year for example, these payments solutions offer a way to spread the cost interest-free. If these solutions prove to be a commercial success, they may expand to other types of products as well, such as household electricals.
A recent report from the IMF, ‘The Promise of Fintech: Financial Inclusion in the Post COVID-19 Era’, showed that FinTech was expanding inclusion in certain areas.
“There is increasing anecdotal evidence, confirmed through our interviews, that fintech is supporting financial inclusion. Apart from faster speed and higher efficiency that benefits all, we heard from stakeholders that low-income households and SMEs also benefit from lower service cost, little or no collateral requirements for credit extension, and typically better customer experience,” the report reads.
“Mobile point-of-sale devices are helping SMEs to collect electronic payments, and subsequently use the documented sales as an indicator of creditworthiness to obtain credit. Fintech solutions are also supporting more efficient cash management.”
But the report also acknowledges barriers for digital financial inclusion, including not only access to resources such as smartphones and internet, but also digital and financial literacy, and potential biases amplified by new data sources and analytics. For digital transformation to benefit everyone and help tackle financial exclusion, stakeholders need to come together.
Governments need to keep expanding internet access and help support initiatives in financial and digital education. Regulators will need to act to keep the FinTech space competitive and introduce guidelines and practices that embrace innovation while upholding financial stability and security and protecting consumers. And financial institutions, new and established, need to seize this chance to innovate, creating a better experience for all customers.
Turn to page 13 of the summer 2021 issue of Chartered Banker magazine to read more about inclusion.