Universal Financial Inclusion in the Era of Fintech and COVID19
By Sebastian J. Olivera ,Spain
Country Manager Spain – TaxScouts , Co-founder Women in FinTech – Interamerican Network and Founder Montevideo FinTech Forum.
What is Fintech?
One of the most common question I’d been answering for a while is:
Each time I give the same answer:
“The word “fintech” is simply a combination of the words “financial” and “technology”.
It describes the use of technology to deliver financial services and products to consumers.
This could be in the areas of banking, insurance, investing – anything that relates to finance.
However the internet, combined with the widespread use of devices like smartphones and tablets,
means the speed of this change has accelerated greatly in recent years.”
This definition exposed in one of the blogs released by the Central Bank of Ireland, is the one I like the most, not only for its simplicity but also for this clarity.
Would this increasing speed represent a major access to Financial Services?
The answer is yes and comes with the hope of fostering universal access for the 1,7 billion who still remains excluded.
The World Economic Forum clearly states on how universal access
to financial services improves people’s quality of life in 5 ways:
1-People
People can save more safely and conveniently; developing good financial habits and getting an education.
2-Low-income people
Low-income people can more easily and safely access government benefits. Eliminating intermediaries and accessing specific benefits in terms of reduction of transaction costs, for example, the exemption of fees for salary accounts. Likewise, the government can carry out a more effective control of its management.
3-Entrepreneurs
Entrepreneurs can access the financial services they need to build small businesses and access new markets. Currently, there are 200 million micro, small and medium-sized companies that cannot access quality financing to operate their businesses.
4-Empowers the inexperienced consumer
Empowers the inexperienced consumer to use formal financial services. There are physical and social barriers to financial access that transactional accounts can help overcome.
5-Eliminating the geographical factor
It contributes to eliminating the geographical factor, which limits access to services, through the use of ICT developments. Kenya is a clear example, where mobile phones are being used to facilitate access to insurance, credit, savings, drinking water and solar energy. With the universal financial reach and mobile phone technology, low-income populations are achieving much more.
The adoption and access to communication technologies presents a heterogeneous distribution at a global level. This reality makes it impossible to determine in advance how these 5 forms will behave, in terms of distribution and development, but the evidence does allow us to infer that the results of promoting access through technology will be positive, particularly in the less favored sectors.
In accordance with what is happening internationally, the Latin American financial services business models have been impacted by technological developments.
According the Interamerican Development Bank, changes can be observed in 4 strategical areas:
1-The access of SMEs to credit.
Highlighting the value and formality of SMEs as an engine for development and inclusion in the region, the impact on transaction costs, new techniques and sources of information to assess credit risk, payment solutions and digital tools that contribute to a better corporate financial performance (with an impact on formalization, operating on information asymmetries) and the creation of fingerprints for credit risk assessment (scoring).
2-Financial inclusion of sectors excluded or underserved by the traditional financial industry.
It is estimated that 49% of the adult population of the region is in a situation of “financial exclusion” (measured by the possession of a bank account). This proportion increases significantly when the use of other financial instruments is examined. FinTechs serve segments of the population that remain underserved or excluded from the financial system, which is why they present an added value as agents of financial inclusion.
3-The contribution of FinTech to the strengthening of the financial system and the global development of the digital economy.
Technological developments make it possible to present global offers in a customized way, so that the provisioning efforts can be efficiently concentrated, serving different customer segments with different needs and behaviors.This enables Fintechs to ;
Solve specific problems and create value propositions focused on each consumer,
which directly impacts the demand for financial products,lower costs for the
consumer(thanks to the use of digital channels) and new collection techniques.
A highly positive and noteworthy aspect is the dialogue that has been established between authorities, regulatory agents and entrepreneurs; with the aim of producing changes in public policies in such a way that, on the one hand, they promote and encourage activity and, on the other, regulate it.
4-The need to adapt to a new trend that is already a reality worldwide.
Around the world, the FinTech sector has seen a significant increase in investment in recent years, from US $ 18 trillion in 2015 to more than US $ 37 trillion in 2019. By the end of the second half of 2020, investment in FinTech will have exceeded US $ 17 billion distributed in 849 transactions.
Despite the COVID19 and the slowdown in the economy, Fintech companies still increases their value as liquidity distribution channels, nurturing SME’s with fresh credit. Likewise, since most of the financial startups had born digital, they are able to shift to remote work environments faster than legacy providers. Nevertheless, fintech companies are facing big challenges in these difficult times. The pandemic is also threatening operating performance of large number of fintech’s, worsening funding conditions and jeopardizing growth plans. Particularly in the case of the alternative lenders, whit lower net interest margins, falling loan growth, rising delinquencies and bigger defaults rates.
While it is too early to make defining claims, it is reasonable to envision a high death rate
in fintech, especially those that have not made their reserve forecasts properly.
Reader should keep in mind that in many regions, fintech companies are also small companies
“fighting for survival” on a daily basis, that requires the support of the Government –
either a loan guarantees system, or through alliances such as the Paycheck Protection Program.