Technology for Development: How FinTech is Bridging the Poverty Gap
The world is not on track to achieve SDG 1 (No Poverty), i.e., the target of less than 3% of the world living in extreme poverty by 2030. FinTech has been instrumental in reducing the digital divide and enabling financial inclusion.
Inclusive digital financial services empower the poor to store money, increase savings, cope with unexpected shocks, access essential services, avail social benefits, improve economic security, and move out of extreme poverty (spending < $1.25 per day). This article showcases how FinTech innovations are making a positive impact on low-income communities in developing countries.
1) Banking the Underbanked
Every second adult in the world is underbanked. Out of 2.3 billion underbanked adults, 1.7 billion are unbanked. More than half of the unbanked adults are women¹.
The traditional banking system – with expensive commissions, lengthy processes, and rigorous screening criteria - does not cater to lower-income households. Mobile money reduces such barriers by making financial services readily available to the local population. Africa has proved to be a fertile ground for FinTech innovations such as Safaricom’s mobile currency M-Pesa. M-Pesa derives its success from its user-friendly mobile technology and a vast agent distribution network. Since 2008, M-Pesa has provided bank account access to 194,000 Kenyans, improving their savings and lifting them out of extreme poverty². Equitel, Kenya’s multichannel mobile money product, leverages Equity Bank’s financial services expertise and Airtel’s customer outreach³.
Two-thirds of the world’s population lacks access to a formal system of property rights⁴. Around 1.5 billion people have no identity papers to prove who they say they are⁵. These factors prevent the poor from accessing basic services and social benefits.
Blockchain technology can prove useful in bookkeeping digital records free of corruption and theft, as demonstrated in Georgia. As of 2018, Georgia registered over 1.5 million land titles on a blockchain-based system built by Bitfury in 2016⁶. India’s digital ID card has enabled 170 million bank accounts to receive DBT (Direct Benefit Transfer) payments from the government electronically. The Aadhar digital ID can be used in e-KYC screening to open a bank account⁷.
2) Providing access to basic services
Low-income households need basic services such as electricity, water, sanitation, health and education, to attain economic development.
Pay-as-you-go Models allow underserved populations to access basic services on their own terms. The success of PAYG models is palpable in various areas such as clean water (Africa Water Enterprises in West Africa), solar home systems (PowerMundo in Peru), sanitation (Sanergy in Kenya), education (Fenix International in East Africa), telecommunications (PayJoy in Mexico), cookstoves and gas (PayGo Energy in Kenya) and agriculture (Hello Tractor in Nigeria)⁸. On the other hand, Safe Water Network (Ghana) and UMEME (Uganda) installed water vending machines where users purchased prepaid meters with smart cards⁹. Both these innovations reduced service costs and waiting times, tracked utility consumption, and improved financial viability of the business models.
Women are disproportionately affected by the lack of access to essential services such as water, sanitation, and hygiene facilities¹⁰.
PharmAccess Foundation’s digital health wallet M-TIBA, which has reached 1 million Kenyans since 2016, has seen positive outcomes, especially in case of women. In its pilot stage, M-TIBA found that provision of savings exclusively for health led to encouraging behavioural changes in women towards health issues¹¹.
3) Serving unmet credit needs
There is a $5 trillion unmet demand for credit from MSMEs in developing countries¹².
MSMEs often lack access to credit as they aren’t deemed creditworthy by traditional banks. Jack Ma’s MYbank credit approval system takes 3 minutes, uses real-time payments data and relies on a risk-management system that analyses more than 3,000 variables. MYbank has lent $290 billion to nearly 16 million small companies, and seen a default rate of about 1% so far¹³. Africa’s Kopo Kopo, Kenya’s M-Shwari, Tanzania’s M-Pawa also rely on electronic transaction history to assess creditworthiness via artificial intelligence, machine learning, and big data analytics and provide loans to MSMEs. In Indonesia, peer-to-Peer lending platforms have reduced the poverty rate by 0.7% by providing jobs for more than 362,000 Indonesians¹⁴.
80% of women-owned businesses with credit needs are either unserved or underserved. These needs amount to a massive $1.7 trillion financing gap¹⁵.
Low-income women often cannot access loans as they lack formal property rights, bank accounts, and hence credit histories. The traditional credit scoring mechanisms do not take such factors into account, even though women default less than men¹⁶. In the Dominican Republic, researchers found that over one-third of low-income women’s rejected loan applications would have been approved if a gender-differentiated digital credit scoring algorithm had been used¹⁷. The algorithms used machine learning to process call detail records and predict creditworthiness.
4) Mitigating leakages from inefficient cash handling
Cash-based transactions are also typically unsafe, expensive, inconvenient, inefficient, and lack transparency for governments, companies, and citizens alike¹⁸.
Digitising payments can reduce leakages, improve traceability, and reduce costs. Many countries and organisations are exploring the advantages of digitisation in various areas – be it in water payments (Tanzania), teacher salary payments (Liberia), agricultural loan repayments (One Acre Fund), logistics (Gojek Indonesia), or government salaries (Mexico). In Bangladesh, 1 million garment factory workers have seen an increase in their savings through wage digitisation¹⁹. India’s National Social Assistance Programme saved $368 million from digitising Direct Benefit Transfer payments²⁰.
5) Improving economic resilience via social protection
While safety nets helped 36% of the poorest escape extreme poverty, only one in five of the poorest in low-income countries are covered by safety net programs²¹.
Brazil’s Bolsa Familia program provided conditional cash transfers (CCT) which brought down inequality by 25% and extreme poverty by 16%. The female heads of the household received monthly cash on the condition of keeping their children in school and taking them to regular health check-ups. Electronic benefit cards, which monitored compliance with conditionalities, were instrumental in the success of the program²². Colombia (DaviPlata) and Nigeria (SURE-P MCH programme) have taken it a step further by providing CCTs via mobile technology.
Pensions are vital to prevent older persons from falling back into poverty once they retire. In 2018, the Rwandan government partnered with pensionTech firm pinBox Solutions to launch Africa’s first universal digital micro-pension scheme, which is inclusive of the poor²³.
6) Making insurance affordable and effective
Insurance is a useful poverty elimination tool since it can help secure financial gains. However, the poor, who need insurance the most, are least likely to have it.
Microinsurance provides the poor with a much-needed safety net during economic losses. Mobile microinsurance relies on mobile phones to improve the microinsurance value chain. Products in the mobile microinsurance market targeting low-income communities include MTN’s life insurance ‘mi-life’ (Ghana), Tigo’s accident insurance ‘Seguro Medico via Celular’ (Honduras), and Safaricom’s weather index insurance ‘Kilimo Salama’ (Kenya)²⁴. With the Rwandan government’s mobile-enabled community-based health insurance, the proportion of insurance-covered informal sector population rose from 7% to 74% as of 2013²⁵. In 2019, Aon plc, together with anti-poverty organisation Oxfam and insurTech startup Etherisc, launched a blockchain-based platform that provides Sri Lankan farmers with automated microinsurance protection against crop losses due to extreme weather²⁶. The platform uses weather data index as a trigger for smart contracts which make the compensation process effective and affordable.
7) Reducing vulnerability to shocks, conflicts, and natural disasters
By 2030, 325 million impoverished people could be exposed to natural hazards and climate extremes²⁷.
FinTech proved to be invaluable in helping provide quick relief services and money post-disaster. Following the occurrence of Typhoon Haiyan in Phillippines, Mercy Corps partnered with mobile phone-based bank BanKO to provide timely electronic cash transfers to the affected²⁸. With the appropriate mobile infrastructure in place, family relatives were able to send remittances to each other during Nepal’s Gorkha earthquake and the 2010 Haiti earthquake²⁹. During Sierra Leone’s Ebola crisis, regular mobile money salary payments to health workers ensured that there were no labour strikes, thereby saving 2,000 lives³⁰.
The landscape provided is, however, not exhaustive. Many more emerging technologies such as peer-to-peer insurance, digital bancassurance, crowd-sourcing, and demand-based insurance hold the potential to bridge the poverty gap in developing countries.
The 2030 SDG (Sustainable Development Goals) deadline is fast approaching, and we are not on track to achieving the SDGs. To fulfil the SDGs, governments around the world must recognise technology and connectivity as fundamental human rights. The FinTech space provides many solutions which can make financial services affordable, effective, and safe for everyone. The need of the moment is for public and private sectors to collaborate and deploy capital towards scaling such solutions which contribute to the global goals.
Note: Views are my own.
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