MICROFINANCE PAPER WRAP-UP: “Fintechs and Financial Inclusion: Looking Past the Hype and Exploring Their Potential;” Published by CGAP

By Gayatri Murthy, Maria Fernandez-Vidal, Xavier Faz and Ruben Barreto; published by CGAP (Consultative Group to Assist the Poor); May 2019; 48 pages; available at https://www.cgap.org/sites/default/files/publications/2019_05_Focus_Note_Fintech_and_Financial_Inclusion_1_0.pdf

Many believe that financial technology (fintech) companies have the potential to leverage technology and data to deliver new financial services to significant numbers of underserved customers, including those with low incomes and people living in remote areas. This has resulted in the rapid growth of fintech companies, particularly in emerging markets. Despite what the authors describe as the “excitement that fintechs have generated in the global development community,” the authors suggest a need for better understanding of how fintech innovations can solve “pain points” in achieving financial inclusion.

The authors conducted a two-year study of 18 pilot projects supported by CGAP seeking insight on whether fintech services: “1) work as stated; 2) create value for underserved customers; and 3) ease…pain points in delivering financial services to underserved customers.”

Based on their analysis, the authors conclude that “excitement around fintech is not without merit.” In particular, the authors identify the following types of innovation that offer potential for increasing financial inclusion: 1) interactive customer engagement through SMS (short message service, also known as text messaging) and other communication tools allowing for customer engagement with less effort and cost; 2) smartphone-based payment applications with low data and storage requirements, resulting in reduced account dormancy; 3) “connections-based finance,” which leverages digital records of customers’ social connections to build credit profiles for customers lacking such profiles; 4) “location-based finance,” which uses satellite data to predict what products customers are more likely to want, such as crop insurance for people in rural areas; and 5) business models that reduce lending risk, such as by disbursing loan proceeds directly to a retailer for a customer’s one-time purchase rather than disbursing funds to the customer.

By Jolene Khor, Research Associate

Sources and Additional Resources

CGAP publication: “FinTechs and Financial Inclusion: Looking past the hype and exploring their potential”
https://www.cgap.org/sites/default/files/publications/2019_05_Focus_Note_Fintech_and_Financial_Inclusion_1_0.pdf

CGAP homepage
https://www.cgap.org

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