United Nations Economist Network

POLICY BRIEF
FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION
DEFINING FINTECH / DIGITAL FINANCE Digital financial services are financial services (e.g.,
payments, remittances, and credit) accessed and delivered
The world is experiencing unprecedented increases in through digital channels, including via mobile devices. These
connectivity and global data flows. This is underpinning technological opportunities have proven extremely valuable,
the so-called fourth industrial revolution, which is charac- particularly during health-related crises1, and certainly more
terized by end-to-end digitization of all assets and integra- so at times of the COVID-19 pandemic.
tion into a digital ecosystem. Fintech has disrupted traditional banking. There is a new
Financial technology (fintech) refers to broad range of generation of consumers who are always online, to under-
technological innovations in the financial sector that en- take the range of services including managing payments,
hance or change the way financial services are provided money transfers, loans, fundraising and even asset manage-
(Philippon, 2016). The innovations typically include crowd- ment through mobiles gadgets, which has created new mar-
kets, new jobs, and new services, all delivered digitally. Banks
funding, insurance, budgeting software, blockchain (and
are running fintech programmes to capture this new wave of
cryptocurrencies), electronic payments and transfers, and
financial innovation.
robo-advisors and trading applications, helping to reduce
costs and risks, as well as extending and broadening ser-
vices to unbanked populations. OPPORTUNITIES FOR FINTECH
A new financial industry that uses technology to improve Businesses of all sizes can gain from adopting fintech in a
the delivery of financial services, fintech is utilized to help variety of ways:
businesses and consumers better manage their financial
> Firms can save 25 billion hours of labour by switching
operations, processes, and lives through specialized soft-
from cash to digital payments for example around
ware and algorithms and has use-cases across nearly 800 working days per month were saved by the Ebola
every industry, geographical market and business model. response workforce, helping them save lives during
> Banks: use fintech for both back-end processes the pandemic in Sierra Leone.
and consumer-facing solutions such as behind-the- > Digital payments create a data trail allowing ready
scenes monitoring of account activity and checking access to sales records, better inventory manage-
account balances on customer apps. ment and enables lenders to assess the creditwor-
> Businesses: rely upon fintech for payments process- thiness of even micro-enterprises offering alterna-
ing, e-commerce transactions and accounting as well tive data sources for credit scoring.
as seeking assistance with government assistance Financial service providers also have a big opportunity
programs like the Payroll Protection Program. from fintech:
> Individuals: use fintech platforms for tasks such as > They can cut costs by up to $400 billion annually by
depositing checks, accessing money overseas or ap- adopting digital strategies.
plying for financial aid as well as more intricate con-
cepts like peer-to-peer lending or crypto exchanges. > Financial services companies can also expand their
customer base at relatively low cost to collect more
Digital finance refers to the delivery of traditional finan- than $4 trillion in new deposits—money that can be
cial services digitally, through devices such as computers, converted into loans, adding more activity and liquidi-
tablets and smartphones. Digital finance has the potential ty to the economy. The case of agent banking.
to make financial services accessible to underserved pop-
Governments experience many benefits from adopting
ulations in areas that lack financial infrastructure and offer
fintech in their operations:
wider choice and increasing efficiency of operations – pro-
vided that such populations also have access to the required > Digital payments can improve government finances
digital technologies. by reducing opportunities for corruption, targeting

FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION 1

 spending more precisely, and improving tax collection FINTECH 1.0 (1886-1967) – INFRASTRUCTURE
equating to a gain of $110 billion per year by digitizing
payments, Sierra Leone made cost savings of up to US This era started with technologies such as the telegraph,
$10.7– an equivalent of funding Sierra Leone’s Free railroads and steamships that allowed for the first time, rapid
Health Care Program catering for 1.4 million children transmission of financial information across borders.
and 250,000 pregnant women annually2.
Key events in this period included:
> Key government services such as education and
healthcare can also be improved through fintech. > The Transatlantic cable (1866) – providing near in-
¬ For example, Côte d’Ivoire in 2011 introduced mobile stant communication between Europe and America.
money payments for school fees. By 2014, nearly all
> Fedwire in the USA (1918) – the first electronic fund
school fees were paid digitally, and parents no longer
had to worry about corruption — with more money transfer system which relied on technologies such as
making it into school budgets. Mobile money providers the telegraph and Morse code.
got new transactions, plus fees from the government.
The education ministry saved money and gathered > Credit Cards (1950s) – helping ease the burden of
more and better student information. carrying cash. Diner’s Club credit card introduced to
Yet, it is important to acknowledge threats. While firms the US market in 1950.
can save billion hours of labour by adopting fintech, this can
FINTECH 2.0 (1967-2008) – FINANCIAL INSTITUTIONS
potentially result in unemployment incase displaced labour
is not able to find occupation elsewhere. Illegal activities The second Fintech era marks the shift from analog to digital
may tap into fintech’s potential as moving “dirty money” and
and was led by traditional financial institutions. The launch
cyber-crime could be made easier. Also, the lack of mass
of the first handheld calculator and first ATM installed by
financial literacy, may perpetuate fraud and indebtedness by
Barclays bank marked the beginning of the period in 1967.
unaware consumer. Its therefore important for governments,
the private sector, and international organizations to work > The early 1970s saw significant fintech develop-
together to develop policy frameworks, infrastructure and ments such as the establishment of NASDAQ , the
operating guidelines for digital financial services. world’s first digital stock exchange. Furthermore,
the establishment of SWIFT (Society for Worldwide
TRENDS AND PATTERNS IN THE EVOLUTION Interbank Financial Telecommunications) in 1973
OF FINTECH/DIGITAL FINANCE created a communication protocol between financial
institutions helping facilitate large volumes of cross
For more than half a century, the U.S. was the center of global
border payments.
innovation for financial technology, inventing credit cards,
ATMs, and online banking (Harvard Business Review, 2021). > During the 1980s and 1990s, the use of bank main-
Now, however, it’s falling behind, as China has become a frame computers helped facilitate online banking and
leader of mobile payments. Africa is a region that deserves
the e-commerce business model, bringing about a
special attention, considering it still has scope for develop-
shift in how money is perceived and the relationship
ment and this can be pushed by the opportunities that Fintech
offers. East African countries, for example, are making huge between people and financial institutions.
strides with familiar technologies such as mobile phones > At the beginning of the 21st century, banks had fully
and SMS-style messaging, and rapidly expanding the circle of
digitised their internal processes, interactions with
financial inclusion. Fintech is observed to have evolved along
outsiders and retail customers.
four periods, commencing in the 1800s, to date.

Table 1: Evolution of Fintech

FINTECH 1.0 FINTECH 2.0 FINTECH 3.0 FINTECH 3.5
Geography Global/Developed Global/Developed Developed Developing
Key Elements Infrastructure/Computerization Internet Services Mobile Platforms Mobile Platforms
Market Development Improve Linkages Digitalization Smartphone Last Mover Advantage

Source: The Evolution of Fintech: A New Post-Crisis Paradigm?, 2015 www.researchgate.net/publication/313365410_The_Evolution_of_Fintech_A_New_Post-Crisis_Paradigm

2 FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION

FINTECH 3.0 (2008-CURRENT) – START-UPS ments, and even the average smartphone user each had a
hand in the massive acceleration of its growth. The IMF cited
The Global Financial Crisis in 2008 caused significant public
estimates of over $50 billion invested in the field during the
distrust of the traditional banking system. This led to the
first half of the 2010s, with triple-digit year-over-year growth
emergence of new companies seeking to disrupt and upend
being the norm.
the market position of existing financial institutions.
Despite their common depiction as competitors, banks
> The creation of Bitcoin in 2009 signalled a major
and fintech start-ups will need to cooperate in the future to
impact on the financial sector and paved the way for
the launch of the new asset class of cryptocurrencies enhance the adoption of fintech products and services.
with uses such as facilitating online payments to trad- There exists a symbiotic relationship between fintech
ing unique digital assets. start-ups and banks, with the former having taken funding
> The mass-market adoption of internet-enabled smart- from banks and often relying on banking, insurance, and
phones also helped facilitate new technologies allow- back-office partnerships to deliver their core products. Mean-
ing people to use their phones for transactions such while, banks have acquired/invested in fintech start-ups to
as Google Wallet (2011) and Apple Pay (2014). leverage new technology to upgrade their existing operations
and offerings.
FINTECH 3.5 - FINTECH IN EMERGING MARKETS
Unlike previous waves, which had relied on technologies
The use of smartphones has signaled a change in consum- at the forefront of their times, the African Fintech wave is be-
er behavior with internet access being the main division ing built on mobile phones, whose adoption in the continent
between consumers in developed and developing markets. accelerated around the turn of the millennium.
As such, Fintech 3.5 can be used to explain fintech devel-
opments across developing countries. Due to not having
TYPES OF FINTECH
had the time to adopt legacy financial infrastructure seen in
western countries, many developing nations have significant
BLOCKCHAIN AND CRYPTOCURRENCY:
fintech market penetration with China (69 per cent) and India
(52 per cent) recording the highest levels of fintech usage, Among the most prominent fintech innovations is block-
well above the global average of 33 per cent (Figure 1). chain, which has paved the way for cryptocurrencies. Block-
chain is essentially a public ledger that continually adds
Figure 1: Global Fintech Adoption Rates transactions that are verified by the network participants in
the ledger. The public nature of blockchain means that it is
decentralized and thus data do not reside in a single stored
location that is vulnerable to hacking. Many traditional fi-
nancial institutions are contemplating the use of blockchain
technology to bolster their processes and increase efficiency,
but banks have struggled to take full advantage of it, since
its benefits are maximized only when there are enough users
to create a network effect.

> Cryptocurrency exchanges including Coinbase and

Gemini, which connect users to buying or selling cryp-
tocurrencies like Bitcoin, are a hallmark example of
fintech in action.

> Blockchain services including BlockVerify help reduce

fraud by keeping provenance data on the blockchain.

It is however important to note the impact of cryptocur-

Fintech Users % of Population
rencies on traditional banking. On the one hand, the exclusive
Source: Authors, adopted from e-zigurat.com right to issue (and/or regulate) money has almost always
been a prerogative of central banks (somehow backed by
THE STATUS OF FINTECH TODAY governments, depending on the specific institutional set up)
with commercial banks creating money (mainly M1 to M3)
Fintech was one of the most explosive fields of the past but acting within a legal framework and under the control of
decade. Venture capitalists, traditional finance firms, govern- central banks. On the other hand, cryptocurrencies have the

FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION 3

potential to shift monetary sovereignty from states to private Sub-Saharan Africa is the only region in the world where
entities that are not being so clearly defined. close to 10 per cent of GDP in transactions occur through
mobile money. This compares with just 7 per cent of GDP in
ELECTRONIC PAYMENTS AND E-COMMERCE: Asia and less than 2 per cent of GDP in other regions.

Among fintech innovations are mobile money and digital pay- INSURANCE:
ments. Everyone with a smartphone could send payments in
a global mobile payment market recording over $1 trillion in Fintech innovations are enabling insurance companies to
2019. Payment apps such as Venmo use technology to allow use data analytics and artificial intelligence to underwrite
consumers to exchange money on mobile devices. insurance products and process claims, for more seamless
engagement. Insurtech platforms cover everything from car
The value of payments associated with digital commerce insurance to home insurance and data protection. Insurance
in Emerging markets and developing economies, rose from startup Oscar Health secured $165 million in funding in
$1.2 trillion in 2017 to $1.3 trillion in 2018 and reached $1.5 March 2020 - at a $3.2 billion valuation.
trillion in 2019—an increase of approximately 8 per cent and
From a regional integration standpoint, Africa can deep-
15 per cent, respectively.
en and broaden financial markets by supporting the digital
Almost half of total global mobile money accounts are payment systems and platforms that underlie electronic pay-
in Africa, which had 396 million registered users and 1.4 ments and transfers through two important continental inte-
million agents serving them in 2018. In 2017, Africa had 21 gration initiatives: the Digital Transformation Strategy and the
million online shoppers, and business-to-consumer e-com- AfCFTA. Both initiatives promise to streamline policies and
merce was worth $5.7 billion, or 0.5 per cent of GDP – value regulations on critical aspects of digital payment systems and
which is still much lower than the global average of 4 per platforms, and to further open markets to e-commerce, the
cent (UNECA, 2020). reason for digital electronic payments and transfers.

The use of mobile money has grown exponentially over INVESTMENTS:

the past 10 years, making Africa the global leader in mobile
Fintech platforms are enabling retail investors to access
money innovation, adoption, and usage. M-Pesa services are
more opportunities for investment both within their domestic
now offered in countries as diverse as Albania, D.R. Congo, markets and abroad. One of the most popular innovations in
Egypt, Ghana, India, Kenya, Lesotho, Mozambique, Romania, the fintech space has been the development of stock-trading
and Tanzania. Prospective agreements with MTN Group will apps where individuals can buy and sell stocks at the tap of
allow both Orange Money and M-Pesa services to cover an a finger on their mobile device. Robo-advising, for example,
even larger number of countries across Africa. has disrupted the asset management sector by providing

Box 1: Examples of Fintech Companies

Affirm: Affirm seeks to cut credit card companies out of the online shopping process by offering a way for consumers to secure
immediate, short-term loans for purchases. While rates can be high, Affirm offers credit services to poor quality borrowers and a
way for consumers to build their credit histories.
Better Mortgage: Better Mortgage seeks to streamline the home mortgage process and bypass traditional mortgage brokers with a
digital platform providing a verified mortgage pre-approval letter within 24 hours of applying.
GreenSky: GreenSky links home improvement borrowers with banks, helping consumers avoid entrenched lenders and save on
interest by offering zero-interest promotional periods.
Tala: For consumers with no or poor credit, Tala offers microloans to poor credit quality consumers in the developing world by ana-
lyzing data on their smartphones for their transaction history and other factors such as what mobile games they play. Tala provides
consumers better options than local banks, unregulated lenders and other microfinance institutions.
Upstart: Loan originator Upstart wants to bypass FICO credit rating by using different data sets to determine creditworthiness
including employment history, education, and whether a would-be borrower knows their credit score to decide on whether to under-
write and how to price loans.
Ellevest: Ellevest is a digital platform to address the fact that women live longer with unique savings requirements, tend to earn less
than men and have different salary curves which leave less time for savings to grow.
Zoona: a money transfer business operating in Zambia and Malawi.
Rainfin: a Cape Town-based lending platform focusing on SMEs.
Live Stock Wealth: also from South Africa, allows customers to invest in cattle and get a return on their investment by selling the offspring.

Source: Authors, adopted from Deloitte, 2020.

4 FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION

Figure 2: Account access varies dramatically according to location and gender.
Globally, 1.7 billion adults lack an account
Adults without an account (%), 2017

Source: Global Findex database.

Note: Data are not displayed for economies where the share of adults without an account is 5 per cent or less

Source: Authors with data, and adapted from World Bank Global Findex Database 2017.

algorithm-based asset recommendations and portfolio man-

agement services that increase efficiency and lower costs.
These new platforms have emerged which have opened up
the possibilities for users around the world to purchase and
hold securities, mostly in advanced markets. Although this
has the potential to improve the effectiveness and efficien-
cy of investment and provide safe assets to investors with
fragile domestic markets, it has also put financial markets in
developing countries in direct competition with those in ad-
vanced economies. This will have implications for financial
sector development in developing countries.

BUDGETING APPS

Budgeting apps allow consumers to efficiently keep track of

their income, expenses and revolutionize the way consumers
think about their money such as Mint.
Source: Global Findex database.

FINTECH AND FINANCIAL INCLUSION Source: Authors with data, and adapted from World Bank Global Findex Database 2017.

A significant share of the world’s population remains un- Today, 69 per cent of adults around the world have an account
Adults with an account (%), 2017
banked, disproportionally affecting women and youth
(UNDESA, 2021). A total of 1.7 billion adults (or 31 per cent
globally) do not have access to a bank account, with inclu-
sion strongly influenced by wealth and income disparities. In
higher-income countries, 94 per cent of adults have a bank
account, while in developing countries only 63 per cent do.
The gender gap also remains considerable: While 72 per cent
of adult men globally have a bank account, only 65 per cent
of women do; and almost half of the world’s young people
(aged from 15 to 24) do not have access to formal financial
services. Additionally, small- and medium-sized enterprises
(SMEs) (95 per cent of companies worldwide) provide em-
ployment to more than 60 per cent of workers, yet struggle to
Source: Global Findex database.
access finance (IMF, 2020a).
Source: Authors with data, and adapted from World Bank Global Findex Database 2017.

FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION 5

Figure 3: Bank account access is largely concentrated in making it profitable to provide accounts for over 1.6 billion
developed markets low-income individuals and businesses across developing
countries, more than half being women. Fintech companies
Two-thirds of unbanked adults have a mobile phone
Adults without an account owning a mobile phone, 2017 can then loan out the new balances providing up to $2.1tril-
lion in capital for individuals and micro, small and mid-sized
businesses. Improving access to financial services could
add $3.7 trillion to the GDP of emerging economies by 2025
and create up to 95 million new jobs with lowest-income
countries adding as much as 10-12 per cent to their GDP.

Fintech developments have been fueled by breakthroughs

in mobile networks, big data, trust management, mobile
embedded systems, cloud computing and data analytic tech-
niques (Gai, Qiua and Sun, 2018). By leveraging mobile tech-
nology, they can significantly reduce financial market imper-
fections associated with banking for microenterprises (such
as information asymmetries and transaction costs), making
Source: Global Findex database; Gallup World Poll 2017.
it easier to extend credit to the previously unbanked.
Note: Data are not displayed for economies where the share of adults without an account is 5 per cent or less.
Source: World Bank Global Findex Database 2017 Financial inclusion, resulting from digital financial services
can boost economic growth as more players are integrated
However, in the last two decades the availability and af- into the economic system. For poor people, especially wom-
fordability of mobile phone access has increased significantly. en, access to and use of basic financial services can raise
Mobile cellular subscriptions have3 increased globally from incomes, increase resilience, and improve their lives. Gov-
12 per 100 people in 2000 to 109 per 100 people in 2019, with ernments can tax and redistribute revenues more efficiently
over 90 per cent of the world now covered by at least 3G ser- and transparently. Fintech financing has increased, helping to
vices4. In this environment, fintech (technological innovation in maintain economic activity during the COVID-19 pandemic.
the financial sector) is creating significant opportunities.
A study (IMF, 2020) finds that digital finance is increas-
Fintech firms target areas in the financial sector where ing financial inclusion and is associated with higher GDP
traditional institutions are not providing services or are pro- growth. Digital finance is increasing financial inclusion,
viding them poorly, perhaps due to regulatory challenges. complementing or substituting traditional finance. While
This is especially so during this digital age, when financial
digital financial services are still small relative to tradition-
services can be digitalized, with fintech improving speed,
al services, they are growing rapidly and at varying speed
efficiency and operating costs, helping to democratize and
across regions and countries. In the 52 countries covered
reduce information asymmetries in financial markets.
in the study, digital financial inclusion increased between
Fintech lowers the cost of providing financial services, 2014 and 2017, even where traditional financial inclusion
with digital accounts costing as little as $10 annually per was stalling or declining. Digital financial inclusion is evolv-
customer, 90 per cent less than conventional bank accounts, ing from “spend” to “lend,” and tends to fill a gap: both pay-

Figure 4: Mobile Money Account Usage Across Sub-Saharan Africa and other Developing Countries
Mobile money accounts have spread more widely in Sub-Saharan Africa since 2014
Adults with a mobile money account (%)
2014 2017

Source: Authors with data, and adapted from World Bank Global Findex Database 2017

6 FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION

ments and lending develop where the traditional delivery of actors, such as M-Pesa in Kenya, Alipay and Wechat Pay
financial services is less present. in China, and Paytm in India. As Figure 2 indicates, mobile
phone ownership is widespread among both men and wom-
Africa and Asia lead digital financial inclusion, but with
significant variation across countries. In Africa, Ghana, Kenya, en, even though it is less for the latter.
and Uganda are front runners. In comparison, the Middle East In most countries digital payments services are evolving
and Latin America tend to use digital financial services more into digital lending, as companies accumulate users’ data
moderately. In some countries, such as Chile and Panama,
and develop new ways to use it for credit worthiness anal-
this likely reflects a relatively higher level of bank penetration.
ysis. Marketplace lending, which uses digital platforms to
Africa and Asia have seen the largest increase in digital directly connect lenders to borrowers doubled in value from
payments, with East Africa, China, and India taking the lead 2015 to 2017. While so far concentrated in China, the United
(IMF 2020). In Africa, fintech has taken the form of mobile Kingdom, and the United States, it appears to be growing in
money—impressively cutting the cost of sending remittances other parts of the world, such as in Kenya and India.
by 50 per cent (GSMA 2016, using the World Bank’s Remit-
tance Prices Worldwide database). It originated in Kenya The value of mobile money transaction now constitutes
and is rapidly expanding to the rest of the continent (Box 2). a substantial part of the financial system. eMoney accounts
In China and India, online payments and messaging apps are not only growing much more rapidly in low- and middle-in-
prompted the development of fintech services. In all cases, come countries than in the rich ones but are now also more
the development of digital money was spurred by systemic numerous. Africa (Figure 5), in particular, is leading the way.

Box 2: Fintech in Kenya

Kenya has seen skyrocketing mobile penetration rates, with subscriptions surpassing the total population amount by 12 per cent, and fintech in-
novations have followed Kenya houses in about 150 fintech companies. Market leader, M-Pesa, which contributed 5 per cent of the country’s GDP, was
formed in 2007 and currently has a market share of about 65 per cent. M-Pesa money transfer service, functions much like a limited mobile bank but
without the need for an Internet connection. M-Pesa combines Safaricom’s mobile infrastructure with an agent model; Safaricom stores their balance
and customers can go to one of 110,000 agents throughout the country to conduct transactions in person. The whole system runs on technology
similar to text messaging and has expanded to seven countries.

Equitel, with a 22 per cent share of the Kenyan fintech market, a mobile virtual network operator competing with Safaricom’s M-Pesa, is push-
ing boundaries for financial inclusion even further by offering a full suite of banking services on mobile devices. Conceived equally through ingenu-
ity and necessity, Equitel is a new type of hybrid firm: a telecommunications company born from a bank. Parent company Equity Bank collaborated
with international telco Airtel to give users a product coming from two longstanding companies. It sent agents throughout the country, even to
remote areas where other banks and telcos had not ventured, to demonstrate usage. Equitel grew to capture 22 per cent of the mobile money mar-
ket in just five years through this locally-focused strategy.

These companies have vastly expanded financial inclusion in the country. In 2017, Kenya became the first country in the world to sell govern-
ment bonds via a mobile app (M-Akiba). Between 2015 and 2019, Kenya has recorded year on year growth in mobile money transactions. While
financial inclusion in Kenya was at just 26 per cent in 2006, today 83 per cent of the population has access to at least basic financial services,
according to the 2019 FinAccess Household Survey. Besides simply becoming exports, these innovations have become models for other African
countries. Twenty-four countries have committed to a Digital Economy Blueprint following Kenya’s example. Results are spreading — the GSMA
estimates that West Africa’s mobile penetration has doubled over the past decade, with mobile payments and banking driving development in its
15 member states. By the end of 2018, the region saw an increase of 23 million mobile money accounts from the previous year. Women, the rural
poor, and the displaced are especially benefiting by the use of FinTech as their gateway toward empowerment.
Major lessons emerge:
i) Bundled and personalized feature delivery: Equity Bank shot ahead of competitors, from 66th to 2nd, due to its one-stop shop appeal. That
consumers prefer the lower search and implementation costs related to bundled services is not specific to the African market — in the U.S., over
50 per cent of product searches start on Amazon, where 44 per cent of all online purchases occur. The trend toward universal solutions extends as
much to fintech as it does to retail.

ii) Finance is about trust: Young fintech firms, have combined trusted and emerging brands. Kenya favored a telecom led regulatory model.
Telcos work with financial regulators to build financial instruments for the populace. These telcos have large market shares and allow most pay-
ment users to operate on a single platform. Traditional brands with many years of working with their consumers have a great opportunity to offer
financial services in the financial space to their clients. As a result, Kenya's fintech success is based on the citizens' deep trust in its telco-fintech
hubs. Equitel, a hybrid firm, was able to flourish by borrowing consumer trust from the long-established brands Equity Bank and Airtel.

iii) Technology enablers: These are often salvaged from dying or outdated models. For example, Safaricom’s use of in-person and widely
spread agents to kick start M-Pesa ended up being the product’s key multiplier, alongside financial literacy. Telcos also have broader agent net-
works; in Kenya, there are about 700 mobile money agents per 100,000 people, compared to nine ATMs and five bank branches per 100,000 people.
Telcos manage the mobile network infrastructure.

iv) Enabling environment: Kenya’s business and regulatory environment has enabled fintech to thrive in Kenya’s 60 million market. Kenya is in
the process of introducing a regulatory fintech sandbox which sets the conditions for early stage fintech regulation. The Capital Markets Authority
(CMA) will use the sandbox to create a conducive environment to unlock the potential of the fintech space.

Source: Authors, adapted from Harvard Business Review, 2021; African Business, 2020.

FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION 7

Figure 5: Fintech in general, or in terms of the potential inequality it can generate and increase financial inclusion and
account ownership in LDCs.

Source: Authors with data from World Bank Global Findex Database 2017

Transactions in Cambodia, Ghana, and Zimbabwe, are seen The fintech market also includes bank-independent loan
reaching more than 75 percent of GDP in 2018 (IMF 2020a). allocation for Micro, small and medium-size enterprises
(crowdlending) and for personal loans to freelancers and pri-
The global fintech revolution is expected to triple access to
vate borrowers (marketplace lending, also known as peer-to-
financial services in Africa for example, creating a new market
of 350 million customers. Africa’s financing gap has provided a peer lending) through private or institutional investors using
unique opportunity for fintech development to furnish alterna- online platforms, such as OnDeck, LendingClub and Prosper.
tive finance sources and investment mechanisms, particularly In Africa, crowdlending for businesses rose from $278 mil-
for start-ups and micro, small and medium-size enterprises. lion in 2017 to $417 million in 2019 (UNECA, 2020).

Two key fintech activities, crowdfunding and crowd-invest- From a sectoral standpoint, fintech opens the possibility
ing, grew from 2017 to 2019 and are projected to keep growing for capital ownership and economic inclusion for smallholder
from 2020 to 2023 (UNECA, 2020). Crowdfunding platforms farmers in rural areas and overall, in agriculture, with is key to
including Kickstarter, Patreon, GoFundMe allow internet and avoid a more significant technological divide. In many low- and
app users to send or receive money from others on the plat- middle-income countries, the manufacturing, agrifood and ser-
form helping individuals or businesses to pool funding from a vice sectors are themselves undergoing capital intensification
variety of sources, all in the same place. Instead of having to go through the adoption of information technologies (robotics,
to a traditional bank for a loan, it is now possible to go straight digitalization and artificial intelligence) that reduce the need
to fans/investors for support of a project or company. for workers. Participation in capital ownership through coop-
The amount of capital raised in Africa using crowdfund- eratives or company stocks is required5. Increasing capital
ing platforms grew at an average annual rate of 38 per cent intensity in the downstream segments of food value chains
from 2013 to 2015, 118 per cent from 2015 to 2016, is estimat- limits labour demand in processing and distribution. In addition,
ed to have doubled from 2017 to 2020 and is projected to grow the mechanization/digitalization of primary production lowers
by 13.6 per cent a year from 2020 to 2023 (UNECA, 2020). profits for farmers who do not or cannot appropriate new cap-
ital assets. Young farmers, possibly more inclined to adopting
Crowdfunding is currently more prominent than crowd-in-
digital technologies and other innovations, can increase their
vesting in Africa. Crowdfunding raises funds by asking a
capital ownership only if they have access to finance, training
large number of people to fund a project through an online
platform. Donation based and reward-based crowdfunding and capacity development6. Fintech can support this; although
are non-investment-based funding because no financial re- it will be critical to build human capacity, including investments
turn is expected. Out of the 57 crowdfunding platforms oper- to scale digital skills, particularly to absorb displaced labour and
ating in Africa, 21 are based in South Africa and 9 in Nigeria. promote adoption7. And although “big data” applications can
Total online alternative finance volume in Africa rose to $209 be highly beneficial in the agriculture and food sectors, new and
million in 2018, with domestic sources accounting for 24 per emerging issues of data ownership, concentration, control and
cent of all alternative finance generated in Africa. privacy must be addressed8 through fintech governance.

8 FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION

EMERGING LESSONS FOR SCALING UP FIN- Most African users now rely on mobile payments to send
TECH/DIGITAL FINANCING OPPORTUNITIES and receive money domestically. Increasingly, they are taking
advantage of new services to also send and receive money
A. ENTREPRENEURSHIP internationally. In addition, they use mobile money to pay their
bills, receive their wages, and pay for goods and services.
Delivery of digital financial services is evolving with var-
ious models of interaction between incumbents and dis- C. STRENGTHENING POLICIES GOVERNING
ruptors. Fintech companies are frequently at the source of DIGITAL FINANCING
the innovation.
Accelerating growth of digital financial services presents
Entrepreneurs have been at the forefront of innovating
financial stability risks if their regulation and supervision
enabling technologies that can meet consumer needs,
usually armed with expertise in data analysis, program- does not keep pace with technological changes in fintech
ming, user-interface design, and development speed. to ensure consumer and data protection, cybersecurity and
Through fintech, the entrepreneurs aim to enhance cheap, interoperability across users and national borders. There is
instant and widely accessible financial services. Entre- need to put in place legal and regulatory requirements that
preneurs continue to innovate in key areas of financial enable digital financial services, including allow the use of
inclusion, including lowering fees and increasing limits on third-party agents to facilitate access to digital financial
mobile money transactions. services, and develop a strong network of local agents, es-
tablish a risk-based and proportionate anti-money laundering
Entrepreneurship remains central for innovation as there
exists huge potential in holistic financial services that in- (AML) framework, foster interoperability and competition.
tegrate consumers’ financial needs and behaviors, such as The swiftly evolving benefits of fintech also calls
healthcare. Integrating payments and other financial prod-
for awareness of risks, policy implications, and related
ucts into health services requires government authorities
tradeoffs. The diverse forms of digital money have implica-
to modernize existing patient data laws whilst respecting
privacy concerns. Additionally, partnering with nonfinancial tions on i) the stability of the international monetary system.
services firms, such as retailers in the “tailfin” space, could Digital money must be designed, regulated, and provided so
have potential such as the innovative partnership between that governments maintain control over monetary policy to
Walmart and PayPal. stabilize prices, and over capital flows to stabilize exchange
rates. These policies require expert judgment and discretion
Fintech entrepreneurs have learned to: i) bundle ser-
vices (e.g. banking and cellular as one offering; ii) en- and must be taken in the interest of the public. Payment
hance trust in financial services, and trusted companies systems must grow increasingly integrated among countries,
can lend their credibility to newcomers with promising not fragmented in regional blocs. And it is essential to avoid
offerings; iii) work with technology that can enable mass a digital divide between those who gain from digital money
adoption or expansion even if it may be old and not cut- services and those left behind. Moreover, the stability and
ting edge. However, continuous experimentation with inno- availability of cross-border payments can support interna-
vations is making the difference. tional trade and investment.
B. IMPORTANCE OF DIGITAL INFRASTRUCTURE ii) There are also implications for domestic economic and
financial stability. The public and private sectors should con-
Technology and service providers have driven the fintech
industry. Adequate digital infrastructure in key, including ac- tinue to work together to provide money to end-users, while
cess to electricity, high-quality internet coverage and mobile ensuring stability and security without stifling innovation.
connectivity, and also Digital ID, communication services Banks could come under pressure as specialized payment
that facilitate access to the Internet and mobile connectivity. companies vie for customers and their deposits, but credit
provision must be sustained even during the transition. And
While access to traditional banking services remains
fair competition must be upheld—not an easy task given the
unreachable for most Africans, the near-universal availability
of mobile phones has allowed millions to access mobile large technology companies entering the world of payments.
money services. Mobile money accounts now surpass bank Moreover, governments should leverage digital money to
accounts in the region and greater financial inclusion has facilitate the transfer of welfare benefits or the payment of
benefited large swathes of the population that remain un- taxes. Scope even exists to bolster financial inclusion by
banked including the poor, the young, and women. decreasing costs to access payment and savings services.

FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION 9

D. ENABLING INSTITUTIONAL INCENTIVES such payments is a proven way to increase account owner-
ship (Global Findex, 2017)
Enhancing supervision and regulation, however, should not
occur at the expense of innovation. Through strategic part- While efficient, consumers need to be made aware of
nerships across a broad ecosystem of players—including some of the risks of fintech including fraud. Control of
fraudulent activities is a major challenge for the fintech
There is need for all institutions in the fintech industry to
market. Crowd-based financing for business activities ben-
establish a common vision for the future, including of the
efits markets only if borrowers and investors trust one an-
international monetary system; to strengthen international
other. Therefore, establishing binding rules and guidelines
collaboration, and to enact policies and establish legal and
is essential to securing that trust. New forms of money
regulatory frameworks that will drive innovation for the benefit
must remain trustworthy. In Indonesia, the Financial Ser-
of all countries while mitigating risks. Traditional financial
vices Authority has recently closed more than 1,000 illegal
services providers for example, should not be crowded-out, as
peer-to-peer lenders that were offering prohibited financial
their experiences could offer information on best practices.
services or operating without a proper license. They must
Incentives for local adoption and the existence of a national ID
protect consumers’ wealth, be safe and anchored in sound
system can also facilitate the development of digital financial
legal frameworks, and avoid illicit transactions through
services that meet consumer needs and demands.
enhanced financial integrity and consumer protection. This
E. FACILITATING ACCESS TO FINANCING involves interventions in financial literacy.

Sensitization on risk with regards to credit will also be

As new players make banks less relevant for the financial
system, central banks may need to adjust their monetary important as new consumers without experience with cred-
policy implementation toolbox, potentially allowing nonbanks it can be roped into financially repressive debt problems. As
access to liquidity lines and incorporating them in their oper- fintech platforms expand into underserved markets, these
ations, taking into consideration new monetary policy trans- issues of predatory lending and debt trap schemes will
mission channels. need to be addressed.

Additionally, smaller fintech companies may face chal-

FINTECH AND COVID-19
lenges of access to financing, rise in non-performing loans,
decline in transactions and credit demand. In a highly rapidly
IMPORTANCE OF FINTECH DURING COVID-19
innovative sector, widespread consolidation and retrenchment
of start-ups would lead to greater concentration in the sector Digital financial inclusion has played an important role in
and could set back inclusion. This calls for accelerating the mitigating the economic and social impact of the ongoing
creation of governance frameworks for big fintech companies. COVID-19 crisis, further supporting more inclusive recovery.
Despite causing significant uncertainty, the COVID-19 pan-
F. SKILLS AND CAPACITY AND TALENT DEVELOPMENT demic represents new opportunities for the fintech industry.
For example, pandemic induced social-distancing measures
Fintech is rapidly evolving and tapping into the usually have facilitated a marked increase in the use of e-commerce
highly regulated industry of money. In order to avoid pit- and digital financial services.
falls, there is need to deepen expertise, widen skillsets and
increase resources in enhancing know-how of the industry, Due to social distancing accelerating customers’ use of
including as tech-coders, software developers, program- online channels to view and manage their finances, many fin-
mers, regulators, and supervisors. Regulators, for example, techs are specifically tailored to offer presentation, onboard-
need to keep up with the pace of potential operational ing, underwriting, and data visualization helping provide the
risks of fintech, including criminal activity, cybersecurity, right context for transactions. These capabilities will likely
become more relevant in the future as a greater number of
competition policy especially for large digital platform, and
financial transactions are conducted online.
consumer privacy.
Fintechs have the unique advantages of being unencum-
G. SENSITIZATION OF USERS
bered by legacy practices and are able to create new ways
of providing value and position themselves in the market,
Fintech involves the use of technology by consumers to
such as:
meet their financial needs.
> Adept at harnessing and analysing data such as cred-
Millions of unbanked adults around the world still re-
it and life insurance underwriting data.
ceive regular payments in cash — for wages, from the gov-
ernment, and for the sale of agricultural products. Digitizing > Unburdened by complex legacy systems ensuring the

10 FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION

 use of cloud-native platforms that take advantage of most types of fintech firms reporting strong growth for the
the application program interface (API) ecosystem. first half of 2020 compared to the same period in 2019,
which was prior to the pandemic. On average, firms in ar-
> Focused on seamless and delightful digital
customer experience. eas including digital asset exchanges, payments, savings,
and wealth management, reported growth in transaction
> Comfortable with partnering with existing financial numbers and volumes of 13 per cent and 11 per cent, re-
services companies. spectively. Digital lending slumped eight per cent by volume
The current global pandemic has expanded the use of of transactions, while also suffering a nine per cent jump in
fintech, including mobile money. The fintech market has con- outstanding loan defaults (World Bank, 2020).
tinued to help expand access to financial services during the By reducing or eliminating the need for physical interac-
COVID-19 pandemic—particularly in emerging markets—with
tions and the need for cash, fintech is helping governments
strong growth in all types of digital financial services except
reach—quickly and securely—people and businesses with
lending, according to the Global COVID-19 FinTech Market
various forms of income and liquidity support (IMF, 2020).
Rapid Assessment Study (World Bank, 2020).
In Nigeria, 54 per cent of customers increased their financial
The Study which gathered data from 1,385 FinTech firms technology (fintech) usage over the past six months (UNDE-
in 169 jurisdictions from mid-June to mid-August, showed SA, 2021). In countries where access to banking networks

How Fintechs are Harnessing their Strengths to Respond to the COVID-19 pandemic
Fintechs have responded to the COVID-19 pandemic by providing relief to individuals and businesses including:
¬ PayPal waiving fees on chargebacks and instant funds transfers from PayPal business accounts to bank accounts.
¬ Lending Club adding new hardship plans, waiving late fees and allowing eligible borrowers to make interest-only payments
or skip up to two monthly payments.
¬ Square waiving software subscription fees for Square Payroll customers.
¬ Stripe fast-tracking support for telemedicine platforms.
¬ Flock, a drone insurance provider, allowing its commercial customers to pause their policies when no work is being conducted.
¬ Kabbage working with other fintechs like Lendio, Finix, and Fundera to launch a platform allowing consumers to buy
gift certificates to support local small businesses during the coronavirus crisis.
¬ Nomo, a platform that assists freelancers in managing their accounting, taxes, and invoices, providing free temporary
access to its new customers.
¬ Chord, the company behind the BondDroid AI engine that generates prices for corporate bonds, temporarily offering
its services free of charge.
¬ Revolut, with other fintechs introducing a charitable-giving feature so that customers can donate funds to those affected
by COVID-19.
Furthermore, many fintechs have innovated to create new products addressing the COVID-19 economic environment:
¬ UK fintech companies, Trade Ledger, Wiserfunding, Nimbla, and NorthRow formed a business-lending taskforce to provide a
turnkey origination and underwriting platform allowing banks, alternative lenders, and private debt lenders to virtually deploy
funds to businesses during the COVID-19 outbreak.
¬ Israeli fintech company Innovesta launched the COVID-19 Resilience Innodex, using proprietary artificial intelligence
technology to assign risk scores based on a business’ ability to withstand the effects of pandemic such as COVID-19.
¬ Iwoca, an online lender developed the platform OpenLending allowing Fintechs and banks to extend Iwoca’s lending
capabilities to more than two million UK businesses.
¬ US-based fintech companies have worked to facilitate the financial relief provided under the CARES Act:
y nCino has a developed a new solution to optimize the PPP loan process.
y ODX, developed a product especially configured to the CARES Act.
y Lendio worked to enable small businesses to apply for PPP loans.
y Unqork developed a small business digital lending platform.
y Numerated, a digital lending platform, is seeing an increase in banks’ interest in using its technology to handle the rise in loan demand.
y Companies like Biz2Credit set up dedicated websites offering information about Small Business Administration (SBA) Economic
Injury Disaster Loans (EIDL) and other types of funding for businesses in need of working capital during the COVID pandemic.

Source: Authors, adapted from Deloitte, 2020.

FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION 11

is limited, mobile money networks are being used to deliver and nonfinancial services firms, including white-labeled fin-
government transfers (e.g., Namibia, Peru, Uganda, Zambia). tech solutions. However, this requires the active involvement
Information from data garnered from mobile payments is of government through endorsing flexible open banking and
connecting governments to informal workers outside formal banking-as-a-service regulations and initiatives.
benefits programs. In Togo, for example, a new program was
Furthermore, Payment-focused fintechs have responded to
introduced targeting informal workers, in which transfers are
the COVID-19 pandemic by bolstering their infrastructure and
made through mobile money and with a top-up for women
expanding capacity to withstand higher transaction volumes.
recipients (IMF 2020). Tax authorities are encouraging use of
Investing in additional capacity could be especially challeng-
online platforms for filing tax returns (Kenya, Namibia, and Ni-
ing for fintechs that rely on transaction volumes for revenue.
geria). Some fintech lenders are also responding quickly to the
liquidity needs of SMEs affected by the pandemic (e.g., China), Additionally, insurtechs are likely to find it harder to at-
taking advantage of the real-time data and online processes. tract end-users as insurers shift to expense management in
Many fintech companies, big and small, are offering flexibility response to the COVID-19 outbreak.
in loan repayments for impacted borrowers (e.g., India, Kenya,
and United Kingdom). This will help mitigate the economic Current market conditions and social distancing prac-
fallout and potentially strengthen the recovery (IMF, 2020). tices have also affected proptechs’ business growth, with
real-estate tech companies forced to pause their activities
Regionally, the Middle East and North Africa saw stron- until they are sure they can sell properties. Other proptechs,
gest growth, up 40 per cent, and sub-Saharan Africa and have introduced discounts and attractive retention offers to
North America, both up 21 per cent. In general, emerging maintain their customer base.
markets and developing countries experienced faster growth
than developed markets. Meanwhile, online lenders have responded to the
COVID-19 pandemic by tightening their underwriting stan-
FINTECH ADAPTING DURING COVID-19 dards to retain their balance sheet quality and mitigate a
potential rise in defaults. In addition, lending companies may
Due to the COVID-19 pandemic, fintech companies may be find that historical data used for underwriting could be less
forced to reexamine their mission and business models and reliable due to a COVID-19 induced shift in market conditions,
adapt to the new business environment. Many fintech com-
and as such, will have to adjust their models accordingly.
panies have experienced significant business disruption due
to the COVID-19 pandemic causing many, including insurtech
and proptech companies, to shore up their funding from CONCLUSIONS
investors and implement cost-saving measures, including
Fintech has been transformative, especially for emerging
workforce reduction. Furthermore, as many fintech compa-
markets and in the developing world, leveraging digitaliza-
nies have transaction and volume-based revenue, a priority
tion. Rapid technological innovation is ushering in a new era
strategy is ensuring as many expenses as possible that are
of public and private digital money. Payments will become
variable and fixed expenses are minimized.
easier, faster, cheaper and more accessible, and will cross
Many fintech companies have also sought to maintain borders swiftly. These improvements could foster efficiency
operational resilience, with the pandemic causing a spike in and inclusion, with major benefits for many people.
customer requests for forbearance and relief, as well as for
But existing concerns also need to be addressed. Finan-
help in accessing aid programs such as the Payroll Protection
cial services are increasingly becoming ‘Jobless’, thus con-
Program (PPP) in the US.
tributing to shifting upward capital intensity, as in many other
Another important development from the COVID-19 pan- sectors. The value added of the financial services is going
demic for fintechs is the acceleration of partnerships with to be increasingly distributed through profit channels, i.e.,
financial institutions which combine the benefits of capital, as remuneration of capital. This may contribute to income
distribution access, and compliance infrastructure of legacy concentration and thus potentially perpetuate inequalities in
companies with (the) digital solutions of (the) new compet- income distribution and asset ownership. Thus, it will be criti-
itors. For example, Blend, an established digital mortgage cal to build human capacity, including investments to scale
software provider has recorded a strong increase in partner- digital skills, particularly to absorb displaced labour, promote
ship requests from legacy banks that do not have digital mort- adoption of technologies, and increase capital ownership.
gage-lending solutions.
Digital money must be designed, regulated and provided
Due to the COVID-19 pandemic, fintechs could also look so that countries maintain control over monetary policy,
for partnership opportunities with other fintechs, bigtechs, financial conditions, capital account openness, and foreign

12 FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION

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14 FINTECH AND DIGITAL FINANCE FOR FINANCIAL INCLUSION