# Financial innovation for financial inclusion
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2019-01-29
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Financial Transformation: Cryptocurrencies, Mobile Payments
Meta Description: Learn about the impact of digital transformation on global financial inclusion efforts and the opportunities it presents for lenders and start-ups.
URL: https://financedigest.com/financial-innovation-financial-inclusionhtml

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_**Paul Randall**, Executive Director, Creditinfo_

Historic institutions, outdated technology and consumer- _unfriendly_ approaches have ripened the financial industry for digital transformation. There have been some changes; today, cryptocurrencies are continuing to prove their resilience, [mobile payment take-up](https://www.nfcworld.com/2019/01/07/358905/chinese-mobile-payment-users-set-to-double-by-2023/) is showing no signs of slowing, and traditional lenders are investing in young, digital-native start-ups – including, most recently, RBS taking a gamble on Loot.

![Paul Randall](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/paul-450x675-1736840132091-compressed.jpg)

Paul Randall

A number of fintech innovations have taken place in [emerging markets](https://www.financedigest.com/electric-vehicle-transmission-market-emerging-growth-analysis-future-demand-and-business-opportunities-2027.html "Electric Vehicle Transmission Market Emerging Growth Analysis, Future Demand and Business Opportunities 2027") – think of MPESA in Kenya in the noughties – all of which comes together to make it easy to forget that, despite significant progress, there are still huge swathes of the global population with limited or no access to formal finance. According to a recent [report by the World Bank](https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf), there are currently about 1.7 billion adults worldwide that remain unbanked; nearly one third of the world’s population. In sub-Saharan Africa, an estimated [80% of the population](https://www.mckinsey.com/industries/financial-services/our-insights/counting-the-worlds-unbanked) is unbanked. Conversely, the maturity of the financial industries in developed and Western regions masks a lesser, but persistent, problem: [3%](https://www.fca.org.uk/publication/research/financial-lives-consumers-across-uk.pdf) and [6.5%](https://www.fdic.gov/householdsurvey/2017/2017report.pdf) of the population of the UK and US, respectively, are unbanked. [Forty-six million](https://www.afi-global.org/sites/default/files/pdfimages/AFI_GrantSnapshot_Russia.pdf) Russian citizens are either unbanked or underbanked, with 37 million across Europe similarly lacking access to crucial financial services.

Without access to formal, regulated financial services, many individuals rely on unregulated credit, often with staggeringly high [interest rates](https://www.financedigest.com/london-stocks-slip-ahead-of-key-interest-rate-decisions.html "London stocks slip ahead of key interest rate decisions"). Rather than delivering benefits for the long-term, this approach can result in individuals rapidly accumulating debt.

**Banking on the unbanked**

Far from presenting a risk to lenders and the broader economy, widening financial inclusion and reducing the under banked population offers a significant opportunity, and could add [more than $600 billion](https://globalfindex.worldbank.org/sites/globalfindex/files/chapters/2017%20Findex%20full%20report_chapter2.pdf) per year to the global economy. Effort from traditional and fintech players to increase financial access must continue, in order to help alleviate poverty, support entrepreneurs and start-ups.

[Improvements in connectivity infrastructure and increases in smartphone penetration globally have gone some way to addressing this problem](https://www.financedigest.com/bottlenecks-supply-problems-improving-at-abb-robotics-division-board-member.html "Bottlenecks, supply problems improving at ABB robotics division – board member"). Many individuals who have struggled to obtain access to formal finance are already taking advantage of mobile lending solutions, particularly in those areas where the cost of [deploying banking](https://www.financedigest.com/banks-deploy-ai-3-major-technological-advances.html "Banks Deploy AI – 3 Major Technological Advances            ") infrastructure is high. Mobile money transactions in sub-Saharan Africa, for instance, reached [$19.9 billion in 2017](http://www.itwebafrica.com/fintech/853-africa/243443-sub-saharan-africa-dominates-in-global-mobile-money-industry-gsma), 63% of the global figure.

The same goes for start-ups and SMEs, with [mobile banking helping to streamline operations](https://www.financedigest.com/russian-regulator-says-mobile-operator-mts-breached-anti-monopoly-laws.html "Russian regulator says mobile operator MTS breached anti-monopoly laws") (many of which were traditionally manual and laborious), reduce overheads, and widen their customer base via online services. [Developments in mobile-based financial services and the growth of the industry](https://www.financedigest.com/bev-automotive-oil-filter-market-recent-industry-developments-and-growth-strategies-adopted-by-players.html "BEV Automotive Oil Filter Market: Recent Industry Developments and Growth Strategies Adopted by Players") means that more (and more tailored) products and services are now available, providing SMEs with bespoke solutions to best support the needs of their individual business.

This is a step in the right direction, and great news for those who are able to take advantage of lending and start/sustain a business. Yet in order to get on this ladder, individuals will be required to demonstrate their credit history to potential lenders and [service providers](https://www.financedigest.com/unprecedented-constructive-disruption-to-drive-the-sleep-service-providers-market.html "Unprecedented, constructive disruption to drive the Sleep Service Providers Market"). For those with no previous relationship with formal financial services – and therefore no [data accumulated on their financial activity](https://www.financedigest.com/oil-slips-on-china-covid-curbs-weak-factory-activity-data.html "Oil slips on China COVID curbs, weak factory activity data") – this is problematic.

**Assessing [credit risk:](https://www.financedigest.com/audit-finds-holes-in-ecbs-management-of-bank-credit-risk.html "Audit finds holes in ECB’s management of bank credit risk") a bulwark to progression**

Many of the [traditional banking](https://www.financedigest.com/how-partnerships-between-fintech-start-ups-and-traditional-banks-herald-a-brave-new-world-of-opportunity.html "How partnerships between FinTech start-ups and traditional banks herald a brave new world of opportunity") infrastructures designed to manage corporate loans and consumer savings have proven to be unprepared for the challenges presented by both substantial increases in the volume of credit and specific requirements of an unsecured lender. In [traditional banking](https://www.financedigest.com/fiat-republic-the-specialist-baas-platform-that-bridges-the-gap-between-web3-and-traditional-banks-announces-it-has-become-an-electronic-money-institution-emi-in-the-uk.html "Fiat Republic, the specialist BaaS platform that bridges the gap between web3 and traditional banks, announces it has become an Electronic Money Institution (EMI) in the UK."), much of the initial risk assessment and data storage processes are manual.

For example, traditional lending methods typically screen out ‘thin file’ customers. These are [customers with a limited](https://www.financedigest.com/natwest-limits-customers-crypto-transfers-citing-scam-concerns.html "NatWest limits customers’ crypto transfers, citing scam concerns") credit history, and are often rejected due to the lack of information on how risk-tolerant or risk-averse they are when it comes to money. The absence of available background information for these customers on record creates an uphill struggle to receive the financial support they [need](https://www.financedigest.com/global-crises-that-need-the-finance-industry.html "Global Crises That Need The Finance Industry"). With a limited [credit rating](https://www.financedigest.com/sp-global-fined-1-1-million-euros-for-premature-credit-rating-publications.html "S&P Global fined 1.1 million euros for premature credit rating publications"), some lenders may demand a high level of security before loaning any money.

One option may be to take out loans with high repayment rates, but in not being able to pay back the interest, these individuals jeopardise their ability to receive formal finance in the future, as any loan [payments that are defaulted upon will make up the little information credit bureaus have to make decisions next](https://www.financedigest.com/the-next-frontier-of-payments.html "The next frontier of payments") time around.

There’s been much investment in and development of new [fintech products](https://www.financedigest.com/why-make-fintech-products-accessible-for-all.html "Why Make Fintech Products Accessible For All?") which support payments, lending, transfers, budgeting, and so on. Yet there’s been less [attention paid](https://www.financedigest.com/cricket-not-enough-attention-paid-to-international-schedule-stokes.html "Cricket-Not enough attention paid to international schedule – Stokes") to the crucial first step in the financial inclusion roadmap: credit risk assessment. Providing (and adopting) new, digital methods of assessment is now needed.

**A new approach to an old problem**

Government officials are increasingly issuing licences to third party credit bureaus, allowing them to work alongside [central banks](https://www.financedigest.com/climate-change-fight-a-core-duty-for-central-banks-ecbs-villeroy.html "Climate change fight a ‘core duty’ for central banks – ECB’s Villeroy") to plan, deploy an infrastructure which will support financial inclusion. Some of these credit bureaus have pioneered modern fintech techniques, offering financial institutions a single source of [data](https://www.financedigest.com/how-to-drive-a-data-culture-in-the-finance-industry.html "How to drive a data culture in the finance industry"), whether that’s through a traditional credit file, or a digital file of aggregated data. As a result, lenders can provide access to financial services at a lower cost, to more people, while also [reducing risk](https://www.financedigest.com/driving-returns-and-reducing-risk-with-data.html "Driving returns and reducing risk with data").

Solutions such as psychometric [analysis allow lenders to combine new credit](https://www.financedigest.com/analysis-powerful-swiss-central-bank-faces-reform-calls-in-wake-of-credit-suisse-rescue.html "Analysis-Powerful Swiss central bank faces reform calls in wake of Credit Suisse rescue") scoring methods with traditional models. Psychometric credit testing, based on questioning a person on their perceptions of the world, allows customers who lack relationships and historical financial data to [build up a credit file and access funds](https://www.financedigest.com/where-can-you-start-building-your-emergency-funds.html "Where Can You Start Building Your Emergency Funds?").

In such a scenario, individuals are asked to answer a set of numerical and linguistic questions, and their responses are used to [gain insight](https://www.financedigest.com/organic-fertilizer-market-where-should-participant-focus-to-gain-maximum-roi-exclusive-report-by-future-market-insights.html "Organic Fertilizer Market | Where Should Participant Focus To Gain Maximum ROI | Exclusive Report By Future Market Insights") into their thought processes, behaviour patterns and spending habits — which are then used to predict their credit risk. The set of questions is based on the five-factor model of personality variation, also referred to as the OCEAN model, considered one of the most trusted and accepted models of personality to date. By mapping psychological traits to other data, psychometric [credit score](https://www.financedigest.com/benefits-of-a-good-credit-score.html "credit score") tools can be used to build propensity models across the consumer risk lifecycle and help lenders and insurers acquire new customers. These include those individuals who may have previously been rejected, not due to their [risk](https://www.financedigest.com/is-2022-the-year-green-finance-incorporates-climate-risk.html "Is 2022 the year green finance incorporates climate risk?") level but to the lack of information related to their financial activity.

The approaches and solutions to reducing the number of under [banked individuals](https://www.financedigest.com/prime-bank-and-agam-spark-lending-revolution-for-individuals-and-business.html "Prime Bank and AGAM spark lending revolution for individuals and business") are there; what’s needed now is a concerted, industry-wide commitment to adopting and leveraging them, with stakeholders working alongside providers of these tools to benefit their own business and wider society.


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