FinTech Applications in Emerging Countries
How are developing markets benefiting from FinTech?
Courtesy of Andrea Diaz Lafuente - MSc Economics & Finance at King's College London
Hundreds of millions of people in emerging countries were unbanked and lived in a cash-based financial system before FinTech. These individuals were excluded from the traditional financial system, and they did not have access to quality financial services. This financial exclusion has had both micro-level and macro-level repercussions. At the micro-level, people did not have the opportunity to invest money to enhance their living standards, and from a macro-level perspective, financial exclusion has been an obstacle to economic growth. When FinTech companies emerged, these people had the opportunity to open a bank account and had access to quality financial services in a much more efficient and cheaper way than traditional banking. FinTech has transformed the financial system from a financial exclusive environment to a financial inclusive scenario in emerging markets. Financial technology is reshaping the world of finance and is making a great social impact in developing countries.
China is the most advanced country in the FinTech environment, and one of its Big FinTech giants is Ant Group which is also known as Ant Financial and Alipay - co-founded by Alibaba billionaire Jack Ma. The previously mentioned Chinese FinTech titan is worth 200 billion US Dollars, has 900 million users in China and handled more than 15 trillion US Dollars in transactions last year. Alipay is like a financial supermarket on your phone - it provides several services such as micro-lending, market funds and insurances, and it is also used as a payment method in shops. Few Chinese people are in possession of a physical credit card when compared to the US, and most people make cashless electronic payments or buy things with QR codes and facial recognition. Alipay has become extremely popular in China because it is simple to use, transactions have no cost and can be done within seconds through a smartphone. MYbank is another Ant Group subsidiary, and it is an online private bank that lives entirely on the cloud where borrowers can apply for a loan on a smartphone and after analyzing more than 3.000 variables in 3 minutes, cash is instantly received if the loan application is successful. Unlike traditional banking, MYbank provides financial services to remote rural areas, and they use satellites to study the farmer’s crops, measure their size and identify what type of crops are planted (eg: rice, cereals, tobacco) with 93% accuracy. Finally, an algorithm estimates the future price of the crop and considers climate forecasts to make an assessment. Before FinTech, these hard-to-reach areas had difficulty in accessing traditional banking services. Ant Group’s online bank is leading a revolution in China.
India has been following China’s steps regarding the digitalization of finance and is now one of the hottest FinTech spots. For instance, financial inclusion in India has increased from 47.1% to 81%, and the number of registered bank accounts has risen from 47% to 79% from 2013 to 2018. This turning point was due to India Stack, a group of tech entrepreneurs who designed a plan to lead the digital transformation of finance in India in 2009. It was estimated that about 400 million people in India did not have any identity documentation. India Stack’s first step was to offer digital biometric identity allowing people to open a bank account by linking their biometric data to their bank account. The second step was to allow digital payment systems from peer-to-peer (P2P) and from government-to-peer (G2P). The last step was the creation of a digital platform, similar to Dropbox, where the Indian population could upload compulsory documents to open a bank account or to be given a loan following the Know Your Customer requirements. This entire process has transformed the financial system in India - it has reduced the time spent to open a bank account and has financially included millions of people that had no access to financial services before. Now, millions of people use digital forms of money, and cash circulation has dramatically reduced illegal money. Furthermore, the amount of money in the financial system has increased, leading to lower interest rates, and making it easier for startups to raise money. Other Asian countries such as Bangladesh, Thailand or Indonesia are already following their example and developing a new digitally-based financial system.
Another example of a FinTech organization that is worth mentioning is Kiva, a micro-lending online platform designed to match borrowers and lenders worldwide, Kiva was inspired by Muhammad Yunus who is the pioneer of microfinance. This alternative way of finance is called crowdlending, which is essentially crowdfunding for debt. The platform is based on P2P lending. For example, someone can lend 25 US Dollars to a developing country family to buy supplies, seeds or livestock. Kiva has done a great job democratizing finance as it has given families and low-scale entrepreneurs from developing countries that are too poor to qualify for a traditional loan the opportunity to access quality financial services. Anyone, wherever he/she is, can give a loan and decide which country it goes to, and once the repayment of the loan is done, you can withdraw your money or refund it giving another loan. Over 96% of the loans are successfully repaid, making this investment a win-win.
Digitalization of finance has implied a more inclusive financial system worldwide. This democratization of finance is a key factor to reduce poverty and stimulate economic growth in emerging markets. Financial inclusion is becoming a priority for authorities and development organizations as it provides access to quality financial services to help many families organize and decide whether they want to invest in health, education or in a small business and improve their living conditions by allowing them to escape from poverty and self-develop. Technology is becoming more and more of a basic need, and it catalyzes progress in developing countries. Emerging markets have many challenges but also greater opportunities with FinTech.
Andrea Diaz Lafuente is an MSc Economics & Finance at King's College London