At the moment, poor financial literacy, inequality, lack of access to bank accounts, and high transaction costs are among the main social and economic challenges. With the view to address these issues, governments and institutions worldwide are implementing financial inclusion strategies.
By integrating fintech software systems, it is possible to minimize commissions, automate manual processes, as well as deliver banking services to emerging and developing countries. This way, financial inclusion has become a top priority for states while driving the interest of startups, businesses, and investors.
According to the World Bank, economic inclusion projects are witnessing a surge in 75 countries, reaching nearly 20 million households and benefitting around 92 million individuals. Analysts also found that digital technology plays a fundamental role across 85% of national programs. It is worth noting that 30% of those programs offer access to their components through software platforms.
In this article, software experts at Surf will explain the importance of financial inclusion and describe the top five categories of fintech startups aiming to build a stronger economy. Furthermore, you will learn why financial inclusion is a key enabler of many United Nations (UN) Sustainable Development Goals (SDGs).
What is financial inclusion?
Financial inclusion, also known as inclusive finance, means the availability of financial services for people and organizations, as well as equal possibilities to access them. These services comprise banking, lending, insurance, and wealth management solutions. Typically, financial inclusion startups and initiatives focus on unbanked and underbanked individuals, aiming to remove the barriers from the supply and demand sides.
Unbanked are people who do not have bank accounts, for example, due to the lack of government-issued ID for identity verification. Underbanked, in their turn, are adults and entities without sufficient access to basic financial solutions generally delivered by retail banking institutions.
As a result, the underbanked often cannot use services like loans and credit card payments. In this regard, this type of customer relies on non-traditional forms of finance and micro-finance, involving checkbooks, point-of-sale terminals, cashiers, and moneylenders.
Financial inclusion as a key enabler of UN SDGs
The World Bank reports that nearly 1.7 billion people, or 31% of the world’s adult population, do not have access to finance and banking services. The institution informs that 50% out of these individuals live in Asia, 25% — in Africa while 10% — in Latin America. Women make up 55% of unbanked groups, according to the World Economic Forum.
Approximately 1 billion women lack access to financial solutions, such as safekeeping deposits, on-demand deposits, insurance coverage, loans, and credit facilities. As a consequence, their funds are not fully protected.
Therefore, by improving financial inclusion, governments tend to promote and increase gender equality. Furthermore, experts at McKinsey forecast that the incorporation of women into the economy will add $12 trillion to global gross domestic product (GDP) by 2025.
As long as financial inclusion contributes to economic growth, gender equality, and reduced poverty, it is considered to be a key enabler of many UN Sustainable Development Goals.
It is important to note the considerable role of technology in financial inclusion. With fintech mobile and web applications, institutions can deliver a wide range of services (for example, online payments, money transfers, digital lending, micro-credit, investment, asset management) even to rural areas. Thanks to neobanks such as Revolut and Monzo, it became possible to significantly cut transaction fees while ensuring a better customer experience.
Fast-growing markets for financial inclusion include China, Kenya, Brazil, Indica, and Mexico.
Top 5 groups of financial inclusion startups in 2021
1. Startups offering traditional banking services at lower costs
As part of a financial inclusion strategy, startups deliver traditional banking solutions and services at lower costs, this way increasing their affordability. With innovative technologies, companies manage to automate a range of manual, repetitive, and time-consuming tasks. Thereby, organizations reduce operating expenses and improve employee productivity. Finally, they minimize commissions, which is among the primary benefits of financial inclusion.
Common examples are money transfers, cashless digital transactions, peer-to-peer (P2P) lending, low-fee robo-advisors for wealth management and investment. P2P lending has become especially beneficial for emerging and developing countries where people do not have access to financial services. In addition, traditional banking institutions may not provide individuals with loans due to the lack of credit history.
An example of a fintech startup in this group is Revolut, the globally leading neobank headquartered in London. Founded in 2015, Revolut has a smartphone app that provides services like mobile banking, online payments, money remittances, and foreign currency exchange at more affordable costs in comparison with traditional banks.
2. Fintechs aiming to solve specific customer issues
Some fintech startups develop solutions and services to address specific issues of individuals, for instance, making online payments available via not only smartphones but through normal cell phones. This is especially important for people in emerging and developing countries who do not have access to technological advancements that have already become widely used across other regions.
With the view of addressing this problem, governments, startups, and institutions are implementing financial inclusion strategies. Concerning success stories, Kenya is known for its early adoption of mobile banking. This became possible due to the M-Pesa system, introduced by Safaricom and Vodafone.
Employing the network of telecom subscribers, M-Pesa enabled users to carry out online payments while providing the rural population with access to banking services. With M-Pesa, 194,000—or 2%—Kenyan households were rescued from poverty. What’s more, the income of the average Kenyan increased by 5–30%.
3. Startups facilitating access to financial services
Traditional financial organizations generally set up minima to access their products and services. For instance, customers may be required to take a loan at a minimum of $500, which poses restrictions on people who do not have this amount of money. By using software solutions and technological advancements such as artificial intelligence (AI), financial inclusion startups remove these barriers.
Digital transformation and smartphone penetration are key market drivers, leading to the wave of fintechs operating in micro-savings, micro-lending, micro-investing, micro-insurance, and other fields of this kind.
Considering success stories, Acorns is a US startup that provides micro- and robo-investing. Established in 2021, Acorns allows for connecting payment cards with app accounts to automatically invest free funds and spare change in diversified portfolios. As of 2020, the system had 8.2 million customers. To date, this financial inclusion startup has raised $207 million over 11 rounds.
4. Startups focusing on education and financial well-being
This group of financial inclusion startups delivers web and mobile applications that offer training on their products. This way, fintech companies enhance customer experience and transparency of their services. Furthermore, organizations can encourage users to save money and form valuable habits associated with budget planning, goal setting, as well as wealth management.
To address the challenges of financial inclusion, banking institutions can build a software solution that rounds up all transactions and sends the change to a user accumulation account.
Speaking of real-life examples, Bank of America developed such an app for middle-aged women with children. During their research, experts revealed that women falling under this category utilized checkbook registries, which was a typical method to track expenses before the widespread aссeptance of mobile banking applications.
The team also found that some survey participants rounded up numbers when paying bills, leading to extra expenditures. With the view to resolve this issue, Bank of America designed the “Keep the Change” service that allowed customers to grow their balances automatically. As a result, the company was able to attract 2 million users in less than a year.
Although this program was implemented quite long ago, the underbanked are still experiencing this problem, which presents opportunities for startups and businesses worldwide. For instance, Digit offers an algorithm that monitors consumer spending and transfers small amounts of money—not affecting user cash flow needs—to saving accounts.
There are other examples of financial inclusion startups, such as Greenlight that issues debit cards for children to teach them financial literacy, and Starling Bank with its app that lets users monitor their spending habits. If you want to learn how to create a fintech startup similar to the abovementioned ones, check out our dedicated article.
5. Fintechs offering personalization and risk minimization
Striving to boost consumer engagement and increase product availability, financial inclusion startups analyze numerous factors (including credit history, purchasing habits, likes and posts in social media) and apply risk-calculation techniques.
For this purpose, it is possible to integrate business intelligence and big data analytics software. Thanks to this, companies deliver personalized recommendations and minimize risks while attracting more customers.
Considering real-life examples, Lenddo and ZestFinance come up with credit scoring services based on user information such as search history and social network activities. By now, Zest AI had raised a capital of $250 million. Another example, Koyo, which is a UK-based fintech company that employs machine learning to provide underbanked people with credits based on transaction data.
Since financial inclusion has an integral role in the world economy, many opportunities appear for fintech startups, banking institutions, and investors. Representing nearly 90% of business and over 50% of employment globally, small and mid-sized enterprises (SMEs) are becoming highly involved in enabling financial inclusion globally. It is worth remarking that formal SMEs contribute to 40% of GDP in emerging countries.
By creating fintech software solutions, companies can increase service affordability and availability while reaching people in even rural areas. What’s more, organizations manage to improve customer experience and generate profits. As a result, the implementation of financial inclusion strategies benefits both supply and demand sides.
If you want to launch a fintech application, contact our team. Our software experts will soon get back to you and help address all issues. With vast experience in fintech software development, we assist our clients in prioritizing features, choosing a technology stack, and outlining a delivery roadmap while ensuring compliance with security regulations.