According to World Bank estimates, about 1.7 billion adults were completely unbanked in 2021. This means one in every four people on the planet does not have access to any type of banking institution, and most of them are in developing nations.
The challenge of financial inclusion is among the most pressing issues facing global development — and it’s the backbone of many of the UN’s Sustainable Development Goals for 2030. So how can the financial technology (fintech) industry serve as a force for good and accelerate the adoption of digital payments worldwide?
Boosting financial inclusion for unbanked populations
In emerging markets, cash is still the primary foundation of commerce.
For example, estimates from McKinsey show that over 90 percent of payments across Africa in recent years were conducted in cash. Traditional financial institutions and individual bank accounts are often largely removed from day-to-day life and are not used to pay bills; even small business owners may find it simplest to get by using cash.
Adding to this reality is the fact that, within many emerging economies, exchanging currencies from nation to nation is highly cumbersome and expensive for individuals and small businesses alike.
For cross-border payments companies, this presents a unique opportunity to facilitate seamless international transactions and unlock new value for the next generation.
Fragmentation in Africa — and how fintech could help
In Africa, for instance, there are 54 nations and 42 currencies — and only 1 percent of its fintech system built out, making it the most expensive continent to trade with.
Financial inclusion is paramount for emerging markets, and the international community has identified Africa as having the most need for financial technology solutions.
In the last few years, the United Arab Emirates halted flights between Nigeria because it does not have the ability to repatriate funds back to Dubai. To purchase Africa’s lithium, Apple and Tesla import it from Europe because there are limited financial systems in place that can handle such transactions with U.S. companies.
Many layers of transaction, compliance and conversion have to be paid off just to have remittance on simple transactions. The result is an alarmingly high cost of doing business across Africa. That cost makes Africa a difficult trade partner internationally and severely limits the business landscape locally, where individuals are hard-pressed to advance their economic standing.
Fintech could hold the keys to solving the problem, though. Digital payments and financial apps can facilitate mobile money services and improve access to financial institutions and resources in remote areas. Fintech firms are also targeting the B2B sector to simplify payment processes and improve cash flow management for businesses in Africa.
With more rails in place to facilitate automated transactions, the infrastructure for handling commerce at a global scale can slowly emerge, eventually bringing reasonable costs and upward mobility across the continent.
Latin America’s hopeful position
A similar scenario is playing out in Latin America, where trade is active with established markets, but costs are not ideal. Financial systems can also be clunky due to a lack of standardization.
Embedded finance allows consumers to access banking services seamlessly within their everyday applications, enhancing user experience and meeting the needs of underserved populations.
However, fintech experts note several key advantages for Latin America tied to its flexible culture that has endured much political and economic upheaval over the past couple of generations.
Established markets bring solutions — but not without hurdles
With modern financial systems largely in place, central banks warming up to digital currencies (CBDCs) and much-needed ISO 20022 standardization anticipated in the near future, established markets from North America and Europe to Asia and Australia are closing in on a new dawn for financial inclusion that could unlock value for generations to come.
Whether it’s preventing fraud or transferring funds for humanitarian purposes without the risk of waste, theft or administrative costs, fintech solves some of the stickiest issues for established economies.
One of the areas with the most promise is financial inclusion in lending. While older models can be prone to discrimination, modern AI-empowered reviews can apply a more comprehensive and holistic assessment of applicants’ risk, uncovering a more accurate sense of their potential.
The impact of smarter and faster lending systems can greatly enhance an economy by bringing more borrowers and entrepreneurs into the system. Additionally, the lenders themselves will be much better off because they will realize higher returns on their loans, fewer defaults and less overhead.
Revolutionizing cross-border digital payments with financial technology
One of the most transformative areas of fintech is cross-border payments. Traditional international money transfers are often slow, costly and cumbersome, particularly for small businesses and individuals.
Fintech companies are revolutionizing payment processing by introducing faster, cheaper and more transparent solutions — with these firms acting as key players to improve access to credit and facilitate financial inclusion. These three innovations are helping pave the way to change the game for FX and financial inclusion:
Blockchain
Blockchain technology allows for secure and instantaneous cross-border transactions without the need for intermediaries, significantly reducing costs and processing times.
Proponents of blockchain-based payments also note that they can be a bridge for unbanked populations to reach financial institutions. As blockchain payments gain more attention from traditional financial institutions and credit unions, there could be ways to exchange cash for digital assets used in everyday transactions — in turn removing some of the geographic barriers to access for those in rural areas.
Digital wallets
Digital wallets enhance the accessibility and security of financial data and transactions, providing a key use case for fintech to boost financial inclusion.
Digital wallets are used to store someone’s payment information and allow fast, seamless transaction without the need for physical credit cards or cash. In regions that have traditionally favored cash digital wallets could help usher in a new era of contactless payment processing.
CBDCs, stablecoins and tokenization
Advancements like digital currencies, stablecoins and the tokenization of real-world assets also play a vital role in this transformation. CBDCs provide an alternative to traditional fiat currencies, offering greater stability and lower transaction fees.
This is particularly beneficial for workers who send remittances to their home countries, as it enables them to transfer money more efficiently and affordably, ensuring that more funds reach their intended recipients.
Ultimately, the cross-border payment industry is anticipated to produce $280 billion in revenues off a total of $290 trillion in payment flows by 2030.
The forces appear to be lining up for a major global breakthrough — with fintech potentially taking center stage. Future applications could enhance payments for all parties, with advanced data analytics playing a crucial role in automating processes to manage risks effectively, enhance efficiency, and provide personalized service for all participants.
When it comes to investing, fintech could democratize access by providing low-cost, easily accessible tools and services, such as ETFs and robo-advisors to a wider range of investors.
Above all, these innovations and improvements are poised to bring about more opportunities for individuals and small businesses in both emerging and established markets.
Want more insights on the topics shaping the future of cross-border payments? Tune in to Converge, with new episodes every Wednesday.
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