Digitizing Inclusion: FinTech’s Promise and Pitfalls in the Global South

Digitizing Inclusion: FinTech’s Promise and Pitfalls in the Global South

For many of us, it's commonplace to use digital platforms to manage our financial lives. If you're reading this article, you likely have a bank account from which you can send payments to cover everyday expenses, and when larger expenses arise, you can access credit with relative ease. The process is so deeply ingrained that the socio-cultural expectation to embed ourselves within the formal financial system is as American as apple pie; and we assume that enabling others to access it will also improve their financial lives, regardless of socio-economic and geographic divides.

As a result, “banking the unbanked” and other poverty reduction efforts from intergovernmental organizations and private financial companies (“FinTech”) have grown across the Global South over the last several decades. For example, we see this trend in the Philippines, a low-middle income country (LMIC), where investment in FinTech companies has ballooned since 2016 under the auspices of financial inclusion (Quimba et al., 2023). The steadfast implementation of financial inclusion solutions begs the question: can FinTech address the needs of cash-poor populations across the Global South? Or does the promise of FinTech collapse in the contexts in which it unfolds?

What is FinTech?

Despite the popularity of the term "FinTech", the precise definition is surprisingly ill-defined (Berg et al., 2022). From a consumer perspective, FinTech may be a savings account, a digital transaction, or a loan managed on a mobile app. For a bank or mobile company, FinTech serves two main purposes: 

1. Improving the customer-lendor experience: FinTech improves accessibility and lowers operational times by facilitating transactions through a mobile or web interface.

2. Advancing credit screening and monitoring: Companies can leverage data footprints and other alternative data sources to improve default rate prediction algorithms for banks seeking new consumers.

What is FinTech’s role in financial inclusion?

Though direct evidence is limited, some academics argue that FinTech shows promise in expanding credit access to underserved populations without formal credit histories. Using machine learning algorithms to predict the creditworthiness of otherwise “unscoreable” borrowers, these algorithms circumvent traditional and historically exclusive credit vetting processes. Others argue that “algorithmic lending” potentially reduces implicit or explicit biases to race, ethnicity, or gender, thus better integrating marginalized groups into the formal financial system (Berg et al., 2022).

Poverty Finance: The Paradox of Financial Inclusion

Critics, however, situate the latest boom in FinTech and “algorithmic lending” within the arc of poverty finance, a term coined by Rankin (2013), to describe the history of short-lived efforts to extend credit to marginalized populations outside of the formal financial system. Some researchers go as far as to call FinTech a “politically-driven fantasy” due to the perceived dissonance between its function and reality. They argue that in a system where financial agencies seek to minimize risk and maximize profits, financiers are inherently uninterested in providing services to populations who earn small and irregular incomes and possess limited collateral. Unambiguous success stories are rare and often require direct or indirect subsidies (Bernards, 2022). Others point to the disproportionate financial risk imposed upon low-income populations in the form of predatory lending and data harvesting (Aalders, 2023; Donovan & Park, 2019; Langley & Leyshon, 2022).

Further, researchers argue that a system where financiers must sort borrowers by risk, whether for credit or insurance, inherently stratifies the global population between those deserving of financial services and those who are undeserving. When today's “unbanked” population are the descendents of the “undeserving” from previous colonial power structures, this raises the question: how do we implement financial inclusion without reproducing the structures of the past? And more rhetorically, can financiers be the arbiters of financial inclusion, if their intrinsic role is to stratify and exclude in order to manage risk? 

While today's development agencies agree that financial inclusion is required for a just and sustainable future (AFI, 2010), the tension between inclusivity and stratification produces a paradox that exposes the limits of financiers in addressing structural inequities (Bernards, 2022).

What's next for financial inclusion?

Given the deeper structural causes of global poverty, it's important for data scientists to avoid the temptation to reduce complex political and social phenomena into arbitrarily neat (but incomplete) problems with techno-centric solutions (Li, 2007). Stanford development scholar James Ferguson (1994) calls this the “anti-politics machine” in which development initiatives, like financial inclusion, obfuscate the structural inequities responsible for prevailing issues, resulting in superficial and ineffective interventions (Ali, 2015). As we move forward, it is important for practitioners to combine their technical approach with what scholars describe as moral-political change, or the critical engagement required to challenge and transform relationships of power (Ali, 2015). One organization that follows the moral-political change approach is the Bangladesh Rural Advancement Committee (BRAC), which ensures low-income populations are met with holistic solutions that encompass health and education, in addition to financial security (Srivastava, 2009).

If you know of other programs that address structural inequities in addition to financial services, I would love to hear from you. Please feel free to comment with your thoughts!

References

1. Aalders, R. (2023). Buy now, pay later: Redefining indebted users as responsible consumers. Information, Communication & Society, 26(5), 941–956.

2. AFI. (2010). Innovative Financial Inclusion: Principles and Report on Innovative Financial Inclusion from the Access through Innovation Sub-Group of the G20 Financial Inclusion Experts Group. Seoul: G20. 

3. Ali, S.I. (2015). Engineering in solidarity: Hybridizing knowledge systems in humanitarian and international development work. Procedia Engineering (107): 11-15.

4. Berg, T., Fuster, A., & Puri, M. (2022). FinTech lending. Annual Review of Financial Economics, 14(1), 187–207. https://doi.org/10.1146/annurev-financial-101521-112042

5. Bernards, N. (2022). A Critical History of Poverty Finance: Colonial Roots and Neoliberal Failures. Pluto Press. Introduction.

6. ​​Donovan, K. P., & Park, E. (2019, September 20). Perpetual Debt in the Silicon Savannah. Boston Reviewhttps://www.bostonreview.net/articles/perpetual-debt-silicon-savannah/

7. Ferguson, J. (1994). Anti-politics machine: Development, depoliticization, and bureaucratic power in Lesotho. U of Minnesota Press.

8. Langley, P., & Leyshon, A. (2022). Neo-colonial credit: FinTech platforms in Africa. Journal of Cultural Economy, 15(4), 401–415

9. Li, T. M. (2007). Rendering technical? In The Will to Improve: Governmentality, development, and the practice of politics (pp. 123–155). Duke University Press. https://doi.org/10.1215/9780822389781-005

10. Quimba, F. M. A., Barral, M. A. A., & Carlos, J. C. T. (2023). Analysis of the fintech landscape in the Philippines. Philippine Institute for Development Studies.https://doi.org/10.62986/rps2023.01

11. Rankin, K. N. (2013). A critical geography of poverty finance. Third World Quarterly, 34(4), 551–572.

12. Srivastava, L. (2009). BRAC: A pioneering Bangladesh human service organization (1972–2009). School of Social Welfare, University of California, Berkeley.https://mackcenter.berkeley.edu/sites/default/files/publications/brac_a_pioneering_bangladesh_human_service_organization_1972-2009.pdf