Financial Inclusion Transforms Vulnerable Communities

Finastra Managing Director APAC Luc Hovhannessian discusses how open banking and financial inclusion can unlock opportunities and drive real innovation for communities whom need it the most.

By Luc Hovhannessian

Southeast Asia has some of the lowest financial inclusion in the world. More than 7 out of 10 adults in the region are either underbanked — with no access to credit cards or long-term savings accounts — or unbanked, without access to a basic bank account. Furthermore, millions of Southeast Asia’s small and midsize enterprises (SMEs) remain largely underserved and are unable to access finance, despite making up 97-99% of the region’s enterprise population and accounting for more than 60% of employment.

However, technology may help solve the financial inclusion challenge. For instance, fintech solutions have made it possible – and cost effective – for banks to provide digital bank accounts for people who cannot get to a branch; non-bank fintechs have made digital payments increasingly widespread, and; alternative lenders can now use a range of methods to assess creditworthiness and grant SMEs access to vital finance.

A recent study by the Asian Development Bank, found that digital financial solutions can address around 40% of unmet demand for payment services and about 20% of credit requirements of poor households and small businesses in Asia.

That said, progress until now has not been fast enough. According to a 2019 study, whilst banking penetration in the region is now 1.25 times what it was in 2014, it is still 50% lower than the banking penetration rate in the US and the UK. Ironically, however, the COVID-19 pandemic – which is having a disproportionate impact on poorer communities – could act as a catalyst for change that will see financial inclusion spreading faster than before.

The fintech industry is key to this shift, as is the concept of Open Banking, which enables the exchange of data between banks and third parties through Application Programming Interfaces (APIs), thereby allowing fintechs, financial institutions, and even governments to collaborate to create innovative solutions. From enabling microloans to lowering barriers to entry for basic financial products, Open Banking aims to create a more level playing field, connecting people with innovation and opportunities by leveraging cutting edge fintech solutions and collaboration.

Governments, financial institutions and innovators are embracing this new model of open innovation more than ever before, as they recognise the opportunity to co-create and launch cutting-edge digital solutions at scale and speed not previously possible.

Since its establishment in 2018, the ASEAN Financial Innovation Network has driven co-innovation through its members across the financial services industry via its cloud-based API Exchange (APIX) platform to solve industry challenges. For example, the Monetary Authority of Singapore (MAS) recently launched a S$1.75 million Global Fintech Innovation Challenge, calling for innovative solutions that can help the sector respond to COVID-19 and climate change, leveraging the APIX platform and repository of APIs.

One of the most powerful facets of open finance is that its benefits are not just available to a select few, but are fully inclusive. For instance, Philippines-based team WonderTech were winners in Finastra’s global hackathon, Hack to the Future, with their ‘Agree Farm App’. Leveraging industry APIs, the team of young professionals and university students were able to build a working prototype in just a few weeks, bringing to life their vision to connect rural farmers in the Philippines with access to bank loans. The team from Manila is just one example of how open finance is helping unlock potential and provide equal access to next-generation fintech tools for innovators looking to solve unmet needs.

To truly unlock the region’s economic potential, open finance and innovation must also be accompanied by financial literacy to ensure people are empowered with the basic knowledge to benefit from new digital financial tools.

Rang De, India’s first social peer to peer lending platform enables individuals to invest in people from low income households, expanding access to low-cost credit. Alongside its peer lending platform, the Rang De Swabhimaan project provides doorstep digital financial literacy in rural India, offering locals a range of financial literacy courses and empowering them with entrepreneurship tools and know-how.

Similarly, E-commerce giant Lazada’s dedicated digital entrepreneurship platform, Lazada University, makes basic e-commerce know-how available to millions of individuals, including those based in remote and underserved communities, equipping them to take control of their business operations and finances over the long term.

It’s impossible to say just how many people in vulnerable and underserved communities across Southeast Asia have great business ideas but are not reaching their full potential due to lack of access to financial tools, or because traditional finance structures don’t meet their needs. For many in underserved communities, tools like these help them take charge of their financial future and entrepreneurial livelihoods.

Individual successes also have a compounding effect as they go on to be role models for their communities.

The pandemic has brought the future forward, driving increased demand for digital transformation in the financial services sector. Leveraging the potential of cutting edge fintech, all players within the financial services ecosystem have a potential role to play in making finance more accessible. As an industry, we now have an opportunity to redefine finance for good and create new solutions that put better outcomes for society at the center.

(Ed. Featured image by Photographer Denniz Futalan.)