How FinTech Is Reshaping the Financial Landscape in Developing Economies

According to the International Monetary Fund (IMF), 152 nations around the globe can be classified as developing countries. With a collective population of almost 6.9 billion, this means that less than 12% of the global population exists within a developed economy. In other words, there is still plenty of room for improvement.

One of the most important criteria for categorising developing countries is their per capita gross domestic product (GDP), but this is not the only factor to consider; a high standard of living is every bit as crucial. Evidently, we need new ways of driving economic development to encourage growth and decrease inequality and poverty levels. As this article will show, that’s where FinTech comes in.

Obstacles to Economic Development

A high per capita GDP is an important part of being categorised as a developed country, but it is not enough on its own. Education standards, economic growth, income equality, transport and communication availability, and access to technology — these and many other socioeconomic factors all play important roles in classification. A real-life example can be found in Qatar, which, despite having one of the world’s highest per capita GDPs, is still considered a developing country due to high income inequality, insufficient infrastructure, and poor education levels.

While FinTech may not be able to immediately remove all of these obstacles, it has been proven to drive economic growth and reduce income inequality by driving financial inclusion.

FinTech, Financial Inclusion, and Economic Growth

With approximately 1.4 billion people worldwide lacking access to banking services, it’s clear we are facing a severe lack of financial inclusion. By enabling secure digital transactions and providing access to mobile money, credit, insurance products, and investment opportunities, FinTech can help in this area, in turn lowering income inequality. In fact, with these new technological tools, the percentage of adults actively using financial accounts leapt from 30% to over 70% between 2011 and 2021, demonstrating that FinTech has already had a sizeable impact.

The literature on FinTech’s influence on financial inclusion is quite sparse, but an article from the ADB Institute provides some concrete examples of its benefits. This essay surveys 25 developing Asian countries, charting the impact of financial technology on their economic development and inclusion. It demonstrates that through technological and financial innovation, FinTech can address the financial inclusion gap, providing affordable, accessible services to previously underserved groups. Such services work on a P2P basis, cutting transaction costs substantially. As a result, more people can access savings, loans, and other financial products, helping them plan for their futures and start small businesses. By increasing access to funding and providing opportunities for low-income people — especially those in vulnerable populations, like women, or in isolated rural communities — FinTech helps stimulate economic growth by creating jobs and increasing entrepreneurship.

But what does this look like in practice? Success stories like those of JUMO and Paga can show us.

Based in South Africa, JUMO is a platform that partners with banks and mobile networks to provide underserved individuals throughout Africa with access to financial products. It achieves this by utilising mobile data and AI to bridge the gap between customer and institution, and in so doing, has facilitated over 180 million loans and dispersed some $6 billion in funds. Currently, JUMO has served over 25 million small businesses and individuals.

Nigerian mobile payment company Paga has enjoyed a similar degree of success by enabling its users to send, receive, and store money, even when they lack access to traditional banking infrastructure. The platform integrates with banks and local merchants, improving financial inclusion and making true on its promise to simplify financial access. With over 19 million users and millions of monthly transactions, Paga’s reach is clear.

Examples like these show how much impact FinTech can have in real life. Companies like JUMO and Paga drive financial inclusion in underserved African countries and will undoubtedly play a large part in these nations achieving economic development.

Potential Obstacles and Challenges

The FinTech industry has grown every year and is only predicted to expand further. In fact, according to McKinsey and Company, between 2023-2028, revenues in the sector are expected to increase nearly three times as quickly as those associated with traditional banking. However, to maintain the expeditious growth that financial technology has enjoyed so far, we must contend with several challenges.

Regulatory compliance is one such hurdle. FinTech companies must adhere to a long list of laws and requirements, including the GDPR, GLBA, and the Money Laundering Control Act, among others — and rightly so. Financial technology must be appropriately regulated to protect consumers, particularly vulnerable ones. However, regulatory bodies so far have not been able to keep up with the rapid change and growth in the FinTech sector, which has hampered its progress.

Integrating new financial technology may also prove a challenge going forward. Many financial institutions are based on outdated systems with limited capabilities, presenting compatibility issues and file format mismatches.

Even after all the legal hoops have been jumped through, and the FinTech solution has been smoothly implemented, more challenges await. Before an economy can benefit from new financial technology, it must have a large enough user base to make a measurable difference. This begins with establishing trust via public education, followed by utilising effective marketing and software design.

Conclusion

Most of the world’s nations are still not considered economically developed. FinTech has already had a massive impact in these countries, increasing inclusive finance and providing unbanked companies and individuals access to financial services. This has helped improve the lives of countless people by providing them with new opportunities and tools. This, in turn, plays a significant role in driving economic growth and development.

However, FinTech still has a great deal of untapped potential to reduce income inequality, diminish poverty, and help developing countries flourish. While it’s true that implementing this technology will prove difficult, the challenge seems worthwhile when we consider the rewards we stand to gain.