The Benefits Of Promoting Financial Inclusion Through Regulatory Policies

Imagine having no access to financial services – no checking account, no credit card, no health insurance, and nowhere to safely store your and your family’s savings. 

When you have access to financial services, you can earn more, improve your living conditions, and decrease your vulnerability if unexpected financial events occur. 

According to the World Bank, financial inclusion means that “individuals and businesses have access to useful and affordable financial products and services that meet their needs… delivered in a responsible and sustainable way.” 

Financial inclusion aims to provide access to affordable and appropriate financial services for individuals and businesses and is essential for promoting economic growth and reducing inequality. 

Having a financial account, allows you to access other financial services, such as payments, savings, and credit. It can lead to better healthcare, education, and business opportunities (as well as supporting people to escape from poverty). Moreover, these positive effects can ripple through wider families and communities. 

Financial Inclusion Worldwide And In The US

The COVID-19 pandemic and resulting social distancing restrictions were a catalyst, handily driving the adoption of digital payments and inadvertently promoting financial inclusion

However, despite the significant drop in the unbanked population during this period compared to previous years, there were still 1.4 billion unbanked adults worldwide in 2021. 

In the US specifically, an estimated 5.9 million households (4.5%) continue to be “unbanked,” meaning no one living there has a checking or savings account at a bank or credit union. 

Unbanked rates in the US are highest among households that are:

  • Lower-income
  • Less educated
  • Black
  • Hispanic
  • Disabled
  • Single mothers

The Role Of Fintech Companies In Promoting Financial Inclusion 

Fintech companies have played a crucial role in advancing financial inclusion worldwide by opening access to financial services to previously under and unbanked populations. 

These innovative businesses continue to disrupt the traditional financial services sector, utilizing new sources of data and developing fresh processing algorithms, which has led to improved decision-making and better access to financial services. 

Many fintech companies use modern artificial intelligence techniques to collect and analyze this so-called “alternative data.” This is information that can be used to assess a consumer’s creditworthiness, but that isn’t normally provided as part of the credit application process—for example, incoming and outgoing cash flow in a bank account. 

To effectively manage consumer data and provide an omnichannel, personalized experience – and hence build trust, including in underserved communities – fintech companies may employ out-of-the-box solutions, like starting a virtual call center

Potential Risks of Financial Inclusion

Despite the benefits of technology in advancing financial inclusion, there are some potential risks. Regulators and the public are increasingly finding that more data doesn’t always mean more objective decision-making—and digital technology doesn’t necessarily spell equal access to information. 

The reality is that big data and sophisticated algorithms often have inherent biases, which can lead to financial exclusion by amplifying existing inequities and discrimination. 

Algorithms use large sets of personalized data, and online consumer behavior is tracked to generate detailed profiles. Advertisers use these to hyper-target ads and products to different groups. This results in different consumers being served different information online, which can hinder their understanding of or access to financial products. 

The Regulatory Role 

Regulators play an important role in ensuring that growth, driven by expanding access to financial services, benefits both fintech companies and consumers.

The regulatory role is thus to provide a necessary legal baseline for innovative, profitable, and safe growth of the sector—while alleviating the risks to consumers stemming from new and emergent technologies. Therefore, the goal is to stimulate innovation while protecting consumers. 

The Benefits Of Promoting Financial Inclusion Through Regulatory Policies 

So, what are the benefits of promoting financial inclusion through regulatory policies?

Improved Consumer Protection

Consumer trust in the system underpins financial inclusion, and effective protection helps cultivate this. 

By adhering to consumer protection regulations, fintech companies can ensure their services and operations are fair and transparent and any potential risks to consumers are minimized and mitigated. This, in turn, encourages individuals (particularly those from underserved populations) to take advantage of the financial services on offer. 

Innovation and Technology Adoption

While ensuring consumer protection, regulatory policies can also foster innovation and technology adoption in the financial sector, including advancements in areas such as Retail Point of Sale systems.

By implementing clear guidelines and frameworks, regulators can instill confidence in fintech companies and promote investment in technology that promotes financial inclusion. 

To be mindful of creating undue compliance costs, effective regulation must strike a balance between consumer protection and the fostering of innovation within the fintech industry. 

Strengthened Financial Stability

Regulatory policies play a crucial role in maintaining financial stability too, by mitigating risks and preventing fraudulent activities. 

Regulators can ensure that fintech companies maintain sustainable operational practices and robust risk management frameworks. This instills confidence in the financial system, encouraging more individuals and businesses to participate. 

The Right Solutions For The Big Mission 

Promoting inclusion through regulatory policies is essential for creating a more inclusive and sustainable financial ecosystem. By implementing effective regulation, both regulators and fintech companies can contribute to better consumer protection, innovation, access to financial services, and financial stability, creating an environment that benefits everyone. 

Unlike legacy financial services providers, fintech companies often lack regulatory compliance experience and resources. This challenge is amplified further when fintech companies operate in more than one geographical market.  

Thankfully, there are tools that can help. For example, solutions like Vonage’s ACD systems enable fintech companies to maintain transparency and regulatory compliance in their consumer interactions by offering streamlined call monitoring capabilities, call recording and archiving, and quality assurance features.

Balancing compliant business growth and further innovation while helping advance the overall mission of financial inclusion and driving positive change is not a small task.

That said, those fintech companies that invest in regulatory compliance solutions that enable efficient and personalized service will most likely be the household names of the future. 

Lavanya Rathnam

Lavanya Rathnam is an experienced technology, finance, and compliance writer. She combines her keen understanding of regulatory frameworks and industry best practices with exemplary writing skills to communicate complex concepts of Governance, Risk, and Compliance (GRC) in clear and accessible language. Lavanya specializes in creating informative and engaging content that educates and empowers readers to make informed decisions. She also works with different companies in the Web 3.0, blockchain, fintech, and EV industries to assess their products’ compliance with evolving regulations and standards.

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