How Fintech is Enabling Progress Toward the SDGs — And Why it’s Time for Investors to Double Down
Global economic policy over the last two years has been all about recovery from the COVID-19 pandemic and its aftermath. Governments started by lowering interest rates and implementing quantitative easing to boost their economies during the crisis. Then, as the pandemic subsided, these policies combined with pandemic-related disruptions in supply chains and labour markets, the war in Ukraine, and other factors to lead to an increase in inflation — causing central banks around the world to raise interest rates to dampen demand.
Now, with interest rates in developed and emerging economies continuing to rise, and interest rates in some least developed countries (LDCs) reaching 17% or higher, the likelihood that the world will be able to deliver on Sustainable Development Goal (SDG) 10 — reducing global inequalities — is meagre. The steep macroeconomic tightening has resulted in difficult economic headwinds that disproportionately affect lower-income populations and micro, small and medium-sized enterprises in LDCs. In addition, these businesses face structural barriers to growth, including a lack of access to local funding, talent and customer acquisition — and particularly, connections to global capital markets. In these LDC markets where small entrepreneurs have struggled to gain access to sustainable funding, global macroeconomic conditions have made investors more demanding, leading to depressed business valuations and a slowdown in equity fundraising.
Tech companies across the globe have been impacted by this slowdown in venture capital funding. As Crunchbase reported at the start of this financial year: “Global funding in the first quarter reached $76 billion — marking a 53% decline year over year from $162 billion in the first quarter of 2022.” This dearth of funding has a major impact on fintech companies, which rely primarily on equity and venture capital. And it puts financial inclusion at risk of receding significantly in developing economies, sending millions of low-income households and micro-entrepreneurs back into poverty — and putting not only SDG 10 but the other SDGs at risk.
In response, it is urgent that the investment community — especially impact-focused investors — double down on tech-led approaches to financial inclusion. Below, I’ll discuss why renewing their commitment to innovative financial solutions will allow investors to boost underserved communities’ access to finance, strengthening their resilience to the ongoing economic hardships happening around the world.
Tech-led solutions boost financial inclusion
Tech-led solutions increase financial inclusion and build the resilience of customers. India — the world’s largest democracy and the largest country in the world by population — provides a compelling example of the impact these solutions can have in emerging markets. As Bain & Company’s “India Fintech Report 2022: Sailing Through Turbulent Tides” puts it, “digital financial services are accelerating financial inclusion, democratising access, and spurring personalisation of products and customer journeys” in the country.
The report highlights the rapid gains that Indian fintechs have made in the payments space in recent years, enabled by public sector initiatives like the Unified Payments Interface — India’s government-run digital payment system — which processes approximately US $135 billion in monthly payments (as of June 2022). This is nine times(!) larger than the value of monthly transactions made with credit cards, which have been used in the country for over 40 years. Prior to the current downturn in funding, this momentum had drawn growing interest from investors, with Bain & Company noting that India’s share of global fintech funding more than doubled from 2016 to 2022, with the sector seeing almost $20 billion in new funding — and the addition of 18 fintech unicorns — in 2021 and 2022 alone.
This progress is occurring across LDCs, where fintechs play an increasingly vital role in boosting financial and gender inclusion, through digital adoption and the digitalisation of financial services and payment systems. To take one prominent example, Africa’s fintech industry is coming of age: Despite political and economic headwinds — and a global pandemic which suppressed, and in many cases outlawed, certain economic activity — fintech companies on the continent have been booming.
According to McKinsey’s August 2022 report, “Fintech in Africa: The end of the beginning”: “Between 2020 and 2021, the number of tech startups in Africa tripled to around 5,200 companies. Just under half of these are fintechs, which are making it their business to disrupt and augment traditional financial services.” McKinsey’s research highlights the substantial traction that African fintechs have gained in the market, with estimated revenues of roughly $4 – 6 billion in 2020 and penetration levels of 3 – 5% on average in most countries — figures that are comparable to global market leaders. The report attributes fintech’s growth in Africa to a number of factors, including decreasing internet access costs coupled with increasing smartphone users and expanded mobile phone network coverage, plus a fast-growing urban population of mainly young people. It notes that the COVID-19 pandemic has accelerated this progress toward digitalisation, with these trends combining to create “a fertile environment for new technology players.”
In this context, fintech solutions enable higher financial inclusion by streamlining the distribution of financial services that unlock business growth and substantiate personal assets and credit history, especially for those previously underserved by the local banking system due to a lack of collateral or record of credit. In emerging and frontier markets where financial needs are often dynamic, time-sensitive and unmet by traditional banks, fintechs allow for speed and efficiency in credit scoring, the onboarding of customers and the delivery of financial services. Digital solutions are also typically cost effective, providing more affordability for the end customer.
In Africa particularly, the rapid adoption of mobile technology and mobile money solutions over the past years has unlocked opportunities for better financial inclusion. In 2021, according to the World Bank Global Findex Database, 55% of the adult population in sub-Saharan Africa had a financial account, with 33% having a mobile money account — the largest percentage of any region, and over three times higher than the 10% average for mobile money account ownership globally. Similarly, the International Finance Corporation, in its 2018 paper “Digital Access: The Future of Financial Inclusion in Africa,” reports that “Africa is home to more digital financial services deployments than any other region in the world, with almost half of the nearly 700 million individual users worldwide.” It’s clear that mobile money has become a key lever for not just payments, but for the expansion of many essential financial services to African communities.
How fintech solutions are supporting progress toward other global goals
The analysis and findings in these reports show the positive impact that fintech companies can make in advancing financial inclusion — something that can have a multiplier effect in accelerating progress toward multiple SDGs in emerging and frontier markets.
For example, Bboxx has leveraged Africa’s growing financial access to support its efforts to provide solar energy and clean cooking solutions to off-grid communities across the continent. Bboxx makes these solutions available through pay-as-you-go models using mobile money, thereby avoiding the barrier of upfront payment which has typically prevented low-income households from accessing these products and services. Along with increasing access to goods and services for underserved communities, the tech-led financial solutions being developed and deployed by companies like Bboxx also help advance global climate-related goals. These technologies can play a critical role in supporting the deployment of renewable energy solutions that reduce greenhouse gas emissions, boost climate resilience and adaption, and mitigate the impacts of climate change.
Fintechs are also contributing to progress on female employment and empowerment. A 2022 report for the IMF entitled “Fintech, Female Employment, and Gender Inequality” found that fintech development generates significant welfare improvement for women. Not only do fintech companies reach female-led enterprises that have typically been financially excluded, they also work with firms in service sectors that traditionally hire more female workers, helping to boost women’s employment. With greater financial resources from fintech providers, these companies are able to hire more female workers by offering the training, maternity leave and flexible hours these workers often require. And the growth of fintechs not only increases the number of female employees in an economy’s workforce, it also raises the ratio of female relative to male employees — particularly in sub-Saharan African, Asian and European countries.
To take just one of many examples of this positive impact: Indonesia is a country with millions of female entrepreneurs, but most of them face significant difficulties in accessing financial services. Founded in 2010 to support these entrepreneurs, Amartha started as a microfinance institution before pivoting into a fintech peer-to-peer lending model in 2016. Through its platform, the company connects female entrepreneurs in rural areas facing difficulties in obtaining working capital to a network of online lenders. The platform includes a self-learning algorithm which determines the risk level of borrowers who lack a prior credit history and automates key aspects of operations — including the application process, data gathering, credit decision-making and scoring — which lowers operating costs. Accessing financing from Amartha generates a credit history for the borrowers, which can enable them to make future funding requests to banks or other financial institutions, contributing to poverty alleviation.
It takes a whole ecosystem to maximise fintech’s potential
Despite the macroeconomic headwinds facing companies around the world, solutions exist that can support the expansion of fintech companies and other tech-led businesses in developing economies. For instance, current conditions are favourable for fintechs and investors to explore debt financing (i.e., money that a business raises by taking out a loan) more closely. Providing debt capital to growing fintechs allows these businesses to continue to serve customers by giving them access to working capital and loan book funding.
Debt capital also protects equity investors against significant dilution of their percentage of share of the company resulting from new equity investments at depressed valuation. Essentially this is because companies lacking debt capital seek out equity funding even at lower valuations, because they are struggling with an overall lack of capital and have limited options. Sustainable debt investments on the liabilities of fintechs’ balance sheets can also contribute to strengthening these companies’ business strategies and governance in times of economic downturns. For all these reasons, now more than ever, debt investments are very much complementary to equity in the fast-growing fintech industry — and these debt investments are likely to accelerate over the coming years, as they have arguably been subdued so far.
A supportive political, business and regulatory ecosystem should also be in place to ensure that fintech’s promise is fulfilled and its benefits are maximised. For knowledge-intensive services like financial technology to be effective drivers of development and structural transformation, they need to be embedded in a supportive and enabling environment. In Africa, this sort of coordinated approach is possible at the regional level, through the governance of pro-business reforms such as the African Continental Free Trade Area, which opens new market opportunities and strategic options for fintechs and other knowledge-intensive services to deliver on their transformative promise. African countries should reinforce regional coordination and advance policies and strategies aimed at boosting the free circulation of goods, services, labour and capital across the continent, enabling fintechs to accelerate and multiply their social impact, and fostering the development of African tech giants.
Key global stakeholders must also unite their efforts to support fintechs in accelerating sustainable growth and development in underserved communities and developing economies, ensuring inclusion for all. The time for coordinated action and collaboration among policymakers, the private sector and the international community has arrived. This effort may start with sustainable investors exploring ways to maximise the economic and social impacts of the fintechs they support, but it can’t end there: All stakeholders in the sector must work together to leverage tech-led financial inclusion to reduce global inequality in all its forms.
Photo credit: Lokatt338 at Megapixl.