How peer-to-peer lending supports financial inclusion
The term “financial inclusion” has been thrown around a lot in recent years. But what does it mean and why is it important?
The World Bank defines financial inclusion as “individuals and businesses having access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”
It is often measured in the percentage of adults having a bank account with a registered financial institution since this is seen as the first step into more extensive financial services. This is also where the term ‘unbanked’ comes from.
According to Oleg Boyko, Founder and CEO of Finstar, a private equity firm, announced they will dedicate $150 million into Fintech startups and in-house R&D through investment, the ‘old ways’ of banking just don’t cut it anymore for 21st-century consumption.
“There are billions of people in the world underserved by traditional financial products and services. Those people are often concentrated in developing economies and frontier markets. However, even in mature markets, there are first-time financial consumers – Millennials in particular – for whom the old ways of banking don’t stack up. What we have, therefore, is a brilliant opportunity to rethink financial services and to reframe financial services so they serve this community.” Boyko said in an interview.
According to the 2017 Global Findex Database, around 1.7 billion people around the world do not have access to basic financial services, like an official bank account.
Why is financial inclusion important?
Financial inclusion is important because it drives development in communities across the globe.
Although more prevalent in developing nations, the issue is not restricted to these areas. As we can see from the above map, it is a global challenge. There are communities situated in the developed world that struggle with the same problem.
A simple thing as having access to financial services can be the stepping stone that helps people to invest in their education, health, businesses and, ultimately, escape poverty.
It will also create a safety net for families. Getting a loan in case of a financial emergency could mean the difference between financial ruin, and at the very least, providing people with some time to work themselves out of trouble.
In these types of circumstances, cash is not deemed to be safe and can be difficult to handle.
The benefits of providing people with access to simple financial services are far-reaching. As reported by The World Bank, studies show that financial inclusion can reduce poverty by improving people’s income potential.
Finally, financial inclusion is important because it helps people to grow their savings and spent money on more fundamental aspects.
In a study done for the American Economic Review, it was found that when people are provided with a simple savings account, they will save at a higher rate and invest more in their businesses. Another study found that access to a savings account helped people to spend 15% more on nutritious foods and 20% more on education.
How does peer-to-peer (p2p) lending support the ethos of financial inclusion?
Fintech, in general, promotes financial inclusion by extending the reach of financial services to isolated communities through innovative digital platforms such as mobile technology. This is something traditional financial services struggle to do as it is often restricted by geographical borders through their legacy protocols and outdated systems.
P2P brings lenders and borrowers in direct contact with each other. What this means is that startups, as well as individuals, do not have to go through traditional financial institutions to gain access to vital funding.
These platforms are often not legally classified as banks and are therefore not restricted by the same bureaucracy and regulation as traditional credit providers.
P2P lenders further enhance access to much-needed capital by running on digital platforms such as mobile technology and users do not need access to a brick and mortar service centres to benefit from the products on offer.
The result is that borrowers can enjoy lower interest rates and reduced costs of capital while lenders (or investors) get paid higher interest rates in comparison to banks.
P2P lenders also have a higher approval rate as eligibility criteria are much less stringent. Consequently, smaller, less settled businesses have easier access to credit which is vital for growth and the potential to create more employment.
What’s more, traditional financial institutions can take as long as a week (often longer) to process loan applications. If someone has an immediate need, like a medical emergency, this is too long. P2P lending can, in certain instances, provide immediate approval.
Without receiving formal credit, students that are cut-off from traditional financial institutions would also have no chance of investing in higher education. With P2P loans they can now get quick, easy, and more importantly, cheaper loans.
Equally as important as having access to credit is the ability to invest and save. P2P loan platforms provide people with the opportunity to invest or save excess funds with the possibility of great returns and above average interest rates. These funds would have otherwise just lied around, most likely in cash, which is inefficient and dangerous.
Peer-to-peer lenders are very important in the advancement of financial inclusion as it enables anyone, even in the most remote locations with very basic mobile infrastructure, to get access to funding.
Financial inclusion is, in many regards, the first step to eliminating poverty while having access to capital is the catalyst that isolated communities need for future growth.
Peer-to-peer lending, in conjunction with the growing availability of mobile technology and smartphones, has the ability to break through geographical barriers to reach the unbanked and champion the rise to complete financial inclusion.
