By Avigail Kohn and Roberto Formicone
In collaboration with Child & Youth Finance International
Since 2010, the rise of Financial Technology (otherwise known as Fintech) has irrevocably changed the landscape of finance. The term Fintech is used to describe the industry of companies who use technology (primarily internet and mobile phones) to make financial systems and their delivery more efficient. These companies tend to be start-ups that make it easier for people to invest, save and make payments.
Fintech has been lauded by many as the key to financial inclusion in least developed countries (LDCs), especially for youth. World Bank data from 2014 shows that 2 billion people in the world are unbanked: around half a million people less than in 2011. The reason is that online financial services have increased the accessibility and ease for people to engage with banking. As such, digital financial services are seen as a crucial element in reducing poverty and banking the unbanked.
However, despite the benefits of Fintech, there are still many obstacles to achieving financial inclusion for young people. This blogpost will examine the opportunities and challenges that Fintech faces in appealing to this segment of the market, and assess its actual impact on child and youth finance.
- Legal and regulatory barriers
Financial education and access are most beneficial at a young age, because it is much harder for older people to change ingrained financial habits. However, youth can face legal and regulatory barriers that impede their ability to engage with financial services. Many banks and telecoms have minimum age and ID requirements to open accounts or own mobile phones. This prevents children and youth from engaging in financial transactions and developing financially savvy behaviours.
However, some Fintechs are working to tackle these barriers. Certain companies accept school certification instead of formal ID, making it easier for children to set up accounts. Moreover, while some regulations limit Fintechs, they are only partially subject to the regulatory constraints applied to conventional banks, meaning they can be more flexible in their approach to youth.
- Poor Infrastructure
Fintechs require fewer highly specialized staff and barely any physical infrastructure. This means that costs imposed by higher regulations will still account for less than the overall costs for regular banks, suggesting that Fintechs will be cheaper for youth in developing (and developed) countries. While Fintech itself may not require much infrastructure, the infrastructure of developing countries themselves poses an issue for youth. In many LDCs, it is hard to access internet or mobile financial solutions due to poor facilities such as faulty electricity, bad mobile network coverage and lack of mobile money agent penetration. Most youth find their electricity/mobile network service too unreliable to send basic texts – therefore, it is hard for them to trust mobile services with valuable goods such as money. Trust with Fintech in general is also an issue: youth feel less comfortable using Fintech because there is a lack of familiarity and security; they may prefer to transact in cash or face to face to limit financial fraud.
While some may regard mobile financial services with suspicion, for others it has created an opportunity to reduce the rate of money insecurity in their homes. In places where theft is rampant, keeping money stored as cash in houses is unsafe. Making financial services more accessible and wide-reaching through Fintech means that youth from low income areas can protect their income securely.
- Limited access to mobiles
There is a steep upward trend towards using mobile phones for banking in developing nations. Research done by Pew Research Center in 2016 showed that smartphone ownership rates in emerging and developing nations have risen from 23% in 2013 to 37% in 2015. This means more youth can be exposed to the benefits of Fintech.
However, low income youth still face several limitations. Primarily, cost prevents youth from buying or using a phone. Furthermore, the apparent increase in youth mobile phone usage may be a result of many people sharing one phone (using different SIM cards). Youth may have access to a mobile device, but will have privacy and security complications when dealing with online financial services. Gender and age structures add another challenge: if a family has enough money to buy a phone, it is more likely adults will get monopoly over it. Young females especially have trouble accessing phones when they reach puberty, as conservative attitudes create the assumption that phones lead to ‘inappropriate behaviour.’
As more people start seeing the benefits of mobile financial services, Fintechs can harness their influence to impact phone prices and provision, hopefully securing more attainable phone access for all.
- Lack of data
Data collection is a critical aspect to many Fintech business models, whether it is retail or investment banking. Companies that are able to derive business insights from financial services data can identify and maximize new opportunities and reduce risk.
In order to create financial services that suit the needs of unbanked youth, Fintechs need a certain amount of information on this target demographic. However, the lack of data on youth mobile banking needs and usage presents a challenge to the creation of appropriate and sustainable products. In addition, the gathering of child and youth specific data becomes more difficult due to privacy issues. This is compounded by a limited digital footprint in developing countries due to poor mobile and broadband infrastructure. A solution to these problems could be the creation of apps which collect user data in developing countries. For example, existing apps such as SERV’D or UBER can be seen as successful examples of data collection tools.
- Lack of youth protection
One of Fintech’s major challenges is to create innovative financial solutions that improve the conditions of users throughout the world, while at the same time respecting consumer protection, especially for youth. There are many opportunities for companies to develop products that are both technologically advanced and safe for young people to use daily. One such example is nimbl, a simple, smart, and safe application that helps children aged 8 to 18 learn how to save, spend and budget their money responsibly. Thanks to the nimbl app, parents can receive alerts enabling them to track their child’s spending in real time.
Fintech should be able to offer solutions to increase cost efficiency, meet the complex needs of consumers and produce value for the economy. To achieve this, adequate policies on access to technology, standardization of data, security, personal data management and protection must be put into practice. Moreover, Fintechs should be considered as an incubator for innovation that creates opportunity for those who do not have significant financial resources. As a result, people in developing countries, especially children and youth, have the potential to benefit greatly from advances in innovative financial technologies.