The impact of digitalization on financial inclusion in emerging markets

Did you know that nearly 1.7 billion adults worldwide remain without a bank account? 45% of them live in just seven emerging economies! Financial inclusion is a crucial factor in shaping the future of these markets and improving the lives of millions of consumers and businesses across emerging markets. 

In this edition of our newsletter, we’ll dive deep into the impact of digitalization on financial inclusion in emerging markets. We’ll explore how digital financial services have revolutionized access to financial tools & opportunities and look at how they will continue to drive change in the years ahead. 

Read on for an insightful discussion that will inspire you to rethink the role of digitalization in financial inclusion.

Why is financial inclusion important? 

In emerging markets, approximately 163 million small businesses are financially underserved, resulting in a staggering $2.1 to $2.6 trillion financing gap. This financial exclusion has far-reaching consequences on society, stunting economic growth and perpetuating inequality. 

Financial inclusion can foster economic growth, create jobs and alleviate poverty by ensuring individuals and businesses have access to affordable financial services. Research has shown that a 10% increase in financial inclusion can result in a 0.3% rise in GDP, which has led the world bank to consider it a vital enabler in reducing extreme poverty and boosting shared prosperity.

Moreover, access to financial services enables businesses to invest in productive assets, manage cash flow and better navigate financial risks. This in turn helps to reduce income inequality and promote social cohesion.

By bridging the gap between unbanked and formal financial services, financial inclusion unlocks the potential of emerging markets and contributes to a more equitable and prosperous world.

Digitalization and financial inclusion: The mPesa story

In 2007, when Kenyan mobile money service mPesa was launched, the country faced a significant financial exclusion problem. At that time, only 27% of the adult population had access to formal financial services. Most people, particularly those living in rural areas, were left with limited or no access to banking services. This is where mPesa stepped in, leveraging the power of digital technology to revolutionize financial inclusion in Kenya.

mPesa, a mobile money transfer platform operated by Safaricom, enabled users to send and receive money, pay bills and access credit services through their mobile phones without needing a traditional bank account. Its simple and user-friendly interface made it easy for everyone, including those with low financial literacy, to adopt the service. With over 96% of households in Kenya owning a mobile phone, mPesa quickly gained widespread acceptance.

The impact of mPesa on financial inclusion has been nothing short of transformative. By 2019, the percentage of Kenya’s adult population with access to formal financial services had risen to 82.9%, with mPesa accounting for a significant share of this growth. The platform now serves over 30 million users across multiple countries in Africa.

mPesa’s success story goes beyond just numbers; it has profoundly impacted the lives of individuals and businesses. Small businesses and micro-entrepreneurs have been able to access credit, save, and invest, leading to increased economic activity and job creation. Additionally, mPesa has played a critical role in lifting many Kenyans out of poverty. A study shows that access to mobile money services increased daily per capita consumption levels of 194,000 households (or 2% of Kenyan households) out of extreme poverty.

The mPesa story demonstrates the tremendous potential of digitalization in driving financial inclusion. It also laid the impressive foundation for RedCloud, which was built on a similar technology to mPesa and was later acquired by leading technology entrepreneur Justin Floyd, our current CEO. RedCloud has a vision to build a new, democratized commerce system for the world.

Looking ahead – how digitalization will shape financial inclusion in the years to come.

The impressive progress in financial inclusion, largely driven by digital technologies, is just the beginning. Digital financial services such as mobile banking, digital wallets and cryptocurrencies will continue to evolve, while advancements in artificial intelligence and data analytics will help build better financial products and services that meet the unique needs of previously underserved populations.

As we move towards this future, governments, private sector players and international organizations must collaborate and create a supportive ecosystem for digital financial services.

At RedCloud, we’re building the world’s first Open Commerce platform to revolutionize how small businesses buy, sell, and pay for their products online, even without a traditional bank account. With Open Commerce, we can connect millions of unbanked retailers across the distribution chain and provide them with the credit facilities they need to grow their businesses.