Fintech and Financial Inclusion

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Introduction: Financial Inclusion, Digital Finance and Fintech…
In 2012, Demirguc-Kunt and al. posited that, effective and inclusive financial systems are likely to benefit poor people and other disadvantaged groups because "without inclusive financial systems, poor people must rely on their own limited savings to invest in their education or become entrepreneurs -and small enterprises must rely on their limited earnings to pursue promising growth opportunities. This can contribute to persistent income inequality and slower economic growth" (2012, p.1). Twenty years earlier, McKinnon (1973), Shaw (1973) the funding fathers of the "financial liberalization" school claimed that the development of the financial system is at the heart of the economic development process.
The share of adults owning a banking account is now 69 percent worldwide. However, about 1.7 billion adults remain unbanked, most of them living in the developing world (Demirguc-Kunt et al., 2017, pp. 2 and 4). The World Bank Group has therefore launched in 2017 the World Bank Universal Financial Access (UFA2020) initiative. According to this initiative, by 2020 the adults who are excluded from the formal financial system will be able to manage their financial lives by having access to a transaction account allowing them to store money and send and receive payments. The initiative is focusing on 25 countries accounting for 73% of the financially excluded, out of which 32% are in India and China (Sapovadia, 2018).
Why so many poor people are still financially excluded whereas financial exclusion is improving globally (Demirguc-Kunt et al., 2017)? Financial exclusion is driven by several reasons: -First because of high costs of branches: branch footprint is small and heavily urban and opening hours might be not convenient for people leaving outside the city; -Secondly because of high documentation requirements to open a bank account: a large share of the population cannot qualify and illiterate potential clients are often excluded; -Thirdly because low-income clients find banks intimidating: they often consider that financial products distributed by commercial banks are not designed for them. So they might prefer more familiar and flexible informal services. Some individuals may also voluntarily decide to remain outside the formal financial system either because they do not want to deal directly with banks, or they do not perceive the advantage of accessing formal financial services because of their lack of education. These individuals will not use a system, product or service they do not understand (Ozili, 2018).
-Finally, because most banks don't want low-income clients: costs vary, most banks charge a sign-up fee, then a fixed monthly or annual fee, minimum balances, etc.
At the same time about 1.1 billion corresponding to two-thirds of unbanked adults, have a mobile phone (Demirguc-Kunt et al., 2017). As mobile phone usage expands, so could opportunities to "bank the unbanked" (Maurer, 2012). The mobile technology, and more generally the so-called "digital finance", is revolutionizing access to financial services and promotes digital financial inclusion (Lauer andLyman, 2015, Suri, 2017). Digital finance includes financial services delivered via mobile phones, the internet, or cards. These innovative digital financial services (DFS) have been launched in at least 90 countries, including three quarters of low-and lower-middle-income countries) with more than 276 DFS providers and 690 million registered accounts worldwide (49,34% in South Asia,6,8% in Middle East and North Africa,5,3% in East Asia and Pacific,3,1% in Latin America and the Caribbean and 1,7% in Europe and Central Asia) in 2017 (GSMA, 2018), so encouraging millions of people to use more and more digital services rather than cash-based transactions.
Digital finance is a new source of innovation in financial services. According to the optimistic view of Manyika et al. (2016), DFS could provide access to financial services to 1.6 billion people in emerging economies, especially to women who are more financially excluded. DFS can also increase the volume of new credits granted to individuals and businesses by $2.1 trillion as well as the volume of new deposits by $4.2 trillion. In this way, DFS would boost GDP of emerging economies by $3.7 trillion by 2025 and generate up to 95 million new jobs (Manyika et al., 2016).
The more general concept of "financial technology," or FinTech, includes any technological innovation in the financial sector: retail banking, investment as well as innovations in financial literacy and education or crypto-currencies. Originally, it emerged from start-ups and technology companies developing user-friendly, cheap and well-suited financial products through digital channels. Fintech has now evolved toward a broad variety of technological interventions into personal and commercial finance. FinTech companies are both start-ups and established financially-oriented IT firms combining finance with information/communication technology. (Gomber et al., 2017). FinTech solutions are expected to reduce operating costs, making it profitable for providers to serve a larger range of customers. For financial-service providers, Manyika et al. (2016) predict that technology can bring up to 90 percent cost reductions with respect to physical branches. This spectacular expected gain explains why developing economies are quickly moving from traditional banking to digital finance.
What are the consequences of digitizing finance in emerging and developing economies?
What do we know about the behavioral changes in DFS users (impacts on savings, remittances, etc.) and about the changes in users' welfare and economic activity? These questions are addressed in the remainder of this chapter together with potential avenues for future researches. Section 2 reviews the expected theoretical impacts of the rise of digital finance and Fintech solutions. Section 3 presents the main existing results of papers on the impact of DFS. In section 4, we give avenues for future research. Section 5 concludes.

The potentials of Digital Finance
According to Ozili (2018) and Manyika et al. (2016), the rise of digital finance and FinTech solutions may have many positive effects. Macroeconomic consequences include: • Raising economic growth by providing access to a large range of financial products and services to individuals and medium & large enterprises. This enhanced access to finance may lead to a reduction of informal economy, and so improve enforcement of tax collection and compliance with labor laws. Other positive impacts relate to formal savings--as opposed to saving "under the mattress"--, financial innovation, such as P2P lending or new credit scoring methods, and new business formation, such as e-commerce.
• Improving the efficiency of the global financial system and providing better monitoring devices to regulators.
• Reducing governments spending by improving tax collection, improving the targeting of subsidies and creating efficiency gains (Manyika et al, 2016). Digital payments could reduce inefficiencies to current payment flows by eliminating leakage (governments could replace cash-based social payments and subsidy programs with targeted, direct payments) and by lowering transaction and administrative costs. From a microeconomic standpoint, the rise of digital finance could: • Enhance financial inclusion (World Bank 2016, Jack and Suri 20111 , Sapovadia, 2018, especially to individuals in rural areas, who save time and money by avoiding traveling to far-off branches. DFS can also improve rural economic conditions by better connecting villagers to urban migrants (Lee and al., 2018).
• Provide affordable, responsive and secure banking services to unbanked people.
Access to a safe money storage and to easy transfers encourages people to trade and save more and help them carry out basic transactions such as bill payments (electricity, water supply) and money transfers (remittances).
• Reduce operational and opportunity costs for lenders by doing business more efficiently and delivering new services, such as transfers and payments of small sums, which are sometimes impossible with traditional banking.
However, the expected benefits of digital finance require three conditions to keep customers in the market (Karlan and al., 2016). First, the cost should be low (Ozili, 2018). Second, users should be well-informed and well-protected, as well as confident in a good-working digital system. Lauer and Lyman (2015) identify seven key risk areas in digital finance: inability to transact due to network/service downtime (interrupted and incomplete transactions, inaccessible funds, etc.), insufficient agent liquidity (customers do not have access to their own money), complex and confusing user interfaces, poor customer recourse (unclear, costly, and time-consuming procedure), nontransparent fees and other terms (lack of transparency leaves consumers without a full understanding of the prices, terms, and conditions of the services they are using), fraud perpetrated on the customer, and data privacy and protection (poor understanding of new uses of personal data, etc.).
Last, digital financial services must be primarily "transformational" rather than "additive" (Porteous, 2006), meaning that unbanked people can gain access to financial services through their mobile without having a prior bank account. The promise of digital finance to "bank the unbanked" refers to the transformative model.

What about impact evidence?
The recent growth in the number of DFS worldwide and the excitement generated by these initiatives of financial inclusion have prompted the publication of several studies. Many of them assess the effects of mobile-payment (m-payment), or mobile-banking (m-banking) services-the most common digital financial services, on users. The studies have been conducted mainly 2 in Africa: South Africa (Ivatury and Pickens, 2006), Uganda (Ndiwalana et al., 2011) and mainly in Kenya because of the birth of M-PESA 3 , the most famous DFS in the developing world.
We present the results of some research studies focusing mainly on clients' changing patterns in financial behavior (savings and remittances) and on some economic impacts (income shocks smoothing, employment and impact on poverty) of DFS.
2 Mobile payment systems have also been lauched in other countries such that the Philippines, Afghanistan etc., and in a number of countries in Latin America and the Middle East.
3 "M" is for mobile, and "PESA" means money in Swahili. It was launched in 2007. M-PESA is a money transfer system operated by Safaricom, Kenya's largest cellular phone provider in the country. M-PESA allows users to exchange cash for e-money on their phones, to send e-money to other cellular phone users, and to exchange emoney back into cash. The customer does not need to have a bank account but must be registered with Safaricom.

Savings and remittances
There is mixed evidence on the impact on DFS users' savings. Focusing on Kenya, Jack and Suri (2011)  it that users may not save more in total, but that they may save differently by using a different formal means of savings.
Let's turn to remittances. Using the 2009 FinAccess surveys, Mbiti and Weil (2016) find that almost 35 percent report that using M-PESA has increased their frequency of sending 5 Using an IV strategy, they find that M-PESA registration increases the likelihood of having savings by 20 percent. 6 The estimate is no more statistically significant in the IV estimation.

Users' welfare and impact on economic activity:
What are the main results of DFS on income shocks smoothing, employment and on poverty? Aker and Mbiti (2010) and Klapper and Singer (2014) suggest that digital payments can reduce households' exposure to risk because DFS "connect individuals to the broader economy and can strengthen informal insurance networks. Electronic networks allow families to expand their "community," and can help households smooth unexpected income shocks by accessing money or support from a community wider than those physically proximate" (Klapper and Singer 2014, p. 9). This is empirically confirmed by Jack and Suri (2014). Using the data on implemented by comparing outcomes, as measured in the 2014 survey, of households that saw large increases in agent density between round 1 and round 2 with outcomes of households that experienced smaller increases over the same period. They find that access to M-PESA "increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty" (p. 1288). However, this optimistic result is a bit tempered the conclusions of Dubus and Van Hove (2017). Using survey data collected among 3,000 Kenyan respondents, they implement a three-step probit procedure to identify the sociodemographic characteristics of, successively, the respondents who do not have access to a SIM card, have access to a SIM card but have not opened an M-PESA account, and, finally, have an M-PESA account but do not save on it. They equate financial inclusion with being able to save formally (digitally) using M-PESA. They find that the poor, the non-educated, and women do not benefit from the positive effects of M-PESA. Moreover, the problem is, by and large, bigger for the rural than for the urban population.
Last, Banerjee et al. (2016) and Muralidharan et al. (2016) are focusing on the impact of the use of Digital Finance on welfare programs and corruption. Banerjee et al. (2016) show that the use of DFS to transfer program funds for the same public works program reduced by 38 percent the program fund expenditure and by 25 percent the corruption in India. Muralidharan et al. (2016) show that biometrically authenticated cards for workers employed by a public works program reduced corruption and could enhance the ability to implement welfare programs in developing countries. institutions. Yet, the impacts of digital finance and FinTech on emerging and developing economies still need to be addressed. The most promising issues relate to the following topics:

Directions for future research
-The regulation of digital finance, including security aspects and customer/investor protection, such as appropriate KYC ("know your customer") transparent and concrete rules, which safeguard financial integrity and must be institutionalized (Gelb, 2016, Buku and Mazer, 2017, Karlan et al., 2016. This point, highlighted by Patwardhan (2018), also relates to systemic risk (Ozili, 2018). For instance, do we need banking licenses for DFS providers? What is the impact of digital finance on financial stability?
-The digital models designed for poor households. Karlan et al. (2016) and Gomber et al. (2017) call for research in the field of digital insurances. Using financial products based on automated weather index models with satellite data are promising instruments to hedge smallholder farmers against losses resulting from adverse climatic risks. Enabling poor people to smooth their income over time is a key element to tackle vulnerability and reduce the risk of poverty.
-The influence of DFS on users' savings? The papers by Mbiti and Weil (2016) and Johnson, (2016) reveal that DFS are rarely used as a savings vehicle for any significant period of time.
This surprising result can be explained by three factors. First, as it is pointed out by Dubus and Van Hove (2017), Jack and Suri's (2011 broad definition "savings" refers to any form of money storage for more than twenty-four hours. Second, it could be that users save differently with DFS (Arestoff and Venet, 2013). Last, Karlan et al. (2016) mention the lack of advanced savings products dedicated to the poor. Identifying the most probable causes of the "digital savings puzzle" offers fruitful avenues for further research.
-The real impact of digital finance on financial inclusion. Is Digital Finance really a transformative model? According to Dubus and Van Hove (2017), the poor, the non-educated, women and the rural population do not benefit from the positive effects of M-PESA. How do Salampasis and Mention (2018, p. 457) summarize the role of FinTech as "to promote transparency, safety, and accountability through a secure, behavioral, cashless, cultural mindshift in terms of building a financially inclusive world, strengthening the economic and sustainable development." This quote encapsulates the world's expectations from digital finance and FinTech. However, along with high expectations of Digital Finance come the fears evoked in this chapter. Current concerns relate mainly to regulation, impact on financial stability, consumer information and protection, and product design for the poor. These challenging issues cutting across research disciplines offer promising avenues to scholarly and applied research alike.