The fintech industry around financial inclusion just got one hell of a boost. Financial inclusion has always been thought to have a positive outcome on economies – with digital finance being the engine – but now a study released by the McKinsey Global Institute in September puts figures to that theory.
The report estimates that digital finance could increase the GDP of emerging economies by as much as 6%, or $3.7 trillion, by 2025 – and that’s a conservative estimate.
For many governments it’s the encouragement they’ll have been waiting for. China had been doubted for its bold moves to permit internet companies to engage in financial services, but, according to McKinsey, the country stands to see a 5% increase in GDP from digital financial inclusion efforts as people move out of cash and into the system.
Similar estimates are made for Brazil. India could add as much as 10% to 12% to its GDP, further supporting the government’s decision to introduce a biometric database. McKinsey also anticipates some 95 million jobs could be created across all sectors as a result.
Enormous opportunity
It’s an enormous opportunity. The unbanked finally get access to financial services that can help them better manage their cash flows and plan for the future. Governments see their countries’ standard of living increase and their costs decrease. And fintech firms and innovators receive even greater support – which could more quickly even the playing field with developed economies.
It’s also a win for banks. While many are focusing on the competition to banking that fintech and mobile phone companies will bring, they are forgetting that banks ultimately will be underlying many of the digital products – there are 10 African banks that partner with Kenya’s M-Pesa, for example.
Not only that, says McKinsey, but financial-services providers would save $400 billion annually in direct costs while sustainably increasing their balance sheets by as much as $4.2 trillion as a result of the increased audience for loans.
But there is a key element missing from the report: what about the developed economies? While they do not face anywhere near the numbers of unbanked or underbanked, the report highlights how much the banking system can positively impact local economies when done efficiently and in collaboration with technology firms or telecoms companies.
Some governments and regulators have been reticent to open up the financial services market to non-banks – often at the behest of the banks themselves.
In the case of the US, banks have been decidedly slow to allow the payments system to modernize for fear of losing revenues, which has slowed the ambitions of new non-banking and fintech firms. With the US GDP growth rate slowing, maybe it’s time the government put more weight behind non-banks and fintech.