How has digital technology been able to boost the development of inclusive finance?
In many ways. We define inclusive finance as being able to provide all-round services for various groups from different strata of society. It is important to determine what inclusiveness means in-house, which then determines the inclusive finance a bank sets out to achieve.
We see inclusive finance having three major features: high risk, high cost and low income, which make commercial banks less motivated to develop it. Despite this, the advancement of digital technology such as mobile internet, big data, cloud computing and smart terminals has eliminated time and space constraints, and offered new approaches to the delivery of inclusive financial services.
First, comprehensive coverage of services: Traditional financial institutions have to increase their coverage by establishing physical outlets, a move incurring and held back by high cost. That means they usually concentrate their outlets in populous and commercially developed regions, laying the undeveloped areas aside.
Extensive use of digital technology has overcome this drawback. So in regions without bank outlets or ATMs, customers now can have their access to financial services they need and complete noncash transactions by using terminals like computers or mobile phones, in which way financial services become immediately accessible to more customers.
Second, evenly distributed customer groups: Commercial banks usually operate following the “Pareto Principle”. They focus on providing services to large companies and urban high-income people, thus leaving small and micro-sized enterprises and rural residents in the long-tailed market not getting offered financial services they want. The development of digital technology has greatly driven down the marginal cost in the long-tailed market.
On the one hand, by utilising internet technology, banks can expand their presence to every corner of the world and take in every penny from different segments of the society, thus achieving the “many a pickle makes a mickle”-effect, meaning many small amounts accumulate to make a large amount.
On the one hand, by utilising internet technology, banks can expand their presence to every corner of the world and take in every penny from different segments of the society, thus achieving the “many a pickle makes a mickle”-effect, meaning many small amounts accumulate to make a large amount. On the other hand, they can optimise resource allocation based on big data analysis, realise precision marketing in the well-segmented market, extend credit to people who really need it, and meet their personalised needs for financial services.
Third, digitalised risk control: Information asymmetry is the root cause for the high-risk of inclusive financial services. Small and micro-sized enterprises or low-income people lack effective collateral, it is difficult for commercial banks to identify their sources of repayment, thus posing high risk. However, by applying cloud computing and big data technologies, commercial banks can analyse data streams and information streams in daily transactions and then effectively evaluate customers’ credit rating and status, which significantly enhances their risk identification capability and credit approval efficiency, and makes it possible for small and micro-sized enterprises and low-income groups to get financial services they need.
Fourth, markedly reduced transaction cost: Instead of visiting physical outlets, with wider use of digital technology, both suppliers and demanders of funds can complete such processes as information search, pricing and trade on online platforms, which can partially substitute physical outlets and occupy less personnel and equipment, significantly lowering operation cost of commercial banks. As a result, customers can receive financial services at a lower price, and financial inclusion progresses further. Experience has shown that digitalised and internet-based operation of traditional banking activities contribute remarkably to the reduction of operation cost of the banking industry. For example, in China, per counter transaction now costs about RMB4 (equivalent to around US$0.62), while each transaction via mobile banking costs less than RMB0.6 (equivalent to around US$0.09).
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