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How Open Banking is Improving Financial Inclusion and Democratizing Trade

Open banking can play a vital role in bringing financial inclusion to the unbanked and underbanked. For fintech innovators wanting to help make this a reality, the opportunities are plentiful.

Financial exclusion usually affects the people most marginalized by society: minorities, people with low incomes, women and those living in rural areas. In the Asia Pacific 24% of the population is financially excluded; in Eastern Europe it’s 33%; in South & Central America that figure climbs to 38%; in the U.S. the number is 22%; while in the Middle East & Africa it’s 50%.

What many people may not realize is that financial exclusion can also have a big impact on a country’s GDP. Research from Ernst & Young shows that broader access to banking, savings and lending products could boost GDP by up to 14% in large emerging countries such as India and up to 30% in frontier economies such as Kenya.

But traditional banking is not suited to solving the problems of financial exclusion. In fact, legacy systems and methods often lead to more bias in financial systems.

Traditional Banking Spurs Financial Exclusion

Traditional financial service organizations gear their products and services towards higher-income clients that yield more profit. These institutions have high overhead costs – due in part to their brick-and-mortar presence, marketing budgets and security, regulations and compliance responsibilities – so they have very little interest in acquiring low-value clients.

Many legacy financial processes reveal bias against low-income consumers:

But open banking is driving significant change and helping the underbanked and unbanked conduct financial transactions without fees or cumbersome traditional banking processes. By enabling services like mobile-only banking, digital wallets and peer-to-peer payments, open banking is leading to financial inclusion.

The Role of Open Banking and Open Finance in Financial Inclusion

Open finance, based on the data-sharing principles of open banking, is allowing banks to create a broader range of products for their customers while empowering people to take greater control of their finances.

Open banking is improving financial inclusion by:
  • Building a financial profile: Open banking is leveraging data sharing and payment information to create accurate financial customer profiles that help the unbanked become eligible for more financial products and services.
  • Supporting micro-businesses: Traditional banking often limits lending products to bigger companies, but open banking is giving small enterprises more access to customized loans based on their needs while helping them manage and plan their costs.
  • Providing greater control of personal finances: Open banking is utilizing data and AI algorithms to help consumers comprehend their financial situation, providing tools for how to improve it and make more informed decisions.
Open finance is giving underbanked consumers access to:
  • Private mortgages
  • Savings systems
  • Pension funds
  • Insurance
  • Credit
  • Investments

How Open Banking Is Democratizing Trade All Over The World

From India to Vietnam to Papua New Guinea, open banking is enabling micro-sized ATMs, empowering women, serving up sustainable coffee and helping remote villagers secure government-issued ID.

Jorethang Block, West Sikkim, India

Until 2019, the people in the remote districts of Western and Southern Sikkim trekked a few miles for even the most basic banking services. Now, the bank comes to them, thanks to the North East Rural Livelihoods Project (NERLP), supported by the World Bank. Bank correspondents carry palm-sized micro-ATMs, biometric readers and internet-connected thermal printers, which help villagers deposit and withdraw money and earn interest. They’ve also started a P-2-P lending network, especially for women.

Da Lat, Vietnam

Farmer Nguyen Van Son grows organic coffee in a sustainable way on his farm, Son Pacamara. He joined Vietbank, which uses Finastra’s open trade platform to analyze data to predict crop yield and future weather patterns. Then, Van Son tapped into new customer networks and he now sells his coffee in the USA, UK and Korea.

Bougainville, Papua New Guinea

The nearest bank in Bougainville was on a neighboring island until the World Bank’s International Financial Corporation tied up with Bank South Pacific and others to deliver last-mile service. Now, bank representatives carry tablets and smartphones to remote villages to help customers open accounts, issue debit cards and even government-issued ID, which most people didn’t have.

Innovation in Fintech will Lead to Financial Inclusion

As fintech continues to play a bigger role in democratizing trade, the opportunity for leaders to create meaningful and far-reaching solutions is limitless. The world has become significantly digital-first over the last year, and fintech innovators have a world of opportunities to further disrupt the traditional financial services field with solutions that lead to greater financial inclusion.

For those innovators and entrepreneurs ready to challenge the current financial ecosystem, the Oxford AI in Fintech and Open Banking Programme will become a stepping stone. Download the prospectus and discover the opportunities awaiting you.

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