Fintech for Financial Inclusion: Reaching the Unbanked

In today's dynamic financial landscape, the line between traditional banks and their neo counterparts is blurring as traditional banking embraces the digital revolution. With over 500 banks and financial institutions transitioning into neobanks, the financial industry is experiencing a seismic shift towards digitalization and tech-driven solutions. Furthermore, the race to provide better customer service and user experience only accelerates the need for technology adoption as competition embraces these advancements. This transformation isn't just altering the banking models but it's also empowering the unbanked and underbanked populations with greater financial access.

At the heart of this transformation lies the growing collaboration between banks and fintech firms. These partnerships are enabling financial institutions to reduce their reliance on physical branches and adopt a more app-centric approach to banking. Consequently, individuals who were previously excluded from formal banking systems now have access to a wide range of financial services through their smartphones.

These technological advancements are particularly beneficial for the gig economy workforce, comprised of millions earning their livelihoods on an hourly or contractual basis through platforms like Zepto, Swiggy, Zomato, and Ola. Moreover, the rise of e-commerce underscores technology's critical role in promoting financial inclusion. Small-scale sellers, once marginalized, are now leveraging digital platforms for transparent transactions, seamlessly integrating into the digital economy, accessing formal credit channels, and achieving financial stability.

A significant stride in this direction is the use of alternative data for credit assessment. By tapping into sources such as social media footprints, online reviews, and transaction histories, banks can paint a comprehensive picture of an individual's creditworthiness. This innovative underwriting approach enables financial institutions to extend loans to previously underserved populations while managing risks, fostering trust, and enhancing marketplace accountability.

Embedded finance represents another groundbreaking development, revolutionizing the lending landscape. Whether through Google Pay or ticket booking platforms offering "pay later" options, every transaction generates valuable data for credit underwriting or monitoring. This seamless integration of financial services into daily transactions not only enhances convenience but also broadens access to formal credit across society.

However, the journey towards universal financial inclusion isn't devoid of challenges. Operational costs in remote areas, infrastructure deficits, and sparse data present significant hurdles. Yet, technology emerges as a potent solution to these obstacles. Advanced AI-driven tools streamline operations, reduce costs, and ensure regulatory compliance, from onboarding processes to fraud detection.

Moreover, the deployment of cutting-edge technologies like facial recognition, computer vision based optical character recognition (OCR), and machine learning algorithms strengthens inclusion efforts while upholding portfolio quality, enhancing efficiency, and mitigating money laundering (AML) risks. By harnessing the power of technology, we can surmount barriers and pave the way for a more inclusive and resilient financial ecosystem for all.

PSL targets for banks serve as vital tools in banking the underbanked, targeting the underserved and unserved segments of the economy. Fintech firms and NBFCs are now empowering banks to collaborate and extend lending to these economies by overcoming operational hurdles between the two institutions through robust technology solutions. The model, coined "Co-lending," is the hottest trend in the lending segment with the potential to transform how India lends. These PSL targets catalyze financial inclusion, compelling banks to allocate a portion of their lending book to priority sectors like agriculture, affordable housing, micro, small, and medium enterprises (MSMEs), low-income households, as well as sectors like infrastructure and green energy (solar, EV, etc.). These models are economically attractive and highly scalable, promoting financial inclusion. Furthermore, the technology significantly reduces operational costs.

The fusion of technology and finance is revolutionizing the way banking services are accessed and delivered, particularly for the unbanked and underbanked populations. As traditional banks and fintech firms collaborate, innovative solutions are emerging to bridge the financial inclusion gap. Continued collaboration and innovation in this space hold the potential to ensure that financial services are accessible to all, regardless of their socio-economic background or geographic location.

Author: Kushal Rastogi, Founder, CEO & CTO, Knight Fintech