Technology is redesigning the financial sector with new innovations that have been impacting countries around the world. Although this transition from traditional to digital financial services has been going on for years now, during 2020, Fintechs were both blessed and tested by the Covid-19 pandemic. It was both an opportunity to expand and showcase the trailblazing, innovative services they had been developing for years, and a test to see if these companies were able to survive the global economic crisis triggered by the pandemic.
Luckily, Covid-19 has created new opportunities for digital financial services as a result of their far-reaching services that reach a wide scope of people who cannot access traditional financial services. Globally, 1.7 billion people have no access to traditional bank accounts. Fintechs are increasing financial inclusion, which leads to economic growth and, consequently, GDP growth.
Why is it that Fintechs have such potential for inclusion in a way that traditional financial services lack? First of all, this is because digital financial services are faster, more efficient and typically more cost-effective and, therefore, can reach those typically left out of traditional financial services. Low-income households and SMEs are two of the sectors that are seeing the most benefits as a result of the expansion of digital financial services. SMEs, for example, represent 95% of all companies worldwide and employ 60% of all workers. However, they are frequently left out from the financial opportunities offered to big businesses. Many Fintechs specifically target SMEs and provide them with the services they need.
Although digital financial services are still relatively small compared to the scope of traditional financial services, they are growing rapidly and thriving, especially during Covid-19 times. Services like contactless and cashless transactions are precious today, as many cannot access cash or approach a traditional financial institution in person to carry out a necessary, sometimes urgent, transaction. Fintechs make transactions available to users wherever they are without the need to leave the house, and are even immediate in some cases.
One of the main concerns for users when approaching Fintechs is cybersecurity, and the possibility of their financial data being compromised due to the insecurity of the internet. However, several Fintechs are adopting the use of Distributed Ledger Technologies, a database consensually shared and synchronized across multiple locations and accessible by multiple people. It allows transactions to have “witnesses” and, therefore, reinforces security and transparency for all operations. The use of DLTs is spreading due to their potential to prevent cyberattacks, as well as illegitimate transactions and fraud.
The pandemic has been the first of presumably many challenges, and Fintechs are emerging victorious onto what will soon be a post Covid-19 world where most financial services are accessed digitally. It will be essential that in the future governments devote themselves to the design and implementation of policies that regulate and support the activity of Fintechs. Policymakers should even aspire for international agreements on data privacy, cybersecurity, digital identification and cross-border digital currencies. The reach of Fintechs is truly enormous, and governments would do well to prepare for the imminent expansion of these companies that will, sooner rather than later, deliver a new and improved financial industry.