Friday, May 24, 2024

Exploring Open Finance’s Potential to Empower Unbanked Communities Globally

Delivering financial inclusivity is a priority that’s near the top of the open finance agenda. Not only can this goal help to supply more populations with life-changing access to banking services, but it can also help to broaden the reach of financial markets and services on a global scale. 

Although many developed countries have long embraced digital transformation in finance, initiatives to bring innovations to communities outside of Europe have been altogether more challenging. However, open finance may finally be the innovation to level the fiscal playing field on a global scale. 

The Battle for Financial Inclusivity

Let’s explore what financial inclusivity actually means for the world’s unbanked population. In a nutshell, inclusivity has the power to deliver financial services for both the underbanked and unbanked at a low cost of entry. 

But what does ‘unbanked’ actually mean? The term unbanked can refer to individuals who lack any access to financial instruments and any key services such as access to credit, loans, and investments. 

Because they can’t open a basic bank account, unbanked communities rely on using cash, salary cards, or digital wallets to make transactions and pay for their living expenses. 

While the concept of lacking access to the most basic of financial instruments may seem like one that’s limited to a small number of individuals around the world, World Bank estimates show that some 1.7 billion adults can be recognized as ‘unbanked’. 

Furthermore, in the MENA (Middle East and North Africa) region, as much as 47% of the population is estimated to lack access to a bank account at a financial institution. 

Some 39% of the Arab world alone is estimated to have no access to financial services, but emerging technology in the financial landscape may have grown to the extent that times may be about to change. 

Examining the Role of Open Finance in Inclusivity

The reason that open finance is such a powerful tool in driving inclusivity for unbanked populations is that the technology focuses on leveraging more comprehensive access to the financial data of customers to optimize services related to investing, savings, pensions, borrowing, accounting, and plenty more. 

This means that open finance can help to share customer financial data securely between institutions with the consent of account holders. 

Open finance actively secures and shares financial data through trusted third parties. Through the insights provided by this shared data, institutions have the ability to offer more bespoke ranges of products and services in a digital manner such as saving portfolio insights, budgeting advice, personalized loan terms, and pension information on-demand. 

The beauty of open finance is that it can help to build digital financial identities for users based on the data that they produce, without the need for online credit checks from third parties like Experian or Equifax, which can help facilitate loans and access to other trust-based services. 

Leveraging Peer-to-Peer Lending

One of the most essential services that open finance can provide for unbanked populations is microfinancing and peer-to-peer (P2P) lending. 

The ability to borrow money can be one of the most inhibiting factors for the unbanked in strategizing their future. Having no access to lending services to begin a business or make an essential large purchase like a car or mobile phone can risk keeping individuals from achieving their goals and even prevent them from working their way out of poverty in some cases. 

Open finance, however, can utilize alternative credit scoring models that leverage non-traditional data sources like mobile usage patterns, utility bill payments, or even social media profiles to determine risk levels and broker loans provided by peers, as opposed to financial institutions.

Blockchain technology has become a driving force in the age of P2P lending, and with smart contracts, it’s possible for loans and repayments to be automatically executed based on certain pre-defined criteria being met. 

Bridging the Advice Gap

Crucially, open finance can help institutions and fintechs alike to bridge the advice gap in a variety of different ways. 

The beauty of open finance is that it has the power to enhance, simplify, and eliminate the friction involved in the onboarding process between investors and their options. This is important because it can help unbanked users access far more personalized and effective insights into their saving strategies. 

Open finance can also help to deliver actionable insights for budgeting in a way that can help users gain unprecedented access to advice on how better to manage their money to reach specific financial goals. 

For many unbanked individuals, access to savings and investment advice is likely to be extremely scarce and could impede their willingness to embrace open finance in the first place. However, spending insights and savings suggestions can serve as a trust-building tool that allows users to take their first steps toward economic sustainability. 

Entering the World Economy

For the unbanked population, open finance has the potential to open the door to the world economy by driving financial growth and facilitating upgrades from cash-based transactions to digital finance transactions safely and securely. 

Although this may not seem like a revolutionary prospect, it opens the door to a pool of 1.7 billion prospective entrepreneurs to build micro and small enterprises and gain access to affordable financial tools that can help drive growth while offering some support for accounting and cash management. 

Open finance can help to automate these processes to provide more technical efficiency. Furthermore, companies can also use open finance to secure more funding sources to achieve their business goals through fintech investment platforms. 

Democratizing Finance

Innovations in banking have helped to drive more financial inclusion in recent years, but the arrival of open finance has the power to change the game for a vast number of unbanked individuals. 

Through the data sharing leveraged by open finance, more users can gain unprecedented saving insights, access to invaluable tools, and the ability to grow a business–all of which are opportunities that simply don’t exist with no recognized access to banking services. 

This technological revolution can not only help to provide access to financial services on a global scale, but it also helps institutions and fintechs to grow their customer base–paving the way for the democratization of finance and a truly level economic playing field. 

Claire James
Claire James
Claire is an accounts manager at Fire Digital UK, an online publishing and content marketing company based in the North West.

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