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Serving the mass market could offer financial service providers significant opportunities for growth. Today, many industry leaders in the financial sector recognize this, and are developing strategies for democratizing finance.
The global societal disruption caused by the Covid-19 pandemic accelerated many trends in the finance sector. One of these trends was more accessible financial services.
The democratization of finance represents a paradigm shift in the way economic resources are accessed, utilized, and distributed.
The democratization of finance represents a paradigm shift in the way economic resources are accessed, utilized, and distributed, holding the potential to catalyze economic growth.
By leveraging technology, specifically fintech innovations, democratization in finance empowers both individuals and financial service providers.
The engagement of a wider demographic in the financial system enhances liquidity and fosters a more resilient and diversified economic landscape. Furthermore, as more people gain access to credit, investment opportunities, and financial education, there is an increase in entrepreneurship, job creation, and consumption.
The concept of democratizing finance has gained popularity since the Great Recession.
Democratized finance, however, can encompass several different meanings. For some people, it means shifting control away from a select few financial institutions or large banks and distributing it among the general public. To others, it refers to the combination of financial decentralization and access to financial tools for the creation of wealth.
For the purposes of this article, financial democratization will refer to the accessibility of financial services and tools regardless of factors such as income, gender, geographical location, or standard of living.
Financial democratization can take many forms.
Let us take public investment banks, which are starting to take on more roles that address crucial societal and environmental challenges of this century. Several new public investment banks have been established in recent years by governments in Asia, Latin America, Africa and Europe. A notable initiative began in Scotland, with a “mission-driven” national investment bank. It was to be established as a public body that was inclusive and ethical.
Democratizing finance, however, is often thought about in tandem with fintech. For instance, M-PESA, a mobile money service, is used by over 51 million people across seven African countries. It serves both the “banked and unbanked”, enabling users to receive salaries, top-up airtime, pay bills, get short-term loans, and more.
Another fantastic example would be India’s Unified Payment Interface (UPI), a revolutionary system that allows users to link multiple bank accounts to a single mobile application. It was launched by the National Payments Corporation of India (NPCI) to facilitate instant real-time payments between two parties.
UPI’s unique architecture provides a seamless and secure way to transfer money, pay bills, and make purchases. By simply using a Virtual Payment Address (VPA), transactions are completed with minimal hassle, eliminating the need for entering detailed bank account information.
This innovation has significantly boosted financial inclusion and digital literacy across India, establishing it as a cornerstone of the country’s shift towards a less cash-dependent economy.
Financial services encompass more than banking, but banking is a good starting line when it comes to understanding the importance of financial democracy.
While many people are now able to access bank accounts, there is much to be done. For example, in the US, 6% of households were unbanked in 2021 – that is, no member of those family units possessed a bank account.
It also offers substantial benefits to financial service providers, paving the way for innovation, market expansion, and enhanced customer engagement.
The numbers are bleaker in developing economies. In 2023, for instance, Pakistan had the third-largest unbanked population in the world, with 100 million adults without a bank account.
Additionally, in many developing nations, Small and Medium Enterprises (SMEs) can contribute up to 40% of GDP. However, the growth of SMEs is restricted by limited access to finance.
Many traditional banks do not lend to SMEs since, often, the amount borrowed is not high enough for the banks’ transactional costs. Furthermore, owners of SMEs may not have official proof of ownership; hence, their properties are rendered ineligible as collateral.
The movement of financial democracy is crucial for fostering financial inclusion, reducing economic disparities, and stimulating overall economic growth. It enables individuals and SMEs to access a wide range of financial services, including banking, lending, investing, and insurance, with greater ease and lower costs than ever before.
Furthermore, while financial democratization is primarily focused on expanding access and equality for consumers, it also offers substantial benefits to financial service providers, paving the way for innovation, market expansion, and enhanced customer engagement.
Providers can tap into previously underserved or unbanked segments of the population, opening up new revenue streams and diversifying their customer base.
This expansion is not just about numbers; it’s about fostering loyalty among a broader demographic by offering products and services that meet a wide range of needs and expectations.
By providing access to financial services for a broader segment of the population, financial democratization stimulates entrepreneurship, innovation, and investment. Increased participation in the formal financial system leads to higher levels of savings, investment, and productivity, driving economic growth.
An example of such a collaboration would be the one between La Banque Postale and WeShareBonds. Together, they help SMEs to quickly access financing.
Another key benefit is the expansion of the customer base. By catering to previously underserved populations, such as the unbanked or underbanked, financial service providers can tap into new markets and unlock fresh revenue streams.
This inclusivity not only boosts profitability but also strengthens the brand’s reputation as an accessible and customer-centric institution. Furthermore, responsiveness to customer demands can set them apart from competitors and position them as industry leaders.
A strong appeal of digital donations is the ease of giving to different countries. For instance, in 2016, over $7 billion worth of donations were made via PayPal to charities across the globe.
Change isn’t on its way – it has passed us and isn’t looking back.
From challenges related to the pandemic to social injustices, events in recent years have underlined a need for democratized finance and accounting services. This will ultimately benefit both financial service providers and disadvantaged sections of society.
Democratized financial ecosystems are a stepping stone towards not just economic opportunities, but economic successes.
Silverskills leverages digital frameworks to design financial operations that create value for all. Contact us now to get started.
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