Bridging the Digital Divide: The role of fintech innovations in raising low-income nations out of poverty

Abstract
This paper revolved around the success of Sustainable Development Goal 1, of the United Nations; focusing on the end of poverty by 2030. Poverty has been a long-standing challenge in all nations across the world, and its threat has never been fully eradicated. The World Bank defines poverty as not earning at least $3 per day. The stubbornness of poverty calls for revolutionary action to be taken against it, as history has proven that traditional methods are not doing justice in the efforts of SDG 1. The problem has been defined, and its relative levels have fluctuated over years, however it remains unstoppable so far. Unless we are able to recognise the vitality of the employment of new resources that have emerged with the integration of finance and technology, the problem will remain and will grow. This paper seeks to identify the weakness of traditional finance in working towards the fulfilment of SDG 1, and how those core market failures can be corrected by a necessary recognition of the role of fintech developments; primarily mobile money. Including a brief case study, limitation, and full analysis of the potential of fintech innovations in the economy, the paper presents the argument of the fintech solution in eliminating poverty and seeing a successful SDG 1. The work concludes that a safe and sustainable approach be taken to knock down barriers presented by traditional finance, and instead form new paths towards the achievement of SDG 1 using the fintech solution.

“End poverty in all its forms everywhere.”
By the year 2030, the United Nations aims to ‘end poverty in all its forms everywhere’, according to Sustainable Development Goal 1 (SDG 1). It is a primary goal, on the basis of which multitudes of factors come into play; current standards of living, exchange rates, as well as cultural practices. However, considering the rapidly accelerating rate of finance and technology’s intersection in the modern generation, this essay seeks to analyse the extent of the role of fintech innovations to achieve SDG 1. Fintech innovations, particularly mobile money and alternative credit scoring, prove invaluable in providing low-income earners with the tools necessary to manage risks, access capital, and essentially pull themselves out of poverty. Such tools which traditional financial systems fail to provide, are readily available with the informed use of fintech, therefore allowing propagation towards the fulfilment of SDG 1.

The Failure of Traditional Finance.
Despite decades of traditional development aid, approximately 1.4 billion adults globally remain \"unbanked\". This means they are locked out of the formal financial system which is required to experience economic mobility and resilience. The reality is such that traditional finance in the twentieth century has failed to overcome poverty. It is a profound economic failure that individuals are stripped of the most financial fundamentals; savings, credit, and insurance.
Let us start with a look at the functionality of the most basic traditional financial agency; the bank. In an overwhelming blur of paperwork, fees, and scattered branches, the operation of traditional banks is highly demanding-so high, in fact, that it marginalises low income earners from the get-go. The expense for banks to serve rural, low-income earners is translated into high prices and fees, which creates market exclusion. The low-income earners can not be blamed for lack of trying or lack of education if the very agency through which they are meant to practice financial responsibility, seems to be working against and barring them.

The reality of asymmetrical information in these traditional financial institutions can be pinpointed to ascertain the root cause of the failure of banks in servicing the low-income population. Within the context of this argument, the information imbalance exists between low-income borrowers, who are fully aware of their own intentions, risk tolerance, and true project viability, and the commercial banks from which they seek to gain loans. Commercial banks lack the relevant and complete information regarding borrowers, hence they feed into two major market failures; adverse selection and moral hazard. Prior to loan securement, banks charge low-income borrowers with interest rates based on the average risk profile, due to the lack of reliable information they have regarding the borrowers’ risk. This averaged, higher interest rate discourages low-risk borrowers from even applying for loans, and instead attracts high-risk borrowers to take advantage of interest rate, since, relative to their high-risk, the rate is cheaper for them. This flaw, known as ‘adverse selection’, makes sure that the riskiest applicants are chosen, and safe ones are excluded. Due to the inevitable increase in the bank's default as a result of this, banks are further discouraged to grant loans to the poor. The concept of moral hazard arises after the loan has been secured, when borrowers feel at ease to use the money for projects that are riskier than initially intended. In such cases, the banks are compelled to increase interest rates or collateral requirements in order to mitigate the increased risk, which excludes low-income borrowers again as they do not have the resources to fulfil the increased interest rates or collateral. The inherent system of traditional banks works against all parties involved, as lenders and borrowers both suffer in the process, and the gap between low and average income earners extends to plunge low-income earners into further poverty.

Beyond these technical faults of the traditional system, logistical and geographical dilemmas are to blame as well. In remote areas, developing nations do not have enough resources to allocate towards the implementation of physical branches, because the potential revenue generated from operations of low-income bank accounts in such areas would not sufficiently meet the costs required to maintain the physical branch. Due to this cost-benefit imbalance, banks are inclined to allocate their resources towards establishing physical branches in urban, profitable areas. Therefore, the poverty-stricken population is neglected and excluded from the traditional financial system, whereas the rest of the population is increasingly catered to, thus further diminishing the possibility of achieving SDG 1.

The Fintech Solution: Overcoming Market Failures.
Now that the shortcomings of the traditional financial sector have been established, it is imperative to determine how fintech innovations can work to resolve these shortcomings, and work towards SDG 1. Directly addressing market failures, fintech solutions aim to use technology to lower costs, bypass the limitations of physical infrastructure, and overcome informational asymmetries.

Mobile money platforms, such as Kenya’s M-Pesa, have revolutionised financial access by detaching banking services from physical bank branches, thus allowing the services to operate across a larger scale than ever imagined. The limitations of transaction costs and lack of physical access previously discussed, are solved by fintech’s ability to break barriers. Small shop owners, vendors, and kiosks all act as agents in the digital transaction, who are able to bypass traditional bank infrastructure, using basic technology available in rural areas. No internet connection or smartphone access is needed, ensuring the inclusivity of the low-income population. In fact, cost efficiency is prioritised as the use of existing retail infrastructure and automated transactions allows to significantly lower the marginal cost of a single transaction. The way that this benefits SDG 1, is that it allows the process of remittance payments from urban workers to their poverty-stricken families, to be streamlined. Research in Sub-Saharan Africa shows that lower remittance fees translate directly into a measurable increase in household income and a reduction in the poverty rate. Furthermore, digital money allows for increased liquidity, enabling rural workers to send and receive even small amounts almost instantly. This smooth consumption directly enhances household resilience, preventing families from the trappings of poverty.

Asymmetrical Information is also being targeted through fintech solutions involving new digital lending models powered by Artificial Intelligence (AI) and Machine Learning (ML). Since the previously referred to unbanked population lacks formal financial history upon which traditional credit scoring relies on, digital lenders have worked to construct risk profiles, using non-traditional data. ML algorithms analyse metadata from mobile phones, including airtime top-ups, utility bill payment regularity, e-commerce history, and even the speed of filling out a digital application form. Hence, the informational symmetry is restored with the use of existing, otherwise useless, data, which has been repurposed into a reliable proxy for responsibility and repayment likelihood. This creation of a digital financial identity through fintech drastically narrows information gaps between unbanked borrowers and lenders.

Through the elimination of the consequences of adverse selection and moral hazard, the low-income population subjected to poverty are readmitted into the financial realm, earning them the resources to pull themselves out of poverty and see through to a successful SDG 1.

Case Study Analysis: Quantifiable Impact on SDG 1.
To evidence my claims regarding the solutions that fintech offers, I offer a link between digital financial inclusion and the achievement of SDG 1 targets. Economists Tavneet Suri and William Jack use the example of Kenya’s M-Pesa platform to demonstrate the poverty-alleviating effects of mobile money. Suri and Jack estimated that approximately 2%, that is 194,000, of Kenyan households were lifted out of extreme poverty through the expansion of M-Pesa. In the case of tackling resilience, mobile money played an essential role to encourage responsiveness in times of economic shock. Households without M-Pesa suffered an average drop of 7% in consumption, whereas those with M-Pesa managed to maintain regular levels wen experiencing illnesses or crop failure, due to the increased liquidity and ease of remittances. This ability to share risk and smooth consumption is essential to building the resilience mandated by SDG 1.

Economic Risks and the Regulatory Imperative
It is important to address the limitations of the role of fintech in accelerating fulfilment of SDG 1, as a digital financial revolution does come with its economic hazards. A seamless integration and effective implementation of fintech requires widespread access to mobile phones and network coverage, along with a sufficient level of digital literacy. Without this, the risk of encouraging a ‘digital divide’ may arise. Although a significant proportion of low-income earners would be able to transition and adapt to digital finance, the poorest of the lot may be further marginalised and a creation of a new sub class within low-income earners may occur. Furthermore, despite the resolution of physical barriers and logistical challenges, the use of mobile money comes hand in hand with its own complications such as a functional exclusion. Without adequate digital literacy, the benefits of fintech may not be fully realised. Instead, the barriers of traditional finance are replaced with barriers of digital finance, and the path towards SDG 1 remains blocked.

With the introduction and transition of finances from traditional to digitalised platform, consumers need to be kept in mind. An information overload may result in poor financial decision making if borrowers are not transparently educated on the workings of the fintech realm such as hidden fees or annual interest rates. To ensure consumers’ safety, fintech platform will need to be strictly monitored as well, to prevent exploitation of borrowers. If the cheap nature of digital lending is contorted for lenders’ benefit, it may result in a market failure of its own through the facilitation of unsustainable borrowing habits.

Therefore, for successful fintech implementation, data protection and strict regulations must be adhered to. Governments should establish Regulatory Sandboxes, to serve as controlled, supervised environments to allow fintech solutions to be tested in live market conditions. This way, the benefits and the potential risks can be seen to play out before large-scale deployment.

Path to 2030
If, by 2030, the United Nations truly seeks to end poverty, the vital contributions of fintech solutions must be realised. Fintech allow the strengths of technology and finance to combine as one, and tackle unique barriers presented by the stagnant traditional financial sector. With the current rate of progress in our technological and economic world, stubborn challenges need modern solutions in order for them to be solved, otherwise we run the risk of acceptance of a failed economy as a normal economy.