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The 4IR and financial inclusion in the age of Fintech

CORRESPONDENT
Bricks to clicks: Banking access has moved from brick and mortar structures to IT networks
Today we stand on the brink of a technological revolution that dictates the way we live, work and relate to one another.

Artificial Intelligence (AI) is all around us, with innovations such as drones, self-driving cars and robotics. This is the Fourth Industrial Revolution (4IR).

It uses digital technology to facilitate and further automate systems and processes that require physical and human capital. It is driven by growth in computing power and the vast amount of data, along with processes used to predict our cultural interests and buying or other behaviour.

The First Industrial Revolution used water and steam to power transportation and mechanise production. The Second Revolution occurred with the discovery of electricity for further expansion and mass production. The Third Industrial Revolution used electronics and information technology to automate everything from production to business processes.

Much of it was powered by the invention of a personal computing system. The Fourth Industrial Revolution is more of an extension of the Third Revolution in that it fuses technologies between the physical, digital and biological spheres.

The 4IR has the potential to raise global income and improve the quality of life across the globe, including addressing inequality through more inclusion. Technology has made it feasible to increase the efficiency and pleasure of our personal lives via new digital products and services.

It is now possible to order a taxi online (Uber), watch a movie online (Netflix) and many more services made available on the internet through software engineering (creation of applications, apps). Customer experiences have been simplified since all kinds of solutions are on the palm of our hands via smartphones, tablets and notebooks.

Technological advancements have their challenges that affect people, businesses and governments. Automation by nature translates into disruption of the labour market.

As automation substitutes for labour, across the economy, the net displacement of workers by machines might worsen the gap between returns to capital and returns to labour. The main effects of the 4IR on businesses are customer expectations, product enhancement, collaborative innovation and organisational reforms.

Customers are now at the centre of the economy and physical products and services are now enhanced through digital capabilities that enhance their value. This has created new business opportunities and equally poses a threat to businesses that fail to adapt. The financial services sector has not been immune to the development of the digital economy and it is benefiting from these technological advancements.

Financial technology (fintech) has experienced growth since the setting in of the 4IR. The fintech industry has expanded exceedingly above its early stages, being visible in the mainstream of all markets around the world. According to EY research, emerging markets such as China and India are leading the way with adoption rates of 87%, followed by South Africa and Russia with 82% adoption rate. Amongst the industrial countries, Ireland, the United Kingdom and the Netherlands lead in the adoption of fintech. Fintech

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has brought a new paradigm to the design and implementation strategies for financial inclusion.

For instance, new players, including non-banks increasingly offer financial products and services directly to customers. Thus, recent technologies such as smartphones for mobile banking are making financial services more accessible to the general public.

In Botswana, some commercial banks have integrated with mobile money service providers for the provision of electronic money services. These services are critical to financial inclusion as they do not need the use of a bank account. Fintech is essential for the under-served and unbanked population as it comes with reduced fees.

Locals are also engaged in cross-border payments that attract charges, which differ for several reasons, including destination, value and purpose of payment. With fintech, customers and suppliers are provided with cost-effective services that deliver in real-time. Another aspect is that fintech can help reduce monopolistic power of existing markets in the financial service industry. This results in increased competition in the remittance realm and thus an added advantage to customers as far as fees are concerned.

Although fintech has been identified as ‘disruptors’ by traditionalists in the delivery of financial services, they are an important tool for financial inclusion and inclusive growth.

In its 2018 Annual Report, Bank of Botswana indicates that fintech is a necessary agent for financial development, noting that it has great potential to deliver economic benefits by enhancing competition and lowering the cost of operations, thereby fostering financial inclusion and shifting the economic paradigm leading to a digitalised economy. It is important to note that fintech permeates all areas of economic and social activity even at the global level.

Although there is rapid change and innovation in technology that drives financial inclusion in some countries, it has been reported that Botswana is behind in the institutional and market depth, financial access and size relative to the economy when compared to other peer economies. For instance, in the rural areas of Botswana, 64% of the population has access to formal financial products and services as compared to 90% and 81% in Mauritius and South Africa, respectively. This clearly shows that Botswana has a gap that can be filled by fintechs.

There is therefore a need to develop a supportive fintech regulatory framework that particularly promotes the business environment, including accelerated penetration of mobile, agency and internet banking.

At the same time, there is a need to benchmark from other countries such as Rwanda and Kenya that have allowed retail sectors and non-bank institutions to offer financial products and services that create competition and make it possible to improve access for the under-served and unbanked communities.

NLEDZI A. JOSEPH & TSHEGOFATSO NANJUNGA*

*Joseph and Nanjunga are settlement supervisors in the Payments and Settlements Department of the Bank of Botswana



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