Finance sector development, Information and Communications Technology

Digitalization for enhancing access to finance and inclusive growth

Digitalization in financial services, or digital finance, can enhance access to finance by expanding the range of financial services and resources available, thereby supporting financial inclusion (Beirne and Fernandez 2022; United Nations 2016). In particular, digital finance enables more affordable and accessible financial services and other credit facilities for underserved and marginalized groups, such as low-income households and micro, small, and medium-sized enterprises (MSMEs), thereby helping balanced and inclusive growth to materialize (Morgan 2022; Ozili 2018). Digital finance also provides a solution to the shortage of bank branches in rural areas, thereby supporting greater capacity for remote rural areas to attain financial services (Benami and Carter 2021).

Earlier work by the World Bank (2014) highlighted the potential of digital finance to support financial inclusion given the growing share of the population in developing economies with access to mobile phones. Digital finance can also provide opportunities that can support household saving and investment, which can be important for smoothing consumption during periods of financial stress (Li et al. 2020; Wang and Wang 2022). Other benefits can include lower financing costs and higher efficiency in financial intermediation and improved banking performance (Scott et al. 2017).

Limited access to finance is a key obstacle for MSMEs aiming to expand their businesses. According to Disse and Sommer (2020), around 50% of formal firms in low- and middle-income countries (LMICs) are not adequately supported in terms of access to finance, with a substantial estimated financing gap of over $2 trillion for MSMEs (or approximately one-third of the total outstanding SME credit in LMICs). The existence of the financing gap can be attributed to market failures, related to an underfunding of MSMEs below the level that would be achieved in competitive capital markets characterized by complete and costless contracts, absence of private knowledge, and rational expectations (Cressy 2002). The availability of credit via digital channels helps to alleviate the extent of this funding gap, also positively affecting aggregate economic output (Manyika et al. 2016). A further consideration relates to the increased availability of financial data via digital channels, which can help to increase efficiency for credit providers in screening and credit evaluation procedures (Remolina 2022; Duan 2021).

COVID-19 as a catalyst for accelerated fintech adoption

While the use of digital finance by many developing economies had benefitted from so-called “leapfrogging technology” using mobile and internet-based solutions, the coronavirus disease (COVID-19) pandemic further enhanced the fintech landscape in terms of its role in affecting inclusive growth and development (Beirne et al. 2022; Sahay et al. 2020; Gevaudan and Lederman 2020). The start-up nature of many fintech firms enabled them to respond rapidly to the pandemic without the constraints posed by legacy technology. With economies more focused on economic recovery during 2022, fintech firms were able to benefit from new opportunities provided by the substantial growth in digital financial services and e-commerce. Social distancing also increased demand for neobanks (i.e., internet-only banks), while traditional banks also demonstrated a keenness to collaborate with fintech firms in providing digital financial services (Luth 2022; Fu and Mishra 2022).

While COVID-19 had disproportionate negative economic effects on MSMEs and poor households, fintech providers played an important role in mitigating these effects. The increased use of fintech during the pandemic has been an important aspect in enabling many MSMEs to remain economically viable, with financial services being faster, more efficient, and cheaper than traditional banking. Moreover, peer-to-peer lending and crowdfunding have been important sources of finance for MSMEs during the pandemic (Gama et al. 2023; Najaf et al. 2022). In addition, digital financial inclusion has helped to provide households with access to financial services in an efficient manner, mitigating the economic ramifications of COVID-19.

The important role of fintech during the pandemic in providing respite to vulnerable groups needs to be highlighted, particularly due to its contribution to enhancing digital financial inclusion, lowering inequality, and stimulating more balanced economic growth. Due to the rapid response of fintech at the onset of the pandemic, communities in remote areas continued to be able to obtain crucial financial services, such as those related to the disbursement of government relief funds (Nathan et al. 2022). In addition, fintech provided important support to the informal or “gig” economy, which is a sector that is typically underserved by traditional banking (Singh et al. 2023).

Harnessing the benefits of digital finance

Although advances in digital finance have the capacity to enhance financial inclusion and inclusive growth, effectively harnessing these benefits requires policy action aimed at enabling greater use of digital finance while also managing risks. One of the main hurdles for policy makers relates to improving the level of digital literacy and financial literacy across countries. Demirgüç-Kunt et al. (2020) highlighted the importance of sufficient levels of digital and financial literacy for harnessing the financial inclusion impacts of digital financial services (see also Qu et al. [2017]; Czernich et al. [2011]). Without having a sufficient level of competence in these areas, economies and communities may be unable to reap the benefits of fintech. Across developing economies, there is significant heterogeneity in digital and financial literacy levels, which means that the rate of diffusion and take-up of digital financial services differs across the economies and regions. Other factors impeding the financial inclusion impact of fintech relate to insufficient levels of development in digital payments infrastructure, internet connectivity, and broadband penetration (Rauniyar et al., 2021; Kaur et al., 2021). Policies aimed at stimulating investment to address digital infrastructure deficits will be key.

Other constraints relate to effectively managing potential risks to financial stability and cybersecurity due to digital finance. Rapid advancement in fintech innovation, combined with the borderless nature of digital finance, poses challenges for policy makers from a financial stability perspective (Financial Stability Board 2019; Ehrentraud et al. 2020). A sustainable role for fintech for inclusive growth and development requires effective financial regulation and supervision to mitigate these risks, as well as the safeguarding of consumer trust concerns related to cybersecurity. On this latter issue, effective controls to manage the exposure to cyberattacks are key to ensuring consumer confidence in utilizing digital channels for engaging in financial services. Indeed, the existence of robust consumer protection frameworks pertaining to digital financial services will play a crucial role in fostering the requisite trust and confidence among customers and users (Malady 2016). Finally, it is worth noting the importance of international policy cooperation on regulation given the substantial cross-border implications of digital finance.


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John Beirne

About the Author

John Beirne is a principal economist at the Asian Development Bank.
Ngoc L. Dang

About the Author

Ngoc L. Dang is a research associate at ADBI.

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