Over the last century, low-income countries have benefited from increased global trade, the spread of new technologies, and the mobility of labor. These trends in world economic output have improved living standards, health, and education. However, many low-income countries still suffer from financial exclusion. This chapter provides the macroeconomic context for a more specific analysis of fintech in subsequent chapters. We describe, in overarching terms, how globalization has impacted emerging economies—the ways it has changed inequality between nations and within each nation. We discuss how the remaining gaps in access to financial services can be tackled in order to help more people escape poverty.
Technology may not be a primary driver of inequality, but it seems to work in tandem with globalization. In the twentieth century there was a trend toward increased productivity via machines and automation. Today technology continues to shape the global labor market; the markets with the cheapest labor often assume a large share of the jobs.
Technology enables and accelerates change in the types of jobs that are in demand. The proportion of G7 countries that added value to the manufacturing sector (as a percentage of GDP) rose between 1820 and 1990 and then took a downward turn. In the United States the number of employees in the manufacturing sector rose after World War II, which in turn contributed to the expansion of the American middle class. During that time the United States established pro-labor policies and faced limited global competition. In the 1980s and 1990s this trend reversed, which may be explained by the rise of China, globalized free trade, and decreased costs for communications and transportation. Then, fractured production processes led to the emergence of global supply chains. These factors resulted in the offshoring of thousands of American manufacturing facilities. Millions of manufacturing jobs were transferred to countries with lower wage structures.1
Technology has been a catalyst for accelerating globalization, leading to massive job outsourcing and greater workforce competition. People today often research and design products in countries with expensive labor markets and then assemble the products in countries with low-wage labor. This results in a worldwide supply chain.
Several emerging economies have become global economic contenders over the past century. The 2007–2008 global financial crisis gave these economies a momentary pause, but their upward trajectory has continued.
Shortly after World War II, many economists feared that famine would spread and that disparity gaps between the rich and the poor would widen. Many expected that increased inequality would lead to increasing social disorder and unrest.
However, while the world’s population more than tripled, to 7.9 billion people, the proportion of people living below the poverty line rapidly declined (Figure 5.1).
In the aggregate, humanity has arguably just experienced its best quarter century. Since 1980, for example, more than a billion people have been lifted out of extreme poverty. According to the World Bank, the global poverty rate has dropped from 35 percent in 1990 to 11 percent in 2013. In other words, 1,083,000 people have climbed out of abject poverty toward a more stable and secure life. And infant mortality—a critical indicator—has been halved. These trends are even more remarkable when we realize that the world’s population grew by almost 1.9 billion during this period. The world has never seen anything like this before.
Between 1981 and 2008, the number of people living on less than $1.25 a day dropped in East Asia and the Pacific, and more specifically in China. Meanwhile, in South Asia the proportion of people below the poverty line remained unchanged. Likewise, poverty rates across the Middle East and North Africa, Latin America, the Caribbean, eastern Europe, and Central Asia remained unchanged. Conversely, in the same period the number of people living on less than $1.25 a day in sub-Saharan Africa increased.
Between 1980 and 2016, economic conditions in emerging countries improved at a rapid pace, particularly in China. The proportion of the population living below the poverty line in China dropped from 50 percent in 1980 to less than 10 percent in the 2000s. In India the relative poverty rate was halved between 1993 and 2011.
Data sources: The absolute number for the world population is taken from the Our World in Data world population data set: Max Roser, Hannah Ritchie, and Esteban Ortiz-Ospina, “World Population Growth,” Our World in Data, May 2019, https://
FIGURE 5.1 World population living in extreme poverty, 1820–2017
However, the “China effect” may soon be over, for three reasons. Chinese economic growth has already begun inflecting. The nation’s GDP growth rate has been below 10 percent since 2010. China’s economy is still growing, albeit at a slower pace, which means that wages and exchange rates will likely rise. In response, Chinese supply chains are moving to less-developed countries where labor is less expensive. This shift toward increased employment in lower-wage countries may result in Asia and Africa’s ability to attract more supply chain opportunities. Furthermore, information technology innovations reduce transaction costs and therefore could facilitate rapid transitions in supply chains.
However, rapid growth in emerging economies, which has greatly reduced the number of people living in abject poverty, is often accompanied by an undesirable outcome: widening inequality gaps within each nation, as we show below. It is important to recognize the difference between declining rates of poverty and rising within-country inequality. Both can occur simultaneously.
In the 1990s the Chinese and Indian governments took steps toward economic liberalization, but they played a direct role in fostering growth by making large-scale infrastructure investments. This produced a steep economic growth trajectory that lifted more than one billion people out of abject poverty in the 1990s. Nevertheless, intra-country inequalities also increased.
What happened in China and India has also happened in other parts of the world. In the last two decades, many emerging economies have undergone a complex transformation. One of the most remarkable features of this transformation has been the growing middle class. The most impoverished people have experienced improved living standards. Beginning in the 1990s, economic growth rates increased exponentially. China, India, Brazil, Russia, Mexico, Turkey, Indonesia, and South Africa all benefited from exponential growth and a growing middle class. In 2015 the world’s top ten middle-class markets included Brazil, Russia, India, and China. Indonesia is expected to join this list in 2020, and both Mexico and Turkey are expected to enter the fold by 2030.2
Despite the absolute gains in wealth, roughly two-thirds of developing and emerging economies saw increased within-country income inequality between 1998 and 2011. Wealth generated in emerging markets was captured by a narrow slice of the population. Specifically, 82 percent of the wealth generated in 2017 went to the richest 1 percent of the global population. Meanwhile, the 3.7 billion people who make up the poorest half of the world saw no increase in their wealth, according to Oxfam.3
To illustrate the magnitude of the disparity, consider that in China the richest decile of the population earns thirteen times as much as the poorest decile, compared with a five-to-one ratio in the United States. In 2017, 73 percent of the wealth generated in India went to the richest 1 percent, while the bottom 50 percent saw their wealth increase by only 1—percent.4
These figures are concerning. When the income share of a population’s top 20 percent increases, overall economic growth is expected to decline in the midterm. On the other hand, an increase in the income share of the lowest 20 percent is associated with increased GDP growth.5
One way to measure and compare income inequality within and between countries is by using the Gini coefficient. If a country had a Gini coefficient of one, it would mean one person received all the country’s income. A coefficient of zero reflects perfect equality. Comparative data suggests that income inequality has risen in twelve out of thirty countries in Asia, including China, India, and Indonesia. Figure 5.2 suggests that in low-income countries, Gini coefficients tend to rise with increased economic growth. This provides evidence that emerging economies develop at the expense of rising inequality.6
One reason inequalities have increased in the past is related to shifting employment opportunities. Over the past four decades, increased global trade and financial sector expansion have precipitated exponential growth in the service sector; however, more traditional sectors have been left behind.
Many emerging economies still depend on agriculture as a primary source of employment. Worldwide, the agriculture sector employs more than 1.3 billion people, 97 percent of whom live in developing countries. The significant productivity gap between agriculture and service industries is positively correlated with income inequality. This helps explain why income inequality coincides with economic growth.7
Inequality is especially prominent in “dual beginner economies” where agriculture and non-agriculture sectors have diverging levels of productivity and average incomes (Figure 5.3). In such settings, a 1 percent increase in the inter-sectoral gap is associated with a 0.5 percent increase in income inequality.8
Data source: World Bank, GINI Index, https://
Note: GDP per capita is 2020 for all countries, except Yemen (2018).
FIGURE 5.2 GINI coefficient and GDP per capita
Studies indicate that non-agriculture employment growth can facilitate a movement from extreme to moderate poverty. In general, this mobility requires people to develop different skill sets and obtain higher levels of education. This in turn requires more investment in education and related skill-building services.9
Data sources: World Bank, “Agriculture, Forestry, and Fishing, Value Added (% of GDP),” https://
FIGURE 5.3 Comparison of GDP value-added vs. proportion of population working in agriculture, industry, and services (2019)
Shifting from a predominantly agricultural economy to a more industrialized service economy can reduce poverty and inequality. However, countries must overcome three significant hurdles before they can successfully make the transition: They must develop infrastructure, education, and health care.
A lack of infrastructure presents a tremendous barrier to economic growth in developing countries that seek to transition from an agricultural society to an industrialized, service-oriented economy. A study in Nepal demonstrated that poor-quality roads made it more difficult for impoverished populations to travel to and connect with markets. This had an obvious impact on countrywide commercial activity. Researchers estimate that in developing countries, existing infrastructure (or the lack thereof) accounts for at least 40 percent of business productivity. For these reasons, the United Nations has emphasized infrastructure improvements as an essential sustainability goal.10
The World Bank has also suggested that increasing internet access by 10 percent could result in a 1.4 percent increase in a developing country’s GDP. In these settings, smartphones are often the primary vehicle for gaining internet access and for connecting to digital financial services, health care, and higher-quality education. For example, M-Pesa’s Vodafone mobile financial service helped lift 2 percent of all Kenyan households out of extreme poverty from 2008 to 2016.11
Unfortunately, infrastructure investments can cost from $1 billion to over $1 trillion, a price that many developing countries cannot afford. Existing infrastructure in many countries often requires major overhauls, as opposed to simple upgrades. This means that the governments of developing countries tend to rely on private-sector or direct foreign investments to modernize their economies.12
As developing countries struggle with inadequate infrastructure, they also face the challenges of insufficient education and health care services. In parts of Asia, the poorest students (in the lowest income quintile) are twenty times less likely to attend college than those in the wealthiest income quintile. Similarly, the chance of dying at birth for an infant born to a low-income household is about ten times higher than that of an infant born into a high-income household. Being born in a low-income household generally translates into less investment in education, health, and other essential forms of human development. These types of investments strongly impact one’s future opportunities, living standards, aspirations, and self-perceptions.
Education is a highly productive investment in developing countries. At the country level, educational spending varies little across regions within low-income countries, ranging from 2 percent to 4 percent of GDP. Panel data of thirty-one low-income countries over the period 1970 to 2008 showed that a 1 percent increase in education spending (typically increasing spending by 0.02 to 4 percent of GDP) led to a 0.18 increase in overall GDP.13
The literature indicates that educational investment represents a trade-off between lost wages in the short term and higher wages over the long run. This is a trade-off that poor households must consider when deciding whether a teenager should work or attend school. Improvements in education rely, in part, on government ministries and nongovernmental organizations (NGOs) that clearly communicate the long-term value of education. For example, on average, an additional year of schooling is associated with a 10 percent increase in earnings.
Beyond individual and family benefits, developing stronger formal educational systems is a foundation for developing nations to transition away from agricultural economies. Moreover, improvements in education, health care, and infrastructure support economic growth and correlate with workforce transitions out of informal and into formal conditions.
Fortunately, there is a way to reduce income inequality in emerging economies that does not require dramatic overhauls of employment opportunities. When analyzing relationships between economic growth, inequality, and financial inclusion, scholars have found that fintech greatly reduces inequality. Clarke, Xu, and Zou indicate that financial deepening—a term used by economists to refer to increased access to financial service provisions—is associated with lower income inequality. When Thorsten and his colleagues assessed the impact of financial development on changes to low incomes and income distribution, they found that financial development was associated with a lower Gini coefficient growth rate and a higher income growth rate.14
Chakravarty suggests that economic development, as measured by a nation’s per capita income, is positively associated with that state’s level of financial inclusion. In addition, it is suggested that low rates of financial inclusion have direct negative impacts on health, education, and gender equality.15
The Asian Development Bank (ADB) researched financial exclusion’s effects on women, and on micro, small, and medium enterprises. The bank estimated that addressing financial exclusion among these populations and business sectors could increase economic growth by 9 to 14 percent, even in relatively large economies such as those in Indonesia and the Philippines. Improving financial inclusion could have a tremendous impact particularly in smaller emerging markets such as Cambodia and Myanmar, where formal providers meet only a small percentage of current financial service needs.16
By improving access to financial services, fintech has the potential to boost productivity and income levels. It can thereby move low-income earners closer to the middle class. It could also help governments transition informal jobs into the formal, taxable economy and provide an efficient infrastructure for government redistribution efforts.
Hong and colleagues found in a 2020 study of Chinese inhabitants that fintech adoption improves risk-taking for all, but that individuals who are more risk-tolerant benefit more from fintech advancement. They found that cities with low financial-service coverage benefit the most from fintech penetration. Overall their results showed that by unshackling the traditional constraints, fintech improves risk-taking for individuals who need it the most.17
Another advantage of fintech innovations is that emerging economies can adopt them without disrupting existing infrastructures. Developing economies have an opportunity to become first adopters of new technologies, leapfrogging expensive infrastructure that wealthy countries built a century ago. A prime example of this can be found in South Africa’s adoption of prepaid technologies.18
The following are some of the ways fintech can address inequality:
Improving financial inclusion does more than advance the economic conditions of a population. It can also improve social and physical well-being. For instance, statistically significant mental health improvements have been recorded among those who received financial advice and services. This implies that financial inclusion has health-positive effects. Deprivation and inequality can have severe ramifications on an individual’s life; thus, assessing the impact of financial inclusion should not be limited to the economic realm.19
Various case studies demonstrate how fintech innovations can improve financial inclusion; however, these case studies also illustrate that (a) many nations struggle to implement new fintech, and (b) fintech does not solve all economic problems related to financial inclusion. In South Africa, better financial services have not led to greater inclusion. In China, which leads the way in transactional banking, credit services still lag. And in Colombia, despite the government’s successful reduction of poverty through financial inclusion, economic inequality remains significant.
South Africa has a relatively well-developed economy, compared to other African countries. But it is a good example of the economic dichotomies within emerging markets. The country has one of the most sophisticated financial markets and macroeconomic management systems among emerging nations. Its finance, retail, and media industries are the most developed on the continent. Nevertheless, its inequality level—a GINI score of 0.6—is one of the highest in the world.20
Economic growth in South Africa is constrained by the oligopoly power of entrenched institutions, including the ruling party and its allied unions, and apartheid-era corporations that remain in power. Unions use their clout to give internal members pay raises well above the rate of growth in labor productivity. In 2009 and 2010 their average wage hike was more than 9 percent, well above the approximate inflation rate of 5.5 percent.21
A large proportion of South African corporate profits are earned outside the country. South Africa’s sixty largest companies produce 56 percent of their earnings from other African countries and international sources. This is one of the highest shares of offshore income in the world. In other words, South African companies do not place much importance on local markets. This lack of within-country investment has resulted in declining productivity. In 2012, 33 percent of South Africans lived in rural areas and had little access to basic social and economic infrastructure, and 31 percent lived below the poverty line of $2 per day.22
In 2010, financial institutions in South Africa accounted for 39 percent of formal employment and contributed 15 percent of the total corporate taxes. This suggests that the South African financial sector was at that time large and vibrant. The same is true today; however, the banking sector, like other South African businesses, functions largely as an oligopoly: It is dominated by four banks that lack competition and charge high transaction fees. As a result, awareness and usage of Mzansi (low-cost) accounts is low.
In 2010 the combined assets of South Africa’s long-term insurance sector and pension funds rivaled that of the nation’s banks. South Africa should be fertile ground for long-term savings. However, South Africa’s domestic savings rate of 15 percent lagged far behind that of other countries. By comparison, China’s savings rate was 47 percent and India’s rate was 31 percent for the period 2000–2010. Technology could help scale up and expand the banking sector, increase competition, lower transaction fees, and inform people about Mzansi accounts.
China’s economic growth serves as a promising example of the merits of financial inclusion. As of 2011, 66 percent of Chinese adults held bank accounts at formal financial institutions, which is a much higher proportion of account holders relative to the other BRIC nations. By comparison, the percentage of adult account holders was 55 percent in Brazil, 44 percent in Russia, and 37 percent in India.23
Another distinctive feature of the Chinese economy is the high percentage of people who save at a formal institution. According to the 2012 World Bank Findex survey, 82 percent of the Chinese population saved at a formal financial institution. This too was significantly higher than in the other BRIC countries, where the corresponding indicators ranged from 50 percent to 72 percent. China’s rate of those with savings accounts is also much higher than the world average of 22 percent.24
Even with China’s high level of financial inclusion, almost 20 percent of the Chinese population, or 234 million people, remain unbanked. Some groups are more likely to be adversely impacted than others. Of China’s unbanked population, 55 percent are women, 71 percent live in rural areas, and 80 percent have an elementary education or less.25
China has a significant urban–rural divide in personal income, economic growth, and financial market developments. Statistics show that 75 percent of urban households have access to formal banking services compared to less than 50 percent of rural households. Rural households also have less than 50 percent ownership of other financial products, including stocks, credit cards, and mutual funds. This can be partially explained by the rural populations’ lack of income, education, and financial literacy. Another underlying constraint that prevents financial inclusion among rural populations is the shortage of local financial institutions. Fintech could help improve this situation.26
The proportion of people in China who can receive loans from financial institutions remains low, at about 9.5 percent. In rural areas the number is even lower (7.5 percent). With this in mind, China’s former president Hu Jintao made “building a harmonious society” a top priority and promised to make credit more accessible for rural citizens. The government asked banks to promote social harmony and enhance social and economic inclusion by increasing access to financial services.27
Despite the government’s strong emphasis on microfinance and increased lending rates, repayment rates remained low and programs rarely succeeded in reaching low-income households. The Chinese Banking Regulatory Commission took a conservative approach to granting legal status to credit providers, which suppressed the provision of credit. Households seeking formal credit had to meet a long, restrictive list of requirements, such as evidence of employment, educational attainment, income, urban residence, assets, and even proof of membership in the Communist Party.28
This environment provided fertile ground for increased informal lending and other financial services. It also raised the ratio of informal lending to total household assets. Overall, the constrained access to credit contributed to the growth of shadow banking systems, which often cause financial instability and multigenerational poverty.29
Despite some weaknesses, China has since become one of the fastest moving and most technologically innovative markets for financial institutions. In 2018 the World Bank acknowledged China as a global fintech leader.
For example, internet banking and e-commerce giants such as Alibaba and WeChat may have the potential to revolutionize the lending market. Digital loans in China have increased from $11 billion in 2013 to $284 billion in 2016. With the expansionary role of fintech in the financial sector, lending markets have also evolved. Fintech lending solutions have helped small- and medium-size businesses overcome barriers imposed by traditional financial institutions. The development of advanced data analytics tools has enabled companies, such as Alipay, to individualize loan products. Alibaba, the parent company of Alipay, monitors and analyzes online transactions to identify commercial opportunities and then offers loans to small businesses.30 In China, and around the world, small- and medium-size businesses constitute a large part of developing economies. Thus, fintech lending solutions have had an immense effect on economic growth.31
As China’s example shows, in environments where savings rates are low and domestic credit is high, fintech can help level borrowing and saving imbalances and create stronger domestic demand.
Latin America is one of the most economically unequal regions of the world. Colombia’s Gini coefficient is presently the seventh highest in the world, which is comparable to the Gini coefficients of Haiti, South Africa, and Honduras. In 2010 the richest 1 percent in Colombia held around 20 percent of the total national income.32
In the late 1990s, Colombia underwent a deep economic crisis driven by a reversal of capital inflows. The Colombian government responded with reforms aimed at overcoming the lasting effects of the crisis. In addition to its efforts to improve peace, security, and trade, the government scaled up its redistribution of wealth to low-income households. The share of household income that was redistributed to the lowest-income populations doubled between 2000 to 2010, reaching 20 percent. Average incomes and redistribution schemes rose, which improved the nation’s low incomes.33
In 2003 Colombia’s trade took a favorable turn. This enabled growth, reduced poverty rates, and dramatically improved per capita GDP. Between 2001 and 2015, incomes of the population’s bottom 40 percent grew faster than the average income, and the poverty rate dropped to 13 percent, a decline of nearly 50 percent.
The Colombian government also focused on financial inclusion and introduced the nation’s banking index, which helped banks and policymakers understand and track progress. The banking index is the ratio of legal-age adults holding one or more financial products to the total population of legal-age adults.
The coverage of banking facilities in rural areas increased by 85 percent between 2011 to 2013, totaling 4,724 bank access points. By 2013 only eight Colombian municipalities were without banking facilities. By 2015 all municipalities had at least one financial service provider. Through the monetary incentives offered by the Banca de las Oportunidades, 187 access points opened in Colombia’s rural municipalities. By 2013 rural banking coverage had increased by 34 percent.
Digital technologies also helped the Colombian government increase its coverage and improve security for transactions and mobile banking. As a result, more Colombians chose to conduct banking transactions online because it was easier and saved time.
These factors have greatly improved Colombia’s situation. According to one government indicator, financial inclusion in Colombia was 76.3 percent in 2015. The government aims to bring 84 percent of the population into formal banking by 2018.34
Fintech firms excel at reaching financially underserved populations who have a sufficient level of technological literacy. Developing countries have populations with high ratios of such profiles.35
However, countries must have the infrastructure that is necessary for fintech to function. For instance, telecom services are a necessary factor for wide-scale fintech deployment. In 2017 in the top ten emerging market countries, 39 to 89 percent of these populations owned a mobile phone. Researchers expect that those numbers will increase to 50 to 90 percent by 2025, bringing the enormous potential of fintech to emerging economies.36
Unlike traditional financial institutions, fintech businesses are built on bytes, not bricks. This gives them the power to quickly build services and rapidly meet consumer needs.
The ability to generate and access data in real time is a game changer that enables companies to customize products and services and to improve consumer experiences. Data generated from online banking transactions, digital sensors, and mobile devices can be captured and recorded at an incredible rate. Every day, 2.5 quintillion bytes of data are created. About 90 percent of all processed data was produced in the past two years. For this reason, large companies like Google, Facebook, Apple, Samsung, PayPal, and Amazon have unique positions of power in their respective marketplaces.37
For example, Alipay, the Ant Financial / Alibaba spinoff, launched MyBank in 2015. This service, unlike all other banks, does not require debtor’s collateral to grant loans. Instead, it analyzes the accumulated financial data related to purchased items across vendors and buyers on e-commerce sites, such as Taobao and Tmall. Applying for a loan on MyBank is much easier than at a bank because it has lower thresholds. As a result, it can improve credit access in rural areas.38
Just as tech companies have found ways to monetize data, governments have also found ways to use data to improve the services they provide to citizens. India uses a twelve-digit citizen identification number called Aadhaar to grant citizens access to government services and social benefits.
Aadhaar’s use of biometric data helps prevent service duplication, information leaks, fraud, and corruption. Recently the government of India made Aadhaar the primary form of identification when people open bank accounts. This improves synergy between government services and overall financial inclusion in the country.
Why was Aadhaar needed? Before the creation of Aadhaar, India did not have a unified, nationally accepted way to prove citizens’ identity. To access government services or subsidies, people had to provide a myriad of documents. For example, ration cards were used for food subsidies and electricity bills, whereas a driving license was required to open a bank account. These documents were not available to 42 percent of the population. This meant that most citizens were either denied services or had to bribe officials for basic necessities, such as fuel, or access to pension accounts.
Fake or duplicate identities posed another issue for the Indian government; most citizens did not have school IDs or birth certificates. In 1969 the government made birth registration and death certificates mandatory by law. However, three decades later, in 2001, only 55 percent of births and 46 percent of deaths were registered. Children without a birth certificate faced difficulties receiving health care benefits and school admissions. Furthermore, a lack of paperwork often resulted in minors being tried as adults in court.
In a country with more than one billion people, only 50 million had passports, only 95.8 million had permanent account numbers (for tax purposes), and only 232.2 million had ration cards. As a result, the government decided that a single identity card would be the best way to prevent government leakages and to foster social and financial inclusion.
How was the data generated? Aadhaar’s new technology was created with three main objectives: enrolling Indians on a very large scale, preventing fraud and duplication, and providing a trustworthy and secure authentication of residency and identification. The government decided that linking a unique twelve-digit number to a biometric system would address these three objectives. The biometric system included a photograph, records of all ten fingerprints, and iris scans. The individual’s name, address, date of birth, and gender were also recorded.
Enrollment equipment consisted of a laptop with secured software, an iris scanner, a fingerprint scanner, a webcam, and a laser printer. All of this fit neatly into a briefcase and could be deployed at scale. The enrollment process took place in English and in the regional language, with translation taking place simultaneously to ensure data accuracy.
To enroll, one had to produce proof of identity, address, and date of birth. For those unable to verify date of birth, the date verbally given by the person was accepted. Data was then compared with existing IDs to prevent duplication. The accounts of children below age fifteen were linked to their parents’ accounts; they had to re-register at age sixteen.39
Aadhaar was a revolutionary undertaking that helped the Indian government create an online database of 1.2 billion people. It was designed to enroll up to one million new people a day. By comparison, the FBI database has about 66 million criminal prints and 25 million civilian prints.
No other system in the world has performed as many transactions as Aadhaar. Visa, for example, processes 130 million transactions in a day. Aadhaar is designed to process up to 600 million transactions per day.
To prevent duplication, the system won’t allow unique identity information to be used to log in with different ID numbers. In addition, the system must account for all other existing IDs a person might possess.
Communicating and registering the homeless, however, has proved to be difficult. Communicating about Aadhaar through traditional media is not helpful for this because many homeless people do not have access to televisions, newspapers, or computers.
Parallel to Aadhaar’s deployment, in 2011 India passed its Information Technology Rules, which provided guidelines for the use of personal data. The Supreme Court upheld the constitutionality of these rules, security practices, and procedures for sensitive personal data.
Aadhaar’s parent organization, the Unique Identification Authority of India (UIDAI), also created an ecosystem of government services around Aadhaar that subsidized education, public health, food, fuel, and rural jobs.
When India subsidized domestic cooking gas, or LPG, to protect citizens against fluctuating international prizes, people began taking advantage of price arbitrage by selling subsidized fuel in international markets. They did this by creating fake accounts and multiple identities. To prevent these abuses, the government linked Aadhaar to the distribution of LPG cylinders, thus mitigating the incidence of leakages and fake identities.
Before the advent of Aadhaar, banking policies for Know Your Customer (KYC) were overly complicated. The government used Aadhaar to ensure compliance with KYC banking norms and ran authentication pilot tests in Bangalore and Delhi. In 2012 banking regulators accepted Aadhaar as a proof of identity, which enabled people to open bank accounts or buy mutual funds.
Today, thirty-four banks across India use the electronic KYC to help customers open bank accounts. This has reduced by 50 percent the processing times and the related costs of granting banking products. By 2014, 3.8 million bank accounts had been opened, representing more than six million transactions. In 2014 the prime minister of India also released the Jan Dhan Yojana, a financial inclusion plan designed to provide bank accounts and life insurance policies to every household in India. This advancement resulted in people opening another 3.3 million bank accounts.
When Aadhaar’s progress was presented to parliament, the prime minister, the finance minister, and the president of India agreed that Aadhaar had helped reduce leakages and improve the delivery of services to low-income households.
It is important to recognize that fintech is just one element within a larger array of strategies to reduce inequality. This fact is particularly important when considering efforts to resolve the widening gap between rural and urban economies, and when studying efforts to improve living standards in emerging markets.
Currently it is more challenging for microfinance institutions to sustain efforts in rural areas than in urban centers. As a result, a lower share of rural borrowers benefit from direct microfinance institutions. Additionally, microfinance institutions with a higher share of rural borrowers may be less able to exploit economies of scale or to increase productivity. This makes it more difficult to achieve sustainable financial inclusion in rural areas than in urban areas.40 This finding is relevant for policymakers trying to enable fintech innovations for poverty-stricken rural areas. Ibrahim has argued that for financial inclusion to alleviate welfare inequality and to ensure income convergence, rural financial markets must be redesigned to allow wider access to credit, specifically for low-income and vulnerable households.41
Another barrier is related to the dependency of fintech on the internet. Access to the internet through mobile devices or other means is a prerequisite for fintech access; however, in developing nations the internet is not evenly distributed. Therefore, the impacts of fintech on inequality will naturally follow the distribution of internet access and effective usage across a population.
In summary, technology can reach its full potential only when nations build robust infrastructures. This usually requires government investments. Reaching rural populations with fintech by increasing internet access should be part of a broader effort to provide access to roads, telecom services, and education. Without infrastructure investment, fintech deployment will not reach its full potential, for the following reasons.
As we can see, finance and technology evolve together in an ongoing process. There are numerous incremental and disruptive innovations, such as internet banking, mobile payments, crowdfunding, peer-to-peer lending, robo-advisory services, and online identification. As digital technology evolves and offers greater e-commerce inclusion for rural areas, fintech can increase financial inclusion.42