For far too long, certain communities—both in urban and rural areas—have been left out of banking and credit opportunities.
Market failures such as discrimination, disinvestment, and gentrification have played a big role in creating banking deserts—places in which individuals with little or no credit history, low incomes, and criminal backgrounds are often overlooked.
In our opinion, scale as a means to profit has outweighed public benefit long enough.
That’s why we firmly believe in working towards financial inclusion, which creates better societies and is more beneficial for the lending industry in the long run.
By focusing on small businesses (SMBs), many of which exist in banking deserts, the commercial lending industry can help push for more inclusive economies.
In this article, we’ll explore the impact that financial inclusion has on both SMBs and lenders—including how lenders can leverage technology to help SMBs thrive.
What Is Financial Inclusion?
Financial inclusion involves removing the barriers that prevent people and businesses from participating in the financial sector.
Commercial lending companies, for example, can do their part by offering flexible and affordable financial products and services to SMBs, regardless of income level or business size.
The World Bank Group sees financial inclusion as a crucial tool to reduce extreme poverty and promote shared prosperity. They believe that when people and businesses have access to affordable financial services, it becomes easier for them to:
- Plan for the future.
- Manage their finances.
- Cope with uncertain economic times.
In other words, financial inclusion isn’t just about having a personal or business bank account.
It’s about offering everyone a world of possibilities, making it easy for them to do things like start a business, invest, and develop financial resilience.
Why Financial Inclusion Matters
Every single person deserves the opportunity to thrive.
In an inclusive economy, people and businesses have easy access to adequate financial resources, such as a livable income and affordable loans.
Working towards financial inclusion has a real impact on the general economy. For instance, reducing wealth disparities between different ethnic groups could increment annual GDP by a staggering $3 trillion.
Let’s explore a few ways in which financial inclusion plays a crucial role in fostering an inclusive economy.
1. Reduces Income Inequality
As much as financial inclusion is about ensuring that each individual or business can access affordable financial products and services for saving, investing, or scaling, it also has a positive impact on income distribution and overall economic well-being.
Studies show that higher levels of financial inclusion significantly reduce poverty rates and income inequality, especially in developing countries.
2. Creates Job Opportunities
Small businesses are the backbone of our economy. In fact, they make up 99.9% of all firms. That means they play an essential role in driving economic growth through job creation.
When SMBs have access to financial resources, they can expand their operations and hire more employees. The greater result is a stronger economy as well as a more inclusive labor market, where more people have opportunities for employment.
3. Strengthens Financial Resilience
When people and businesses have access to financial products like credit, they are better equipped to manage financial risks, navigate through unexpected events, and mitigate the impact of economic shocks.
In other words, having the right tools helps people and businesses—especially from underprivileged segments of the population—improve their overall financial stability.
They can transition from good years to difficult ones smoothly, knowing that their financial institutions have their backs, even in times of economic uncertainty.
4. Promotes Financial Literacy
Worldwide, only 17% of surveyed adults considered their financial knowledge to be high.
As a result, about two-thirds of unbanked adults say they would need help using an account if they opened one. These users may be more vulnerable to fraud and higher bank fees, especially if they want to open a business.
Financial inclusion can bridge that knowledge gap. It’s not only offering products or services, but educating individuals and businesses to better understand what they are and how they can be used effectively.
Ultimately, financially educated individuals become empowered to make more informed decisions about their financial present and future, and are better positioned to contribute to the general economy.
The Added Benefit for Commercial Lending
Contrary to popular belief, serving underserved markets doesn’t hinder economic progress—it actually fuels it!
In fact, by focusing on financial inclusion, SMB lenders can reap a whole bunch of direct and indirect benefits, including:
- Tap into a new customer base: by reaching out to underserved individuals and SMBs, lenders expand their reach to a new pool of potential customers who are eager for financial services and support.
- Earn customer loyalty: by providing much-needed access to credit and other financial resources, lenders can become the go-to choice for those who were previously left out.
- Spark innovation: lenders are inspired to come up with creative solutions to tailor their offerings to meet the unique needs of underserved customers.
- Increase brand reputation: being known as an inclusive and socially responsible institution can attract more customers in the commercial lending market.
As much as profit is what drives a business, success can also be measured in other terms.
Lenders who foster financial inclusion rapidly understand the importance of KPIs such as community engagement, financial education, and access to financial products/services.
How Lending Software Can Help Drive Financial Inclusion
More and more, the financial industry is leveraging technology to create a wealth of new opportunities for small businesses.
Here are a few ways lenders are using technology to promote financial inclusion.
1. Alternative Credit Scoring Tools
Conventional lending practices often sideline potential borrowers due to poor or non-existent credit histories. However, the emergence of alternative credit scoring, which takes into account non-traditional data points and leverages innovative technology (AI, ML, decision engines, etc.), presents a solution to this issue.
By factoring in diverse financial activities such as cell phone and utility bill payments, lenders can gain a more comprehensive understanding of a borrower’s financial behavior and risk profile. This nuanced evaluation can often reveal creditworthiness that traditional metrics might miss.
Furthermore, lending software’s capability to analyze large volumes of data rapidly allows financial institutions to effectively broaden their pool of eligible borrowers. By shifting away from restrictive traditional credit scoring and embracing these alternative methodologies, lenders can extend financial opportunities to a larger, more diverse group of individuals.
2. Digital KYC and Identity Verification
With the aid of contemporary technologies such as digital “know your customer” (KYC) protocols, the identity of borrowers can now be validated without the need for time-consuming in-person interactions or extensive paperwork.
Techniques like optical character recognition (OCR), video conferencing, facial identification, and even biometric data have made this feasible. This innovation not only accelerates the loan approval process but also extends the reach of financial services to individuals who may lack standard identification documents, thereby enhancing accessibility and speed.
3. Automation
Modern lending technology leverages automation to streamline significant operations such as client onboarding, data entry, document collection, underwriting, risk assessment, and loan disbursement. This allows lenders to shift their focus from mundane, repetitive tasks to forging robust relationships with their customers.
With the advent of automated client onboarding, lenders can smoothly guide clients through the application process, minimizing manual paperwork and ensuring an efficient, streamlined experience for both parties. Automation in data entry significantly reduces the risk of human error, ensuring that client information is accurate, up-to-date, and readily available when required.
In addition, automation allows lenders to tailor their services to the unique circumstances and needs of each client. By freeing up resources previously tied to manual processes, lenders can invest in understanding their customers better, thus enabling the creation of personalized products and services—a big win for marginalized and underbanked segments of the population.
By focusing on personalization through automation, lending practices become more efficient, customer-oriented, and inclusive, enabling lenders to meet diverse client needs effectively and promptly.
SPARK: Empowering Mission-Driven Lenders
At SPARK, we believe in the power of financial inclusion through mission-driven lending.
- We understand the needs and motives of mission-driven lenders because we were born from one ourselves.
- We were established as a public benefit corporation to ensure decisions go beyond pure profit motives.
- We were built to support SBA loan programs, which were created specifically to increase access to capital by underserved markets.
- We actively support and provide discounts to mission-based lenders focused on serving minority communities.
It’s our vision to streamline the connections between traditional lenders and mission-driven lenders through SPARK technology. In doing so, we can help traditional lenders better meet the needs of underserved markets by ensuring access to partners that support their growth into the mainstream.
As a public benefit corporation, our decisions go well beyond just making profits. We aim to level the playing field for all SMBs by helping them gain better access to capital
Let’s join forces to build a more inclusive economy for all individuals and businesses—request a free demo today.
P.S. – Learn more about The Cost of Ignoring Underserved Markets in Banking by downloading our latest report.
