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Is Digital Transformation Improving Financial Inclusion? Here Is What We Found Out

Institutions of all types and sizes have embraced the new technologies to update their business and reach marginalized groups. Progress is uneven, but the opportunities are enormous.

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Institutions seeking to expand financial inclusion in Latin America and the Caribbean are embarking on a digital transformation to service MSMEs, women, migrants, senior citizens, indigenous people, rural communities, and other underserved populations. 

But are they reaching them? 

To learn more, we conducted the study “Digital Transformation for Financial Inclusion”. In 16 countries, we asked 35 banks, microfinance institutions, and cooperatives to self-assess their ability to create value through digital, known as their digital maturity level.  

We also conducted 54 in-depth interviews with high-level executives and half a dozen focus groups with decision-makers and employees in key roles. A few fintechs were included to contrast the findings between traditional and digital-native companies.

We found that participating institutions have made progress, reaching a moderate level of transformation of about 2.6 on a 5-point scale.  

The more advanced institutions demonstrated that digital transformation is a core element of their business strategy; they allocate significant resources to digital initiatives and have established strong innovation governance to implement them effectively. 

After evaluating digital strategy and culture, products and services, technological Infrastructure, analytical data and processes, the digital maturity assessment (DMA) classifies the entities as an observer, follower, initiator, advanced, or innovative level. 

Graphic barries to access financial services.

 

Not surprisingly, fintechs lead the way in product and service development and have the most robust digital culture. Banks closely follow them in organization, communication and technology, digital strategy, and data use.  

While microfinance institutions and cooperatives classify at a follower level, they have strategically embraced digital transformation to prioritize the customer experience. 

In the interviews conducted, these institutions highlighted the launch of digital education pilot initiatives, deploying advisors to educate clients on using digital channels. 


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They have initiated their path to using data for decision-making, but they still need to strengthen their capacity to derive useful insights from data and leverage them to create more innovative offerings.

Some of the trends we found across different institutions and countries showed that 86% of them use cloud technology for various purposes, such as storage and email.  

Only 8% use it to optimize operations for scalability, flexibility, and agility. 60% provide customers with online financial education tools, but only 20% actively measure their impact.  

This same percentage of institutions deployed Artificial Intelligence (AI) technology through pilot projects. Still, due to regulatory concerns and the investment required, it remains the least leveraged technology.   

The study includes some more trends and identifies that engaging in partnerships between financial entities and other players in the ecosystem presents a strategic avenue to enhance operational efficiency, refine product design, and augment customer insights across distinct phases of the value chain.   

The opportunity  

As McKinsey points out, as the use of cash declines and digital payments increase in the region, growing fourfold from 3% to 13% in 2022, financial institutions are making progress in using digital technology to communicate with clients.

At the same time, we face an unprecedented opportunity to create digital products and services that can better reach women, senior citizens, rural and indigenous communities, and other underserved, vulnerable populations.  

Migrants often face obstacles in accessing financial services in their destination countries. Solutions like mobile banking apps and online money transfer platforms may enable migrants to send and receive remittances swiftly and cost-effectively.  

Also, integrating bank accounts and e-wallets provides access to essential financial services that could dismantle geographical, cost, and identity barriers. 


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Lastly, digital solutions can consider non-traditional credit scoring variables, such as the frequency of remittances and other financial behaviors that indicate creditworthiness. 

Indigenous populations, comprising approximately 8% of the total population, have disproportionately elevated rates of poverty, and tailoring solutions to their language and culture is essential for expanding financial inclusion. 

Products based on these communities' specific forms of income generation, particularly agriculture, are critical, while digital solutions that can identify risks associated with climate change may prove useful. 

For senior citizens, leveraging digitalization to collect data to comprehend their financial behavior can facilitate tailor-made financial products in the context of long-term savings and investments that can complement pensions, offering solid financial opportunities to ensure the economic growth of the silver economy. 

Progress is possible, but there are difficulties ahead. The most cited are the need for digital culture, resistance to change, implementation costs, and limited regulation. On the client side, the absence of connectivity, distrust of digital solutions, cost concerns, and low digital skills still prevail. 

Overcoming these challenges will be vital in facilitating and accelerating the digital transformation process, so vulnerable populations have access to financial services in the region.

Download the report here


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Authors

Terence Gallagher

Terence Gallagher, de nacionalidad británica, es el jefe de inclusión financiera en BID Invest desde abril de 2018, con sede en Washington, D.C. An

David Brogeras

David leads the Digital Transformation Advisory Services team at IDB Invest, which he joined in 2021. His role involves developing advisory and knowle

Cristina Nolasco

Cristina Nolasco, speaker, entrepreneur, and recognized for her work as a connector of the innovation ecosystem in Latin America and the Caribbean. He

Financial Institutions

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