MICROFINANCE PAPER WRAP-UP: “Fintech and Financial Inclusion in Latin America and the Caribbean,” by Dmitry Gershenson et al, Published by International Monetary Fund

This paper examines financial technology (fintech) in Latin America and the Caribbean (LAC), particularly: (1) whether fintech can increase financial inclusion; and (2) best practices for governments seeking to use fintech to do so. Among the challenges is that low levels of financial inclusion are associated with “institutional weaknesses, low levels of bank competition resulting in high cost of financial services, inadequate infrastructure, and an excessively restrictive regulatory environment.”

Based on their own calculations and previous literature, the authors consider the following metrics: 1) Having an Account; 2) Using Digital Payments; 3) Having a Debit Card; 4) Using a Debit Card; 5) Paying via Internet; 6) Receiving Wages into Account; 7) Receiving Government Payment into Account; 8) Saving in Account; 9) Having a Credit Card; 10) Borrowing from a Bank; 11) Using a Credit Card; and 12) Paying Utilities with Mobile.

Overall, the effects of fintech on financial inclusion in LAC are mixed. Although many indicators suggest improvement since 2011, the progress is less pronounced in LAC than in most other regions in the data sample. Within LAC, there is wide variance among countries. For example, the rate of holding debit cards in Trinidad and Tobago is about six times higher than in Haiti. In Central America, the rate of having bank accounts is approximately 2.5 times as high in Costa Rica as in Nicaragua. The differences among countries in South America are not as sharp.

The authors argue that fintech can increase financial inclusion both by boosting access to financial information as well as decreasing the cost of financial services. However, with many people lacking access to smartphones, the internet or both, fintech can increase gaps in financial inclusion by making it easier primarily for people with higher incomes to obtain financial services.

Case studies conducted by the authors indicate that barriers such as high lending rates, overly strict documentation requirements and excessive regulation have slowed the development of fintech and, in turn, financial inclusion. However, the authors suggest that governments’ “adoption in most countries of financial inclusion strategies and discussions of new fintech strategies” could have a positive impact on financial inclusion in the near future. Further, the increase in usage of digital payments due to the COVID-19 pandemic, particularly as encouraged by government cash-transfer programs, could pave the way for better utilization of fintech.

This is a summary of a paper written by Dmitry Gershenson, Luis Herrera, Frederic Lambert, Grey Ramos, Marina Rousset and Jose Torres; published by the International Monetary Fund (IMF); August 2021; 77 pages; available at https://www.findevgateway.org/sites/default/files/publications/2021/IMF%20publication%20-%20Fintech%20and%20Financial%20Inclusion%20in%20LAC.pdf

By Bradley Shulman, Research Associate

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