FinTech and banks as complements in microentrepreneurship

The rise of financial technology (FinTech) is changing the way people handle money, especially in low-income and middle-income (LMI) countries that have limited access to traditional banks. With its ability to offer affordable, improved access and user-friendly financial services, FinTech has the potential to help people save money and manage their finances, even if they do not own a bank account. However, the belief that FinTech can replace banks varies depending on the economic environment, social structures, and the financial needs of the people in a given region.

Professor Siddharth Natarajan (Nanyang Technological University) and Professor Arzi Adbi (National University of Singapore) collaborated to determine the joint influence of FinTech and banks in encouraging savings in LMI countries. They also analysed the influence of FinTech adoption by poor people and women when saving for small businesses.

“FinTech can reduce transaction costs and simplify money management. However, individuals at the margins of society face a range of social and institutional challenges that discourage savings. Technology alone may not address all these challenges. Therefore, we think the complementarity between FinTech and banks becomes vital.”, said Professor Siddharth.

Overcoming Barriers in LMI Countries

The research examines the impact of mobile money used by 81,345 individuals in 74 LMI countries. In many of these countries, traditional banks are hard to access and have high fees, making it difficult for poor people to save or use banking services. Moreover, the poor find it costly and difficult to use banks due to a lack of financial education. This is where FinTech becomes a game-changer by reducing transaction costs and providing the poor with easier access to formal financial services.

“For people living in remote or rural areas, travelling long distances to visit the banks often means taking half a day off work, which leads to lost income. Digital technology offers a way to reach these individuals without the need for them to visit a bank in person,” Professor Siddharth explained, highlighting the difficulties faced by those in rural areas.

While mobile money allows people to transfer money on low-cost phones that are widely adopted in LMI countries, marginalised individuals in LMI countries face many barriers to saving for small businesses. The poor have scarce financial resources. Poverty can also cloud judgment and make people focus more on short-term needs than long-term financial planning. This can be especially challenging for women, who often juggle work and family duties. Challenges could also arise because of one’s disadvantaged social position. The poor lack social capital, face uncertainty in meeting basic needs and struggle with the legitimacy of operating a business.

Synergy of FinTech and Banks

Since FinTech may not overcome all barriers for marginalised individuals, the researchers propose three hypotheses to explore how FinTech can encourage savings for small businesses, especially when it is complemented by banks. Firstly, using mobile money is more likely to lead to savings for small businesses, especially for the poor and women. Next, the positive association between mobile money adoption and saving for microenterprises by the poor and women strengthens with bank account ownership. Finally, the joint effect of mobile money adoption and bank account ownership on saving for microenterprises is stronger in poor women. 

Their findings provided support for all three hypotheses. To dig deeper into the intersectionality between poverty and gender, the research analysed how mobile money affects saving for microenterprises differently for banked vs. unbanked individuals across four groups: poor women, poor men, non-poor women, and non-poor men. The analysis revealed that the complementarity between mobile money and banks was strongest among poor women.

Policy Implications

By leveraging mobile-based fintech, policymakers have a powerful tool to reduce inequality and foster economic inclusion. The researchers suggest that FinTech should be seen as part of the broader, trusted financial ecosystem of a country. Thus, FinTech firms can adopt an evolutionary approach rather than trying to replace the existing financial system.

“The institutional environment in which technology is used differs across the world. For instance, countries across Asia vary substantially in their level and pace of institutional development. Therefore, it is important to understand how technology and institutions can work in tandem”, said Professor Siddharth.

Note: This research paper was published by the Strategic Entrepreneurship Journal (Wiley) in May 2023.

Dr. Siddharth Natarajan is an Assistant Professor in the Division of Strategy, International Business, and Entrepreneurship at Nanyang Business School, Nanyang Technological University. In his research, Siddharth examines business growth in global and digital contexts. His research has been published in outlets like Strategic Management Journal, Strategic Entrepreneurship Journal, Organization Science, and Journal of International Business Studies. His current work focuses on resource-based strategies for sustainable business growth.