Fintech, financial inclusion and income inequality: a quantile regression approach

Abstract

Although theory suggests that financial market imperfections-mainly information asymmetries, market segmentation and transaction costs-prevent poor people from escaping poverty by limiting their access to formal financial services, new financial technologies (FinTech) are seen as key enablers of financial inclusion. Indeed, the UN 2030 Agenda for Sustainable Development (UN-2030-ASD) and the G20 High-Level Principles for Digital Financial Inclusion (G20-HLP-DFI) highlight the importance of harnessing the potential of FinTech to reduce financial exclusion and income inequality. This paper investigates the interrelationship between FinTech, financial inclusion and income inequality for a panel of 140 countries using the Global Findex waves of survey data for 2011, 2014 and 2017. We posit that FinTech affects inequality directly and indirectly through financial inclusion. We invoke quantile regression analysis to investigate whether such effects differ across countries with different levels of income inequality. We uncover new evidence that financial inclusion is a key channel through which FinTech reduces income inequality. We also find that while financial inclusion significantly reduces inequality at all quantiles of the inequality distribution, these effects are primarily associated with higher-income countries. Overall, our results support the aspirations of the UN-2030-ASD and G20-HLP-DFI. Highlights • Harnessing the potential of FinTech to reduce financial exclusion and income inequality has been proposed by the UN and G20. • We posit that FinTech affects income inequality directly and indirectly through financial inclusion. • We invoke quantile regression analysis to investigate whether the effects of FinTech differ across countries with different levels of income inequality. • We find that financial inclusion is a key channel through which FinTech reduces income inequality, at all quantile levels, primarily among higher-income countries.

Does Financial Inclusion Diminish Poverty and Inequality? A Panel Data Analysis for Latin American Countries

“…Moreover, it has a greater impact when individuals have access to digital financial services (i.e., mobile money) (Iqbal et al, 2020 ) Bangladesh 2010–2015 Population in moderate and extreme poverty (%) Branches per 10 km2; accounts per adult; deposits per adult; credit per adult; river erosion; cropping intensity; paved road; high remittance By using a unique dataset of 544 administrative sub districts of Bangladesh, the authors found that financial inclusion decreases both extreme and moderate poverty levels in rural areas (Mushtaq & Bruneau, 2019 ) 62 countries 2001–2012 Poverty headcount ratio; Gini index; Poverty gap; GDP per capita Deposits per head; Borrower ratio; Loans (% GDP); GDP per capita; trade openness; government consumption; inflation; mobile; fixed telephone; internet; price of 3-min local call Results suggest financial inclusion had negative and significant effects on poverty and inequality. Moreover, Information and Communication Technologies (ICT) stimulate financial inclusion, therefore favoring economic growth and reducing poverty and inequality (Demir et al, 2020 ) 140 countries 2011, 2014 and 2017 Gini index Use of mobile phone to pay bills (% population); Accounts (% population); Savings (% population); Borrowers (% population); GDP growth; education; trade openness; government expenditure; inflation; population Financial inclusion reduces inequality at all quantiles of the inequality distribution, and 'FinTech' also reduces income inequality (Park & Mercado, 2017 ) 176 countries 2004–2012 Poverty headcount ratio; Gini index ATMs per 100,000 adults; branches per 100,000 adults; borrowers per 1000 adults; credit (% GDP); depositors per 1000 adults; share of highest to lowest income; inflation; education; banks growth; GDP growth; Rule of Law Results demonstrate that financial inclusion is capable of decreasing poverty and inequality levels. However, financial inclusion presented no effect on inequality when only a subsample of 37 developing Asian nations was considered (Fouejieu et al, 2020 ) Between 19 and 107 countries 2004–2015 Gini index ATMs per 100,000 adults; number of bank branches per 100,000 adults; number of ...…”

“…Granting that developed economies present high levels of financial inclusion, the overall status of financial inclusion (and its efficiency) in developing nations is still under discussion (Donou-Adonsou & Sylwester, 2016 ; Park & Mercado, 2017 ; Swamy, 2014 ). Many studies already found empirical evidence of financial inclusion benefiting the poor (Demir et al, 2020 ; Fouejieu et al, 2020 ; Koomson et al, 2020 ; Mushtaq & Bruneau, 2019 ; N'Dri & Kakinaka, 2020 ; Omar & Inaba, 2020 ).…”

Determinants of digital financial inclusion in India: Evidence from the World Bank’s global findex database

“…They found that, despite signi cant development in China's nancial system, there is still a development inequality between the most and least developed regions. Some of the previous studies have used World Bank ndex data to examine the relationship of demographic characteristics with accessibility and usage of digital nancial services (Anson et al, 2013;Borg & Smith, 2018;Demir et al, 2020;Demirguc-Kunt & Klapper, 2012, 2013Efobi et al, 2014;Zins and Weill, 2016). For instance, Anson et al, (2013) used data from the Global Financial Inclusion Indicators (Global Findex) database and attempted to study account ownership patterns at post o ces in comparison to traditional nancial institutions such as banks.…”

“…Besides, other non-demographic factor such as attitude, access, and digital self-e cacy are also determines how people engage with internet use to address digital inclusion. Demir et al (2020) investigated the interrelationship among nancial technology (FinTech), nancial inclusion and income inequality for a panel of 140 countries across the globe. The ndings of the study show that FinTech and nancial inclusion signi cantly reduces income inequality and these in uences are primarily concern with the higher-income countries.…”

Digital Finance and Financial Literacy: An Empirical Investigation of Chinese Households

“…Digital finance may complement traditional financial intermediaries by increasing access to finance for the members of the population who are often underserved or ignored by inefficient Chinese formal institutions. Consequently, digital finance might create more opportunities to improve income equality and social welfare (Cocco, Gomes, and Maenhout 2005;Demir et al 2020). Next, by competing with traditional finance business, digital finance may also enhance the resilience of a financial system and promote financial stability (Buchak et al 2018).…”