Few issues in financial inclusion have generated more hype — and confusion — in recent years than fintech. Digital technology continues to inspire a dizzying array of new companies, business models and products, transforming financial services value chains in the process. While many fintechs claim to advance financial inclusion, the link between specific innovations and financial inclusion is often assumed rather than proven. For all the buzz around fintech, the reality is that it is hard for funders, investors and social entrepreneurs know which innovations matter for low-income, underserved customers. The excitement around fintech can also obscure risks it poses to financial systems and low-income customers, as we have seen with digital credit in East Africa.

To help funders, providers and regulators understand how fintech is evolving and identify promising innovations, CGAP is working to bring clarity to the space with a focus on what matters for the poor. At the market level, our research has demonstrated that technology-enabled disruptors are increasing competition for mass market customers while breaking down vertically integrated value chains in the financial sector, with potentially wide-ranging implications for financial institutions and financially underserved customers. At the level of individual financial services, we find a range of new business models emerging among fintechs, digital banks, and platforms that enable challengers and incumbents alike to put useful, user-friendly, lower-cost solutions into the hands of poor customers so that they can use them to improve their lives. Explore our resources in the sections below to learn more.

The big picture: How is fintech disrupting financial services in emerging markets?

While some business models are more relevant to financial inclusion than others, the overall impact of fintech innovation has been to unbundle value chains in ways that could prove beneficial for low-income customers and providers who serve them. On the consumer end, this means customers gain access to a rapidly growing range of financial service providers, often with innovative models that offer products in a different way, at lower cost, with fewer preconditions and less administrative red tape. On the back end, it means that providers themselves are able to rely on a growing range of third-party fintechs who offer highly specialized, value-adding, and cost-effective solutions to core banking processes. In both cases, highly scalable innovators are redefining how banking works.

Since 2016, CGAP has been researching emerging business models in digital financial services with the goal of separating the hype around fintech from solutions that can genuinely benefit the poor and underserved. Our conclusion is that there really is transformative change underway that will redraw the financial services landscape in ways that should expand inclusion. A number of distinct and innovative business models are emerging, often driven by people and companies that come from outside the traditional banking sector and do not identify with legacy banks, their business models, or their approaches to financial services. In the resources below, we identify and describe some of the main models and innovations among fintechs, digital banks, and platforms.

Development funders have an important role to play in helping fintechs at all stages – early, growth, and mature – reach their full potential to serve low-income customers. In developing their fintech strategies, funders should carefully assess which fintechs have real potential to improve the lives of low-income customers. It is also important for funders to align goals and approaches with the stage of fintech they are targeting, and to nurture the broader fintech ecosystem with support for infrastructure, policies and regulations, and local capital markets.

Fintech can harm low-income consumers if not properly regulated. For instance, CGAP’s research has raised serious questions about the digital credit boom in East Africa. See resources below for policy makers and regulators.