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.
Highlights
An important underpinning in finance theory is that financial institutions and markets play a crucial role in the efficient allocation of capital resources, in the absence of asymmetric information, transaction costs and other market imperfections
Theory suggests that financial market imperfections – such as information asymmetries and transaction costs – prevent poor people from escaping poverty by limiting their access to formal financial services (Banerjee and Newman 1993; Galor and Zeira 1993; World Bank 2014)
Theory suggests that financial market imperfections, such as information asymmetries and transaction costs, prevent poor people from escaping poverty, by limiting their access to formal financial services
Summary
This paper seeks to rise to the challenge, by investigating the interrelationship between FinTech, financial inclusion, and income inequality in a large panel of developed and developing countries using the Global Findex waves of survey data for 2011, 2014 and 2017. Jaumotte, Lall, and Papageorgiou 2013; Asongu 2015; Dabla-Norris et al 2015c; Richmond and Triplett 2018) By fusing together these two strands of the literature, the paper seeks to make three main contributions. To the best of our knowledge, this is the first study to provide evidence of a link between mobile finance, financial inclusion, and income inequality at the cross-country level.
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