Digital finance, fintech, and income inequality: Opportunities and risks for financial inclusion in Pakistan

Abstract

The present study investigates the transformative character of digital finance and financial technology (fintech) in supporting financial inclusion in Pakistan and discusses their impact in terms of income inequality critically. Pakistan is also experiencing tremendous expansion in the digital financial service category in the last ten years that is comprised of mobile money, digital payments and alternative credit scoring due to growth in mobile and internet penetration, favorable regulatory environment and new fintech solutions. Improved access to cheap financial services has the potential to strengthen the marginalized groups, boost entrepreneurship, and ease the process of adopting the formal financial system. Nevertheless, this paper also emphasizes risks that could potentially arise on the high pace of digitalization of finance. Using empirical data based on national surveys, fintech adoption data, and examples of the Pakistani digital finance ecosystem, the study appraises the effect of digital finance on economic participation behaviour by various groups of people, based on income. Results indicate that although digital financial services can potentially lessen the risks of inclusion and help eradicate poverty, policy interventions and design principles is the key to reducing risks.