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

Ayse Demir, Vanesa Pesqué-Cela, Yener Altunbas and Victor Murinde

The European Journal of Finance, 2022, vol. 28, issue 1, 86-107

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.

Date: 2022
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DOI: 10.1080/1351847X.2020.1772335

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