1. Introduction
Financial inclusion is a financial system wherein all economic agents have access to effective financial services, especially for underdeveloped areas and low-income people. A sound financial inclusion system is a necessary foundation for the improvement of the depth and breadth of finance. In the aftermath of the financial crisis, financial inclusion has become an important public policy priority, and thus had been set as an improving goal in more than 50 countries and regions worldwide by 2014. Financial inclusion refers to the “access to appropriate, low cost, fair and safe financial products, and services from mainstream service providers” [
1]. The development of financial inclusion has great achievement all over the world, and the living environment of the poor is in the process of improving. The concept of financial inclusion was introduced in China in 2005, and the idea of developing financial inclusion was formally put forward in 2013. There is a strong association between the practice of financial inclusion and innovative digital finance in China. Digital financial inclusion experienced a great leap forward in development from 2011 to 2020 in China. The novel digital financial service as a representative of the fintech company could reduce the threshold and cost of financial services and expand the coverage of financial services through information technology and product innovation. Therefore, the novel digital financial service has become an important driving force and growth point of financial inclusion. There is a core and weak link in the improvement and development of the county financial inclusion system in China. The integration of digital technology and financial inclusion contributes to surmounting the financial exclusion of vulnerable groups in rural and county areas, such as farmers and small micro-enterprises in China. Digital financial inclusion could be invaluable in boosting economic growth and solving agricultural and rural development.
With the support of digital technology, financial inclusion has contributed significantly to reducing the cost of financial supply and improving the effectiveness of financial services. The Global Partners of Inclusive Finance (GPFI) advocates for the use of digital technology to promote financial inclusion. Moreover, the OECD highlighted the need for digital financial literacy. One of the most successful examples of digital money accelerated financial inclusion is Kenya’s M-Pesa [
2]. Based on the literature and the traditional financial inclusion indicators built by international organizations, combined with the new features of digital financial inclusion, Peking University Institute of Digital Finance and the fintech company Alibaba Ant Financial Service have constructed the Peking University Digital Financial Inclusion Index of China (PKU_DFIIC) [
3]. The PKU_DFIIC is built from three dimensions: the coverage breadth of digital finance, the usage depth of digital finance, and the digitization level of financial inclusion. Existing research largely focuses on two areas: On the one hand, most scholars discuss the determinants of financial inclusion, while digital finance is discussed separately. Both financial inclusion and digital finance are indeed able to promote the development of areas excluded from financial services. On the other hand, several scholars have investigated the implementation effect of digital financial inclusion, such as narrowing the income gap and optimizing resource allocation in the financial market. To ensure digital financial inclusion development, it is crucial to understand the determinants and mechanisms better. The inefficient and uneven allocation of financial resources under the dual urban-rural economic structure has not been efficiently solved, which is the constraint of the rural vitalization. It is necessary to gain insight into the development status of digital financial inclusion, identify the bottlenecks and obstacles faced—which provide the basis for the formulation of relevant policies—and promote the sustainable development of digital financial inclusion. However, these points are neglected by most current existing research. Therefore, herein, it is urgently addressed how to promote digital financial inclusion in a timely and effective way under the dual urban-rural economic structure in regard to financial development. Meanwhile, the discrepancy in urban and rural areas for digital financial inclusion will help governmental and financial institutions to adjust the policies based on urban and rural status, contributing to financial efficiency and allocation. These findings suggest that further investigation is warranted. One objective of this investigation is to examine the determinants and mechanisms of digital financial inclusion development based on urban-rural differences. Another objective of this investigation is to examine the discrepancy of the urban and rural determinants under different financial development levels.
The main work and findings of this paper including the following. Based on the panel data of 1607 counties in China from 2014 to 2019, this paper investigated the discrepancies in the determinants and mechanisms of digital financial inclusion development between urban and rural areas by using the fixed-effect model and panel threshold technique. First, we investigate the discrepancy of urban-rural digital financial inclusion determinants more generally, rather than focusing on one particular economy. The industrial economy and governmental intervention are the common determinants of urban and rural digital financial inclusion development, in which the degree is different. At the same time, secondary education is only a determinant in rural areas. Second, we go a step further in the mechanisms of the discrepancy in the digital financial inclusion development between urban and rural areas. On the one hand, industrial upgrading plays a mediating role in the relationship between the industrial economy and digital financial inclusion, which, in rural areas, is much weaker than in urban areas. On the other hand, indirect finance plays a mediating role in the governmental intervention of urban digital financial inclusion, but this may be absent in rural areas. Third, there is a threshold effect in the financial development-digital financial inclusion relationship. The role of the industrial economy has been continuously improved through financial development. The promotional effect of governmental intervention in urban areas is blunted with the development of finance, which displays a tendency of decreasing first, and then increasing in rural areas. These findings are expected to make appropriate adjustments in the implementation of digital financial inclusion in urban and rural areas to improve the depth and coverage of digital financial inclusion.
The marginal contributions of this paper are as follows. First, most of the existing research examines financial inclusion and digital finance separately. Digital technology helps financial inclusion to better perform in promoting development in underdeveloped areas and for low-income people. Therefore, it is necessary to investigate digital financial inclusion. On this basis, we present the main results of the digital financial inclusion determinants and mechanisms. The development of rural digital financial inclusion should focus on talent cultivation and infrastructure construction. Second, we investigate the difference of the industrial economy, governmental intervention, and secondary education on urban and rural digital financial inclusion development. In addition, we also bring new light to the mechanisms of the industrial economy and governmental intervention. These findings fill the vacancy of the correlative research and provide recommendations for the development of digital financial inclusion. Third, the phenomenon of financial exclusion in the county environment is more obvious, and the demand for digital financial inclusion is great. The results of this paper have a stronger targeted policy by using county data to carry out empirical research. Moreover, when comparing the differences between urban and rural areas, it is conducive to overcome the issues presented by the dual urban-rural economic structure and enable the excluded people to enjoy financial services to escape poverty.
The remainder of the article is structured as follows.
Section 2 is the literature review, which reviews the existing research.
Section 3 lays out the research hypotheses and introduces the empirical model based on the analysis of the relationship between key variables.
Section 4 contains a discussion of the empirical findings of the determinants of digital financial inclusion development, which is different in urban and rural areas.
Section 5 further discusses mechanisms about the determinants of digital financial inclusion development, which varies between urban and rural areas.
Section 6 provides conclusions and implications.
Figure 1 shows the logic framework of this paper.
2. Literature Review
The benefits of linking digital finance and financial inclusion are attracting the attention of the public to the number of advantages that digital technology advances and financial inclusion have for the population. On the one hand, digital finance can assist financial inclusion to operate much more effectively. Through detailed content analysis, it is evident that digital financial literacy can further set the stage for financial inclusion development [
4]. Leong et al. shed light on how digital technology can improve the financial inclusion of previously excluded market segments [
5]. Larios-Hernandez have exemplified how both blockchain and digital finance technology have the entrepreneurial motivation to seek opportunities for financially excluded individuals [
6]. Information and Communication Technologies (ICT) could help to bridge the financial infrastructure gap by collaborating with the financial sector [
7]. Mobile money services are expected to accelerate financial inclusion under sustainable business models [
8]. However, in practice, greater use of digital finance may contribute to greater financial data inclusion rather than greater financial inclusion [
9]. The practices of digital-based FI incorporate the poor into global strategies of capital accumulation, which is particularly apt to shaping financialized subjectivities [
10]. On the other hand, digital financial inclusion may contribute to increasing economic efficiency for stakeholder groups. The expected benefits of digital financial inclusion can be fully realized by neglecting the cost of digital transactional platforms [
11]. There are long-term positive effects for banking performance in the innovation of digital financial inclusion, such as lower costs and fewer bank branches [
12]. A platform provided by digital finance facilitates increases in financial transactions, which subsequently generates higher tax revenue, benefiting governments that can then exert direct influence by orienting their activities [
13,
14]. Digital financial inclusion has diminished households’ ability to insure against transitory income shocks, partly because the online purchase may lead to the oversensitivity of consumption to income [
15]. Through investigation, Kemal found that digital payment enables female beneficiaries to receive social cash securely and conveniently [
16]. Development in digital financial inclusion also encourages a positive trend in foreign portfolio investment in the form of FDI [
17,
18]. Berger et al. examined the design and installation activities surrounding information communication technologies which, if implemented effectively, can provide quality financial services to the poor [
19]. The innovation process of digital finance has been significantly accelerated, and digital financial inclusion has been evolving at a very high speed. There is no doubt that digital financial inclusion is a good access point for the future in the field of formal financial services for excluded and underserved populations. An effective digital financial inclusion program should be appropriate in the population, and should be delivered sustainably and affordably.
Existing research on digital financial inclusion focuses on determinants of policies, financial tools, government conduct, and socio-demographic characteristics. Policies that push forward information infrastructure development and financial sector reform could stimulate financial inclusion by promoting digital finance [
7,
20,
21,
22,
23]. The digital revolution adds new layers to the material cultures of digital financial inclusion, offering the state new ways to expand the inclusion of the underprivileged [
24]. P2P lending as a tool to popularize digital financial inclusion may unintentionally exclude some consumer segments due to the competitive nature of P2P platforms [
21,
25]. If the government and the financial sector could collaborate better, digital financial inclusion would be better due to technology adoption channels [
26,
27]. The increment effect of financial support and technological progress transit from high to low smoothly with the changes in government expenditure [
28]. Digitizing government services and government cashless policies can help to promote digital financial inclusion in developing countries [
29,
30]. The rigid rules placed on digital finance have limited their ability and endangered commercial sustainability, thereby harming financial inclusion [
31]. The humble and light-touch regulatory attitude of fintech regulation would promote innovation for improving digital financial inclusion [
32]. The contextual facilitators, like price benefits, network externalities, trust, and habit, drive mobile payment usage intention, which holds the potential for financial inclusion in developing economies [
33]. There is a significant effect of socio-demographic characteristics on the use of digital financial services [
34]. These research trends suggest that some studies have studied the determinants of digital financial inclusion. However, there has been barely any research that has analyzed the discrepancies in the determinants of urban and rural areas.
Under the dual urban-rural economic structure, there are great divergences in developing digital financial inclusion between urban and rural areas. The theories of digital technology overrepresent urban experiences, producing a gap in understanding of rural areas [
35]. Zhang et al. found that digital financial inclusion is positively correlated with household income, and the positive effect in rural areas is larger than in urban areas, which indicates the benign distributive impact in rural China [
36]. Factors hindering the innovation of digital financial inclusion were the reconfiguration of rural life, the dematerialization of cash, local and regional politics, and gender relations [
37]. The disparity between the rural and urban dwellers is an issue as the use of digital financial services has not yet gained popularity, and most of the rural dwellers are not on the digital financial inclusion’s radar for assisting financial institutions’ increased customer reachability [
38]. Similarly, digital financial inclusion in Kenya primarily reaches wealthier urban inhabitants who are already financially served, rather than serving rural inhabitants who are poor and underserved [
39]. The chasm between urban-rural development leads to a better implementation of digital financial inclusion in urban areas, and less than expected implementation in rural areas. There are persistent and growing differences in data infrastructure quality between urban and rural areas [
40]. Digital financial inclusion should improve the rural groups uncovered by financial inclusion and deepen the usage depth of the covered groups. The economy cannot grow fast without proper implementation of digital financial inclusion in rural areas. Although the digital economy contributed to the sector of the rural economy, stubborn social, economic, and territorial digital divides continue to create challenges that put remote rural home-based micro-businesses at risk of being left behind [
41]. Moreover, there is a significant disparity among people of rural-urban areas in availing the services of the financial inclusion system in India, which has made great efforts to bring in underprivileged rural people to the mainstream financial system [
42]. Titus observed that the sustainability of financial inclusion to rural dwellers in Nigeria is keeping with the mainstream for economic growth in any country [
43]. The advancements in digital financial inclusion have a stabilizing impact on the banking industry, which is mainly driven by underserved adults who live in rural areas [
44]. However, although a great number of literature has studied the discrepancy in the development of digital financial inclusion between urban and rural areas, so far, relatively little is known about the real determinants of the discrepancy.
6. Conclusions and Implication
This study provided new evidence on determinants and mechanisms of digital financial inclusion, and further explored the discrepancy in urban and rural areas. By combing the data of Peking University Digital Financial Inclusion Index of China and China Statistical Yearbook (County Level), we performed empirical analyses on differences in the determinants and mechanisms of digital financial inclusion development between urban and rural areas. The empirical results indicated that these determinants and mechanisms differ in urban and rural areas, and that there is a financial development threshold in the determinants. Through using the fixed-effect model and panel threshold technique, the following conclusions can be drawn.
First, the determinants of digital financial inclusion are different in urban and rural areas, as follows: (1) The industrial economy can effectively promote digital financial inclusion development, which tends to impact urban areas more positively than rural areas. The urban industrial economy, which is relatively high, would advance digital financial inclusion to a higher level. At the same time, though the proportion of the industrial economy in rural areas is relatively low, its role in boosting digital financial inclusion is less than that of urban areas. (2) Governmental intervention has a catalytic role in advancing digital financial inclusion, which tended to be pronounced in urban areas. The more complete organizational setting in urban areas makes the implementation effect of the policy better. The vulnerable rural group who has little access to financial services is much larger and more complicated, which may explain why the effect of governmental intervention in digital financial inclusion is less than in urban areas. (3) Secondary education would boost the rural digital financial inclusion development, which may be absent in urban areas. This is more conducive to promoting rural residents’ access to formal credit who are educated to the secondary level. However, this effect is less evident in urban areas where higher education resources are more abundant. There also exist other determinants of digital financial inclusion development, where there are no observations available for some local and economic characteristics. There should be many determinants of digital financial inclusion, so that the research is worthy of further expansion.
Second, the mechanisms of the industrial economy and governmental intervention on digital financial inclusion development are different in urban and rural areas. On the one hand, industrial upgrading plays a mediating role in the relationship between the industrial economy and digital financial inclusion, which in rural areas is much weaker than in urban areas. This may be in correlation with the economic structure of urban and rural areas. The urban industrial economy is relatively concentrated, maximizes the social capital flow, and pools innovative resources through industrial upgrading. While a low proportion of the industry and slow process industrial upgrading in rural areas may lead to this mediating effect, it is not as good as that of urban areas. On the other hand, indirect finance plays a mediating role in the governmental intervention of urban digital financial inclusion, but this may be absent in rural areas. This might be related to the different requirements of people who have little access to finance in urban and rural areas. It is relatively good in urban financial infrastructure and economic development to play a guiding role in digital financial inclusion through the indirect financial system. If the governmental intervention in rural digital financial inclusion development focuses only on increasing loans, whose design mismatches the characteristics of agricultural production, it cannot exert its full function as a promoting effect. We believe that further investigation in mechanisms of determinants helped us do our work much better. In future research, we will study in-depth the mechanisms that may be overlooked in this paper.
Finally, there is a threshold effect in the financial development-digital financial inclusion determinants relationship in urban and rural areas. The determinants of rural digital financial inclusion are relatively stable under the influence of financial development, manifested in two ways. For one, the role of the industrial economy in promoting the digital financial inclusion development has been continuously improved with the financial development. The magnitude of the increase in rural areas is larger than urban areas. For another, the promotional effect of governmental intervention on digital financial inclusion development in urban areas is blunted with the development of finance, which displays a tendency of decreasing first and then increasing in rural areas. This phenomenon is likely associated with the following reasons. There are more constraints in the urban industrial economy than in the rural industrial economy. Therefore, after the financial development shifts, the changes in the impact of digital financial inclusion development are not as significant as that in rural areas. With the improvement of financial development, the vitality of the urban market has increased significantly, and the guidance of the government in digital financial inclusion is weakening. The government is likely to take more steps to give preferential policies and several subsidies to the poor in rural areas that may eliminate the adverse redistribution effects of high financial development in rural areas.
Knowing the determinants and mechanisms of digital financial inclusion and the discrepancy in urban and rural areas are important in ensuring the effectiveness of digital financial inclusion for growth. The conclusions of this paper can be used as a reference for governments to adjust policies of digital financial inclusion based on urban and rural status. Due to the difficulties with county-level data collection, several other factors we do not incorporate may be correlated with digital financial development. These potentially important issues can serve as future research topics. It is vital to consider potential limitations and other determinants that may affect the development of digital financial inclusion. Moreover, to make the investigation more persuasive, more research methods are needed in the further study, as there are likely not enough in this paper. Given that the determinants of digital financial inclusion development may have spatial interaction and a spillover effect, one interesting aspect would be to analyze the impact of digital financial inclusion development on surrounding counties. Further refinement of vulnerable population groups with little access to financial services is required to explore their discrepancy of digital financial inclusion. More research is needed to confirm the findings and further advance the research direction. For these issues, we leave these for future research.