6 September 2019
By Dr. Alfred Hannig
Over the past decade, financial inclusion became an important part of public policymaking in many countries and moved to the core of mainstream economic thinking. This led to the understanding that greater financial inclusion not only provides opportunities for the unbanked and the poor, but equally, that it is a catalyst for numerous international development goals. Most importantly, today, it is clear that inclusive and sustainable growth starts with financial inclusion.
The financial inclusion megatrend has been riding the wave of a technological revolution that has enabled a dramatic reduction in the costs of retail banking and allowed the entrance of new financial market players, such as mobile network operators, payment platforms and, recently, even social networks. It is important to note, however, that during this last decade, financial inclusion was traditionally regarded as a predominantly developing country concern.
Indeed, we have mainly seen policymakers and regulators in developing and emerging countries embrace the leapfrogging potential of new financial technologies and opt for innovative regulatory approaches, such as ‘test and learn’ and sandboxes, without compromising their monetary or financial stability mandate. Today, however, the previous patterns we are used to don’t work anymore.
We are increasingly witnessing a global convergence of policy and regulatory solutions in the financial inclusion and financial technology (FinTech) space. Such solutions are designed to respond to emerging major public policy challenges that resonate for both developing and developed countries alike and break down traditional distinctions between developed and developing country policy concerns.
The first dimension of global convergence refers to policy and regulatory solutions that respond to innovative FinTech and aim to effectively oversee increasingly digitized financial systems and services. The concerns of financial regulators on the risks of technology all around the world underline the convergence of such solutions. At AFI’s first Global Thought Leadership Conference held in Abidjan earlier this year, policymakers and regulators from both developed and developing countries highlighted the need to balance the promotion of digital channels to deliver more inclusion, with attention to the risks of new technologies. These risks include cybersecurity, systems interdependencies, consumer data management and effective consumer protection that reinforce trust to digital financial services. Recently, concerns on the risks of technology have been brought to the forefront by the entry of the Big Techs into financial services. These global multi-billion user platforms hold the promise of efficiency gains and their potential ability to facilitate greater financial inclusion even in unchartered territories, such as the broader issuance of cryptocurrencies backed by a reserve of assets. At the same time, such innovations raise critical regulatory concerns and structural challenges. While it is too early to make any conclusive statements, given the complexity of the regulatory challenges raised by these developments, it is already apparent that global policy coordination and learning will be crucial. Not only will this assist in the adoption of policy choices that keep these risks in check but also facilitate the developmental value that such platforms – when scaled – may hold for financial inclusion. Conversely, the emergence of fiat cryptocurrency may hold promise for addressing some of the efficiency barriers to financial inclusion and confront regulatory concerns on privately-owned cryptocurrencies .
The second dimension of global convergence relates to the recent shift of financial regulators towards the challenges of climate emergency. A climate emergency is recognized by standard setters and regulators as a financial stability risk warranting policy focus. Inclusive green finance is an emerging policy area where we are beginning to see evidence that financial inclusion can be an appropriate way to build resilience to the effects of climate change and financial services for low-income customers and micro, small and medium enterprises (MSMEs). Appropriate financial services to this segment can provide buffers against climate catastrophes. We are also becoming aware of the demand for building resilience and enabling mitigation at the bottom of the economic pyramid. For example, this can be done through appropriately designed insurance products that enhance MSMEs so that they can better cope with climate impacts. This approach is indeed unique and requires policy and regulatory guidance. Inclusive Green Finance goes hand-in-hand with other global initiatives, such as the Network for Greening the Financial System, which is arguing that “climate risks are a source of financial risk”. The common ground of both initiatives is the insight that financial regulators have a role to play in mitigating the daunting effects of global climate change.
Disproportionately excluded: women, the youth, older people, FDPs, disabled…
Finally, the third dimension of convergence addresses the role of financial inclusion in contributing to broader global aspirations, such as the Sustainable Development Goals. For segments disproportionately suffering from financial exclusion, more is needed to ensure not only access to formal finance but also usage and quality of services. The disproportionately excluded segment includes women, the youth, older people, forcibly displaced persons and disabled people.
We know that the financial inclusion gender gap at the global level and in developing economies has remained broadly unchanged over the last six years. This indicates that women’s account ownership is growing at a similar rate as men’s, therefore, not quickly enough to narrow the gap.
Apart from the digital financial inclusion of women, this year’s Global Policy Forum in Kigali puts special emphasis on the financial inclusion of the youth. The world is now home to more young adults than ever before. There are 1.8 billion of young people between the ages of 10 and 24 and approximately 90 percent of them live in developing countries.
According to the World Bank’s Global Findex data from 2017, 47 percent of young adults (aged 15-24) in developing countries are excluded from formal financial services, compared to 18 percent of young adults in high-income countries. Young people are also affected by low levels of financial capability. Both factors inhibit the possibilities for young people to benefit from long-term sustainable financial inclusion, especially at a time when the world is moving towards a platform economy.
Technology providers drive behavioral changes among the youth, whose views on data privacy in some markets may significantly differ from older generations. Many young people even emphasize the convenience they are experiencing as a result of digital transparency when a simple mouse click allows them to find exactly what they are looking for on digital platforms. These groups are growing up in an increasingly digitized environment and may value the convenience of digital platforms over the risks to their data privacy. And with continuing technological advances and improving skills, users themselves are beginning to shape the design and use of financial services. These emerging patterns of user behavior and demand for digital services among the youth segment create new challenges for most financial and consumer protection regulators. They also make the case for investing more into financial literacy for young people, as well as requiring innovation in how financial education is delivered to the young through new digital channels.
The objective of financial inclusion is not only to bring the unbanked into the financial system. We also need to avoid already banked populations falling out of the system over time. This year’s G20 Presidency of Japan has focused on the financial inclusion of older people. Today, 70 percent of the world’s older generation live in G20 countries. However, ageing in developing countries is happening much faster than in the developed world with 80 percent of older populations expected to live in low- and middle-income countries by 2050. Spurred by dramatic demographic transformations, the digital revolution is already affecting financial inclusion for older people. For example, in some Scandinavian countries you will find it difficult to pay for your coffee with cash. The Fukuoka Policy Priorities of the Japanese Presidency, therefore, rightly focus on the risks as well as the opportunities of technology and emphasize the need for policy responses that ensures the inclusion of all age groups.
The global convergence of issues and solutions under the financial inclusion agenda calls for the cross-pollination of ideas and for structuring mid- to long-term systematic peer engagement on converging topics that are pertinent to both developed and developing country regulators for advancing financial inclusion and sustaining the financial system. This would allow policymakers to stay abreast of the rapid and global digitization of the economy and to learn from and coordinate with each other. Grounded by the conclusions of the above-mentioned Global Thought Leadership gathering, our belief is that the expansion of global collaboration among developing and developed countries to address emerging risks and challenges and accelerate financial inclusion to the next level is an effective way to identify appropriate global solutions through learning to address local challenges. Ultimately, the availability of multi-facetted policy choices driven by an evolving financial ecosystem can make a significant contribution to ensuring that financial inclusion leaves no one behind.