BCEAO “Central Banks in a Changing World” symposium – Digitization and financial inclusion: What levers for increased use of financial services? – Remarks by AFI’s Executive Director Dr Alfred Hannig

Governor Jean-Claude Kassi BROU

Governors, distinguish guests

During my remarks, I would like to touch upon five points:

1. Changing world: What are we at the end of 2022?
2. Technology and global convergence
3. Central Banks in a Changing World
4. Digitization and Financial Inclusion: What levers?
5. Conclusion and way forward

1. Changing world

We are in the middle of a global environment of ‘polycrisis, ’ which shall continue to affect our operating environment in the coming years. The term polycrisis, a term recently coined by Adam Tooze of Columbia Univeristy,characterizes a situation where disparate shocks interact in a way that the whole is worse than the sum of its parts.

The world economy is expected to remain stressed, with inflationary pressures and slow growth in most regions. Heightened geo-political tensions, food and energy crises, climate change and migration of people within and across countries will present risks and challenges for policymakers who are increasingly challenged by managing increasing number of conflicting macro objectives.

On top of that, there is also the risk that we will be seeing more protectionism, segregation, isolationism, and ultimately more inequality, all of which have far reaching implications in undermining an inclusive society, once again hitting hard the most vulnerable: women, young people, the forcibly displaced, the elderly, and people with disabilities.

This leads me to the role of technology.

2. Technology and global convergence

Technology is ever evolving, and new financial service providers are coming to the fore. Empirical evidence clearly shows that digitization drives the use of financial services and enhances financial inclusion. Technology is therefore a main driver in pursuing the goal of inclusivity.

In the future, financial services will continue to be shaped by technology, probably even more than in the past, and faster. While there are the above-mentioned obvious benefits, risks of technology, are emerging, and with digitization moving forward the need to work towards frameworks that are responsible and inclusive at a time.

We do observe global convergence around challenges of risks of technology and policy and regulatory solutions to manage and mitigate these risks. Old patterns such as North/South do not work anymore.  Knowledge is spread in pockets all over the world, and everyone can indeed learn from everyone. This refers to the highly active peer learning among AFI members, but also explicitly includes the emerging dialogue among developed and developing countries.

One might conclude from that that the key goals of financial inclusion are not so relevant for advanced economies with a well-developed, stable and competitive banking sector. But financial inclusion covers a larger agenda, crucial for advanced economies as well.

And, it has been widely recognized in the Global North that while catching up, the developing countries are at anadvantage.  They can leapfrog the current business models or technologies that are slowly becoming obsolete and thus reach the cutting edge earlier than advanced economies, all.

3. Central Banks in a changing world (coming back to the theme of this symposium):

Is only the world changing? Are Central Banks also changing?

More and more financial regulators around the world, and in particular AFI members conceive financial inclusion as one of the key pillars of financial stability, which in turn is a prerequisite for sustainable and inclusive growth.

As some of you in this audience will remember, at the recent AFI Global Policy Forum in Jordan, we witnessed an exciting panel discussion on what we had coined “contemporary financial regulation”. On that final  panel of the Global Policy Forum, Central Bank Governors from emerging and developed economies provided thought leadership on the future of financial regulation and central banking. The key question that emerged was whether financial inclusion should be included in the mandate of central banks.

The relevant observation from that panel for our discussion here today is that the mandate and responsibilities of financial regulators are rapidly evolving with the entry of new players into the financial sector and technological innovations that raise new risks but also opportunities for greater efficiency and inclusion. Technology has brought to light new players in financial sector and these new actors are having stronger roles in the life of the poor, the underserved, the unserved.

An interesting takeaway from that discussion was that opposite views of the orthodox and the less orthodox camps considerably narrowed down towards the end of the conversation (“more orthodox and less orthodox”). What clearly came out of the discussion is that Central Banks should use all the available tools to promote economic growth. Central Banks can do many things within their mandate without having to necessarily change their governing laws. In other words, mandates don’t have to necessarily change, but a lot can be done within the given mandates. With that in mind, it was stated that issues like social wellbeing, (of which financial inclusion is a key element), are too important for a Central Bank not to address.

To follow up on this conclusion, let me now turn to the main point of this discussion here:  Digitization and financial inclusion: What levers for increased use of financial services?

4. Digitization and Financial Inclusion: What levers?

I will highlight some key element for discussion through the following points:

1. Role of digital financial services (DFS) in advancing financial inclusion
2. Role of financial regulators in creating an enabling environment and building robust DFS infrastructures

• Policies measures in addressing consumer protection related issues

1. Actions to prevent and/or reduce the risks of exclusion
2. Focus on Inclusive Financial Technology (inclusive FinTech)

1. Role of digital financial services (DFS) in advancing financial inclusion

According to the World Bank Global Findex:

• 76% of adults globally and 71% of adults in developing countries had an account in 2021 at a regulated institution.
• From 2017 to 2021, the average rate of account ownership in developing economies increased by 8%, from 63% of adults to 71% of adults. In Sub-Saharan Africa, this expansion largely stems from the adoption of mobile money.
• In many countries like Cote d’Ivoire, Senegal, Guinea, Ghana, Zambia, Tanzania, Kenya, mobile money account for people aged 15+ is above account opened at banks or other financial institutions.

Mobile money has become an important enabler of financial inclusion in Sub-Saharan Africa—especially for women—as a driver of account ownership and of account usage through mobile payments, saving, and borrowing. Specific use cases such as merchant payments, bill payments, international remittances, digital credit etc. have witnessed rapid growth in the past few years, driving the adoption and usage of mobile money/digital financial services. According to GSMA, merchant payments nearly doubled in 2021 (compared to 2020), reaching an average of USD 5.5 billion in transaction per month. Similarly, international remittances sent and received via mobile money grew by 48% in 2021, reaching USD 16 billion.

While many developed countries are still exploring mobile money and payment systems, Africa is leading the way by leapfrogging when it comes to adoption of innovative and inclusive digital financial services.

This success is fueled by several trends, including increasing smartphone ownership, declining internet costs, and expanded network coverage, as well as a young, fast-growing population. Additionally, yourselves the regulators – have played a key role in creating an enabling regulatory ecosystem for digital financial services and FinTech to flourish and advance financial inclusion for the poor and vulnerable segments of the society.

With the growing evidence of the role of digital financial services in advancing financial inclusion, what role should the financial regulator play?

1. Role of financial regulators in creating an enabling environment and building robust DFS infrastructures

• Spearhead the development of a “DFS Vision Document” (developed through a consultative process) and coordinate the implementation of such documents by the various stakeholders in the ecosystem.
• Implement policies to encourage the building of robust retail payments and financial systems (widely available ATMs, merchant payment points, Cash-in Cash out (agents) networks, online/offline payment points, etc).
• Implement policies to encourage the building of robust retail payments and financial systems (widely available ATMs, merchant payment points, Cash-in Cash out (agents) networks, online/offline payment points, etc).
• Adopt clear and transparent approaches to provide space for all relevant market players, especially new actors like FinTechs, to offer digital services and products in a safe environment
• Promote efficiency and transparency in payments, as well as programs that encourage the use of electronic forms of payment
• Champion innovation through establishing innovation hubs, regulatory sandboxes etc.

iii. Implement policies in addressing consumer protection related issues

The uptake and usage of Digital Financial Services go with increasing consumer protection risks. Hence there is urgent need for regulators to:

• Identify, define and incorporate relevant DFS legal and regulatory provisions into existing consumer protection frameworks
• Define a clear and harmonized governance framework for financial consumer protection
• Facilitate a level playing field within the DFS industry to promote healthy competition. Where possible, develop a DFS industrywide competition framework.
• Mandate (or encourage) DFS providers to have internal policies on data privacy and data protection on disclosure and consent of customers
• Develop a cybersecurity framework with DFS sector-specific provisions
• Mandate DFS providers to have internal cybersecurity policies, processes, and incident response plan
• Encourage the development of an industry Code of Conduct (covering the principles of integrity, transparency, fairness, confidentiality, respect to the client, avoiding discrimination, greater attention towards vulnerable people such as women or people with disabilities, etc.)
• Set responsible lending practices: risks related to digital lending is increasing in Africa. AFI, under the guidance of AfPI, has developed a “Regional Policy Framework for Responsible Digital Credit” to guide policymakers in developing appropriate legal and regulatory frameworks and mitigate the potential risks of providing digital credit
• Facilitate progressive/simplified customer due diligence – tiered Know Your-Customer (KYC) models
• Establish strategies and interventions to promote the knowledge of DFS, awareness of the risks and its prevention, consumer rights, responsible complaint and redress procedures
• Encourage DFS providers to incorporate digital financial literacy and capability in product advertisements
• Promote inter-agency coordination in the application of enforcement measures within the DFS sector to avoid duplication, and inconsistency in interventions.

1. Take appropriate actions to prevent and/or reduce the risks of exclusion

• Implement strategies and regulatory approaches to reduce the gender gap in financial inclusion using technology.
• Facilitate innovative solutions, new business models, and cross-sector collaborations in delivering financial services to women, youth, older persons, forcibly displaced persons (FDPs), and other vulnerable segments of the population.
• Integrate women and youth into the National Financial Inclusion Strategy
• Implement sex-disaggregated and age-disaggregated data collection to inform and track efforts to achieve women and youth financial inclusion and support evidence-based policymaking.

1. Promote inclusive financial technology (FinTech): FinTech, through their rapid innovations, can improve financial inclusion by broadening financial access “at scale” and improving the affordability and quality of financial services through “efficiency”.

• Focus on the deliberate adoption of technological innovations to create, promote, and operate inclusive financial services, products, processes, applications, use cases, and business models that accelerate purposeful access and responsible usage of financial services.”
• Promote technological advancements that serve the distinct needs of the underserved, including cultural differences, gender, income patterns, and the level of digital literacy.
• Show openness towards improving or developing new approaches to regulation and policymaking, along with the use of technology, to balance the benefits of financial services innovation, financial stability, and consumer protection mandates
• Adopt and implement fintech legislation in a timely manner

5. Conclusion and way forward

Key principles regarding regulatory approaches towards digitization:

• Responsibility
• Inclusivity
• Flexibility

For increased use of financial services through digitization, financial regulators should:

• Show clear vision and coordinate the implementations of appropriate policies to create space for all players
• Be agile in policy formulation
• Develop and implement policies to protect consumers
• Take actions to create resilient and inclusive financial sector.

These require collaboration at various levels. Financial regulators cannot afford to be isolated. More than ever, Central Banks depend on knowledge sharing.

I am sure you will agree that collaboration, peer-learning, and capacity building are important on this journey to advancing digital financial inclusion. This is an integral part of AFI’s global agenda. Over the years, we have initiated strategic platforms to advance peer learning between members (member trainings and Joint Learning Programs), between the Private and public sectors (Private Public Dialogue) as well as between developed and developing economies.

We have made significant progress in our inclusive FinTech journey through the establishment of the Developing-Developed Dialogue (3D) platform under the aegis of the Sochi Accord on Inclusive Fintech. The 3D Platform acts as a neutral peer learning forum on topics of mutual convergence and interest among AFI member countries and developed country partners such as digital financial services and inclusive fintech. Indeed, there is a wealth of knowledge and experiences that can be shared across these platforms. As the adage goes, if you want to go far, you go with others. I encourage you to explore the opportunities for collaboration and peer learning in this regard.

AFI, the policy leadership alliance owned and led by central banks and financial regulatory institutions, is ready to guide, lead and promote to-peer learning, knowledge exchange and peer transformation.

Thank you