The digital revolution and its potential to transform access and use of financial products and services by the unserved and underserved is currently a focus for financial markets, the development sector and governments. A multitude of financial technology or fintech companies continue to emerge, all actively developing a wide range of technology-driven financial products and services in the retail finance sector. Much of this activity is being driven by significant recent advances in technology, including the rapid growth in mobile phone ownership and internet connection which provide new channels to reach the underbanked. Despite the increasing number of fintechs entering the market and the availability of digital financial services (DFS) continuing to grow at rapid rates across the region, why has the expansion and adoption of DFS among those at the base of the economy remained slow? As part of the Asia-Pacific Financial Inclusion Forum in 2020, an APEC policy initiative, FDC examined the challenges associated with providing DFS to the poor and microenterprises including the viability of DFS providers to service the poor and the extent by which the unbanked recognise DFS as a service which could meet their needs. Recognising the important role of governments in addressing these challenges, FDC has developed a series of recommendations for policymakers and regulators to assist their efforts to enhance the role of DFS as a driving force for financial inclusion at the base of the economy. These recommendations, including supporting case studies, are explained in detail in FDC’s recent publication: Enabling shared prosperity through inclusive finance: leaving no one behind in an age of disruption. This report was prepared for APEC’s Finance Ministers and other senior officials to support regional efforts to expand the reach of financial services to the underserved. A summary of the recommendations is as follows.
Recommendation #1. Support the development of a DFS ecosystem which offers greater utility to the unbanked and the base of the economy by:
- De-risking digital finance products and platforms extended to the poor through stakeholder coordination and developing strategies in areas such as privacy/data security, fraud, know-your-client (KYC) etc., emphasising protection of the poor and vulnerable.
- Enhancing literacy, including functional numeracy, financial and digital literacy, as well as general awareness of the benefits of digital financial products and services, especially for women and young people.
- Promoting interoperability and encouraging financial service providers to share data and connect their platforms, enabling providers to design appropriate products and services which meet the unique needs of those at the base of the economy.
- Modernising G2P payment systems beyond digitising transfers to allow recipients to choose where they open their accounts (other than government) and enabling competition between DFS service providers.
- Encouraging effective partnerships by incentivising DFS providers to work with Non Bank Financial Institutions (NBFIs), which often have more experience and more direct relationships with the poor.
Recommendation #2. Support the business case of DFS providers which target and serve the base of the economy by:
- Supporting increased levels of interoperability in the DFS payments infrastructure to foster greater economies of scale and scope, and competition between providers.
- Providing financial incentives such as concessional loans, subsidies, guarantees or pricing guidelines to support the improvement of agent profitability for DFS providers.
- Supporting the development of digital identification schemes to enable customers who lack formal identification to satisfy KYC requirements more efficiently and access digitally enabled financial products and services.
- Collaborating with the private sector and donor institutions to crowd-in and test viable DFS solutions via regulatory sandboxes, innovation hubs or accelerators.
Recommendation #3. Prioritise the development of public infrastructure and supervision frameworks to enhance DFS benefits to the base of the economy by:
- Evaluating current infrastructure and prioritising investments in core ICT systems including the internet, and in rural and remote communities.
- Providing clear guidance on which institutions or set of institutions are responsible for protecting the poor from digital risk.
- Ensuring that local policies, strategies and regulations for the development of the digital economy recognise relevant gender issues and pursuing reforms which reduce gender bias or inequality.
- Establishing guidelines/requirements and incentives for DFS providers to establish cash in/cash out services in rural areas, including regulations to encourage the expansion of agent networks, i.e. minimum rural coverage requirements.
- Supporting interoperability by developing clear rules and governance structures for operators and ensuring that these systems are not only technologically functional, but also safe and reliable, with appropriate regulation and supervision.