The Missing Link: Effective Market Conduct for Financial Inclusion Technologies

I recall a conversation in the wake of the global financial crisis, at the end of 2008. We had just begun to disseminate the idea to create a global financial inclusion peer learning network among potential partners and stakeholders. At the time, a representative from a multilateral organization bluntly asked me: How can you promote financial inclusion at a point in time when the world is suffering from a crisis that is a result of too much inclusion?

The outbreak of the crisis became the tipping point for the Alliance for Financial Inclusion (AFI) to be created, and this week we are in Sochi, Russia to celebrate the organization's 10th Anniversary.

It was precisely the financial crisis that taught us that the developed world does not have all the answers. At the same time, the incredible innovations coming out of the developing world have shown that there are rich resources of financial knowledge and lessons waiting to be shared. And in the aftermath of the crisis, financial inclusion has moved to the mainstream debate on economic and financial development. Greater financial inclusion has been recognized as a key enabler of most of the ambitious Sustainable Development Goals (SDGs) set by the United Nations. The G-20 has recognized financial inclusion as a crucial component of growth, and standard-setting bodies have started to incorporate issues relating to financial inclusion in the international regulatory framework.

In terms of impact, the world has seen tremendous progress in the financial inclusion space. According to the Global Findex, the standardized measurement of the demand-side of financial inclusion, from 2011 to 2017 adult's tenure of accounts at a financial institution have increased from 51 percent to 69 percent of the total 5.2 billion adults. The increase allowed approximately 1.2 billion new adults to be included, 700 million from 2011 to 2014, and 515 million adults from 2014 to 2017.

However, these numbers indicate that in the last three years, progress has also begun to slow down. A closer look at the 515 million adults who were included during this period, reveals that almost 40 percent of the new accounts have been opened in India, and according to the Global Findex, almost half of these accounts are dormant.

In AFI, we believe that if usage and quality of financial inclusion are not seriously addressed at earlier stages of the financial inclusion journey, dropping off from financial access is a risk that can again lead to financial exclusion. This is also another lesson from the financial crisis in 2008, when over indebtedness, created by fast and easy access to financial services, led to the deterioration of credit portfolios and ultimately to low-income families losing their economic base and falling into poverty. This is why we also argue that the so-called last mile is harder than the first stretch of the trip, and why we see the danger of too much optimism and preference for simple and quick solutions — attractive under the current conditions of an increasingly crowded financial inclusion space. It takes time and considerable investment to achieve and maintain sustainable, and high-quality financial inclusion.

Fast emerging financial technologies like artificial intelligence, machine learning, blockchain technology, and big data have led to the introduction of new business models and transformational solutions for enhanced customer value, convenience and experience. However, the current global debate on financial technology is changing. Some countries, particularly in Europe, where preferences for holding cash are traditionally higher, are deliberately turning against cashless transactions and arguing that the public control over customer data in payments systems needs to be strengthened. Apart from the most recent, politically motivated attacks on global tech giants, companies are also coming under increasing pressure from the public as the recent Facebook data scandal has shown. The knowledge and expertise in artificial intelligence, as well as the access to a wide range of consumer data, facilitate the entry of large tech companies into the financial sector. In light of the potential threads of cybercrime and risks stemming from market concentrations, experts from the World Economic Forum (WEF) recently warned that the widespread use of artificial intelligence could trigger another financial crisis. The risks of technology are now beginning to dominate the public discourse, especially in countries that have suffered from the last financial crisis. These countries are also the main stakeholders of the global standard setting bodies.

The debate on risks of technology could potentially have detrimental effects on global financial inclusion. The relevance of these risks should strongly encourage us to direct our attention towards quality, and usage as key components for sustaining financial inclusion gains, which are largely a result of digital innovations, and to continue moving forward towards full financial inclusion.

With the convergence towards universal financial access in emerging and developing countries, issues that have now become more relevant are related to demand-side interventions. Growing demand-side databases will enable us to understand consumers better, particularly in markets where consumers are unsophisticated, possess low financial literacy and lack of experience with advanced technological solutions.

Regulators are dealing with technology-related risks such as cybersecurity, DFS agent fraud, data privacy, and issues around digitally delivered credit. As a result, regulators are increasingly turning their attention to reinforcing responsible lending, and enhancing their market conduct regulatory frameworks to address these challenges. Resolving these issues through effective regulatory approaches that apply tested policy solutions should also be key in maintaining high levels of financial inclusion and ensuring financial stability. Within the AFI network, the focus within consumer protection correspondingly evolved from basic consumer protection issues such as disclosure & transparency, to a more specific focus on the implications of digitization of financial services for low-income consumers, exemplified by the recent guideline on digitally delivered credit, among others.

At AFI, our cherished peer-to-peer model incorporates an intricate and holistic approach that weaves the important policy dimensions while promoting quality or sustainable financial inclusion. We believe that the development of holistic frameworks gives regulators better understanding of new risks, especially now when financial technologies are taking center stage. Ultimately, the enhanced focus on demand-side issues will help to build the defense against the potential backlash to financial inclusion.

We are now looking forward to the discussions with policymakers, regulators and global financial inclusion stakeholders at AFI's 10th Anniversary in Sochi this week where we will enhance our knowledge base on FinTech for Financial Inclusion. Our discussions are not oblivious with the signals pointing at the stickiness of usage and quality issues. With the experience and wisdom that we have gathered through balanced policy interventions, while avoiding the rushing for necessary access that lacks consideration of usage and quality enablers, we are confident that we can identify the appropriate steps forward and reap the benefits from digital innovation.