The Seismic Implications of Digital Financial Inclusion

In countries around the world, a digital revolution is bringing formal finance to hundreds of millions of mostly poor households and businesses that currently operate in the costly, and often uncertain, informal cash economy. To help global organizations, such as the G20 Global Partnership for Financial Inclusion (GPFI), and the financial sector standard-setting bodies grasp both the opportunities and evolving risks of digital finance, CGAP collaborated with digital providers and leading policy makers in five countries to capture the essentials in a 10 minute video.

New digital transactional platforms like bKash in Bangladesh, which has reached nearly a quarter of the country’s adult population of over 160 million in just over two years, offer convenient and vastly less expensive ways to make payments and transfer funds – and, what’s newest, a safer place to store value for hundreds of millions of households that current rely on the proverbial mattress. These services accommodate the meager and unpredictable cash flows of the poor, allowing them to transact affordably in tiny amounts.

Digital transactional platforms yield further benefits for financial inclusion by providing both a means to pay for additional financial services, such as interest-bearing savings, credit, insurance, and even investment products. They also generate data that financial providers can mine to target base-of-the-pyramid customers with tailored services and “digitally underwrite” financial products matched to their repayment capacity and specific financial needs.

The dramatic rate at which poor consumers are taking up products like the one-month, flat fee, M-Shwari consumer loans offered over the M-Pesa digital transactional platform in Kenya or the life insurance products marketed to purchasers of Tigo pre-paid airtime packages in Ghana to increase customer loyalty speaks volumes about demand. One million customers had taken an M-Shwari loan within 41 days of the product’s launch by the dominant Kenyan mobile network operator Safaricom and its joint venture partner Commercial Bank of Africa, catapulting the bank from a modestly sized corporate lender to one the largest retail players in Kenyan banking. Tigo’s Family Care life insurance product doubled the insurance market in Ghana in its first year of operation. With the advent of ever cheaper smartphones, the pace of change will only accelerate.

Policy makers, regulators, and supervisors in countries like these where digital financial inclusion expands exponentially see the financial inclusion promise clearly. Yet they pause at the fast changing risk picture. Digital financial inclusion is introducing new market participants and allocating roles and risks – both novel and well known – among them and the legacy players in new and sometimes unexpected ways.

Raising awareness of these dynamics was a primary motivation for the Second GPFI Conference on Standard-Setting Bodies and Financial Inclusion: Standard Setting in the Changing Landscape of Digital Financial Inclusion, hosted by the Financial Stability Institute at the Bank for International Settlements (BIS) in Basel, Switzerland, 30–31 October 2014. The video, which opened the event, sought to demonstrate to representatives of the GPFI and the six participating financial sector standard-setting bodies – the Basel Committee for Banking Supervision, the Committee on Payments and Market Infrastructures, the Financial Action Task Force, the International Association of Deposit Insurers, the International Association of Insurance Supervisors, and the International Organization of Securities Commissions – that they share a common interest in understanding the seismic implications of digital financial inclusion, including both the promise and the changing risks.

In welcoming participants to the groundbreaking gathering, Jaime Caruana, General Manager of the BIS was clear on this point: “The implications for standard-setting bodies of technology-enabled connectivity among retail customers are exciting, yet also cross-cutting. The discussions today and tomorrow are likely to highlight that banking and retail payments can no longer be seen as separate domains – nor are they the exclusive province of traditional players such as universal banks. The often specially tailored products in savings, credit, insurance and investment – even micro-pensions – that are already reaching low-income households via innovative digital transactional platforms pose new questions, and even challenges, to all the standard setters in the room.”