FinTech: What is the Promise for Financial Inclusion?

Around the world, emerging financial technology companies (FinTechs) are disrupting the finance industry. They affect how we save, borrow, make payments and transfer money, both domestically and internationally. They can better address customer needs through enhanced accessibility, convenience and tailored products.

This impressive success of FinTechs also holds promise for financial inclusion in developing and emerging economies. To get a fuller picture, we must examine the varied bundle of outcomes, including risks, that may emanate from this potential.

The conventional roles of regulators are being challenged. As they are not traditionally in direct contact with emerging technological innovations, the sheer speed and complexity of financial digitization can trigger cautious initial reactions.

Learning is therefore key. Regulators in developed economies e,g., the UK Financial Credit Authority (FCA) have established regulatory sandbox environments, as have an increasing number of central banks and financial regulators from emerging economies such as Malaysia, Mexico, and Thailand. This facilitates learning among regulators and the industry, and enables isolated, risk-neutral pilot-testing of regulatory responses to FinTech.

Cooperation is key to reap the full benefits of FinTech, including benefits for regulators. As Christine Lagarde, the IMF Managing Director, noted in 2017, dialogue is needed among experienced regulators, ones new to FinTech, investors, policymakers, FinTechs themselves and governments.

For further understanding, decade-old research refers us to additive and transformative models of technology-enabled financial service delivery. Additive solutions made the mobile phone merely another channel to an existing bank account. With transformative models, the financial product provided through the mobile phone was targeted at the unbanked.

Many current FinTech innovations are additive in the above sense. At AFI, we go further and ask: which are potentially transformative? Which can successfully address access and usage for the two billion people who are still completely outside the formal financial system?

An essential first step is to build a knowledge base with information on experience with transformative FinTech. This way, policymakers and regulators can educate themselves about solutions that make a real difference for the unbanked.

With FinTech for financial inclusion, the regulatory landscape becomes more complex. New risks will arise, including unfair lending practices and increased systemic vulnerabilities due to cybersecurity threats. With fast-moving FinTechs interlinked with thriving e-commerce, household debt could grow, bringing demand faster into regulatory focus.

If effectively supervised, FinTech can strengthen financial stability and integrity by broadening the deposit base. Digital financial services are an important channel for this. Likewise — as has been recognized by the Financial Action Task Force (FATF) — financial inclusion can reduce the volume of unseen transactions taking place in the gray economy, such as money laundering and the financing of terrorists.

This landscape means that financial regulators will need to balance their traditional regulatory oversight with the development of highly competitive markets, while enabling transformative FinTech. With more actors, come more roles, competencies and appropriate funding among in-country implementers, development partners, agencies and projects, industry groupings, private-sector players, consulting companies, research institutions and funders.

Support for policymakers and regulators to create conducive regulatory frameworks and supervisory mechanisms for FinTechs is widely available in an increasingly overcrowded financial inclusion space. Amidst all this, who does what in the future becomes more contested than ever before.

The additional resources and inputs are, in principle, welcome. Equally important are rationalization and coordination of support activities to preserve the neutrality of regulatory approaches. This will also help prevent confusion among potential beneficiaries, duplication of efforts and overlapping work streams.

Some key elements are emerging with regard to regulatory balance:

1. Creating opportunities to build a knowledge repository for financial regulators, focusing on transformative FinTech.
2. Enabling test-and-learn approaches on the country level. 
3. Collaborating with global Standard Setting Bodies and experts and providing additional regulatory guidance originating from practical examples on risk proportionality and peer learning efforts among regulators. 
4. Facilitating peer learning, knowledge sharing and capacity building to upscale awareness in the regulatory space. This can be done by implementing key policy enablers to reinforce digital financial services. Knowledge sharing should include lessons on effective approaches for balancing financial innovations with other key public policies of financial stability and financial inclusion.
5. Incorporating FinTech into National Financial Inclusion Strategies with facilitated collaboration among regulators. 
6. Enhancing Public Private Dialogue (PPD) and global dialogue with the private sector, technology companies, researchers, development partners, and regulators from developed and developing economies to enhance mutual understanding of FinTech innovations’ risk profiles, their role in financial inclusion and their contribution to solutions to strengthen compliance to international standards.

This preliminary agenda is not exhaustive, nor does it offer a universally-applicable solution. It can, instead, be seen as one way to reduce complexity and make FinTech truly transformative yet still tangible for regulators who see financial inclusion as part of their stability mandate.