Fintech and Financial Services: Delivering for development

The financial services industry around the world has been transformed by technology-enabled financial services—known as fintech.  This disruptive technology is reshaping financial products, business models, markets—and even the concept of money itself—offering new ways to collect and use data, create new investment assets, and extend innovative services. The ongoing digitization of financial services and money creates opportunities to build more inclusive and efficient financial services and promote economic development. To make it happen a recent World Bank report, Fintech and the Future of Finance, explores the dramatic changes in the financial services industry and underscores the need for policymakers and financial regulators to address new challenges and support responsible innovation. 

In developing economies, we can see tremendous progress in access to financial services.  There has been a spectacular increase in the share of adults using financial accounts, which rose by 30 percentage points between 2011 and 2021 to 71 percent, is partly attributable to fintech developments such as mobile money. The share of adults making or receiving digital payments grew to 57 percent in 2021 from 35 percent in 2014 according to the latest round of World Bank Findex data surveys.  

This is great news for economic growth and reducing inequality, poverty, and informality. For poor people and small businesses without access to financial services as basic as a bank account, fintech is opening a new world of opportunity.  Fintech offers the ability to send and receive payments securely and gain access to savings, credit, and insurance products that can help expand businesses, mitigate risks, and plan their futures.   

This revolution has especially benefitted women. Owning digital accounts boosts women’s autonomy and standing within the household, as they can directly access government payments and wages, rather than depend on male relatives for control of household finances.  Digital accounts have also given women greater access to credit, which has been shown to help poor people smooth fluctuations in income. Take the example of women who once had to rely on day loans from loan sharks when they needed credit. These loans had interest rates of between 10 and 20 percent per day – sometime even more. She can now benefit from fintech services which provide microloans at more competitive rates made possible by using alternative data and data analytics to assess her credit as long as proper safeguards are in place.  

The fintech revolution is also reducing the costs of remittance services, a lifeline for families in developing countries who are dependent on financial help from relatives working abroad. The World Bank Remittances Price Worldwide data shows that the average price for sending $200 is around 6 percent across all types of providers, whereas the price to send remittances through mobile money services is under 4 percent. This means more money for families to spend on basic needs, such as food, or health care and education.  

This reduction in cost is possible because fintech is making the global financial system more efficient by overcoming geographic, physical, and social barriers and by making information more widely available to consumers and providers. The costs of serving poor people and small businesses, even in remote rural corners, has fallen sharply.  

New Players and Business Models Are Here 

Technology and connectivity allow new players to unbundle financial products and services and compete with traditional banks, lenders, and insurance companies. Telecom companies, for example, are rapidly expanding payments services. E-commerce platforms are making loans to merchants selling through the platform. Start-ups are offering software and regulatory compliance services that enable virtually any company in any industry to offer customers credit cards and transaction accounts. Payments, lending, and insurance products are being embedded into other products and services—from search engines to social media platforms, from shopping websites to manufacturers with business-to-business operations.     

Policymakers globally have embraced fintech development with the goal of promoting innovation and growth of the digital economy.  Governments and businesses relied on technology—especially mobile money and electronic payments—to maintain financial services and business activity during COVID-19 pandemic shutdowns. For example, e-commerce and social media platforms in many parts of the world, enabled small retailers to sell online, enabling them to continue operating amidst unprecedented mobility restrictions. 

By leveraging data, analytics, and new business models such as embedded finance, digital financial services can play a big role in maintaining active credit markets to support a resilient and inclusive recovery.  

Increased benefits, increased risks 

However, fintech also brings new risks for consumers, providers, and the broader financial system. Digitalization has created challenges to competition, financial stability, integrity, consumer and investor protection, and data privacy.  New areas of market concentration could impede future competition. Digital lending outside credit reporting systems may result in over-indebtedness among poorer consumers. Unregulated or under-regulated fintech and big tech firms may abuse their access to consumer data and market power. Crypto-assets, which have been shown to be very volatile, are marketed to investors and customers who may not fully understand the significant risks in these markets.  

The growing risks of technology and new business models could overshadow the gains that fintech provides if regulators and supervisors don’t fundamentally change the way they oversee the financial system. They need to shift to an approach more focused on risk and type of service, rather than on type of institution. “Same risk, same activity, same regulatory approach” is a good motto for financial regulators. In emerging market and developing economies, regulators and supervisors need to improve monitoring tools and calibrate the perimeter of firms under supervision.  They need structured frameworks to identify fintech companies large enough to undermine the health of the financial system and plan for how to deal with potential failures of such firms. 

As we think about strengthening global economic growth during a time of overlapping challenges, delivering financial services to the 1.4 billion adults around the world without bank accounts and scores of under-served MSMEs is a powerful solution for supporting entrepreneurial activity and building resilience. IFC—the private sector arm of the World Bank Group—has been investing in a diverse group of private-sector fintech providers for over a decade, promoting the growth of responsible inclusive finance providers that serve tens of millions of customers across emerging markets.

Building on the work of the Bali Fintech Agenda, the World Bank is helping governments to adapt legal, regulatory, and supervisory frameworks, modernize financial infrastructures and payment systems, and ensure high standards of consumer and investor protection. It is essential for policymakers to ensure that supervisory and regulatory frameworks are aligned with policy objectives for innovation, inclusion, competition, integrity, and stability, with keen attention to consumer protection. For fintech and financial services to contribute to resilient and inclusive development, we need to strike the right balance between encouraging innovation and managing risks.