Published on Voices

Well-regulated financial technology boosts inclusion, fights cyber crime

Luceildes Fernandes Maciel is a beneficiary of the Bolsa Família program in Brazil. © Sergio Amaral/Ministério do Desenvolvimento Social e Agrário

Financial technology — or FinTech — is changing the financial sector on a global scale. It is also enabling the expansion of financial services to low-income families who have been unable to afford or access them. The possibilities and impact are vast, as is the potential to improve lives in developing countries.

The financial sector is beginning to operate differently; there are new ways to collect, process, and use information, which is the main currency in this sector. A completely new set of players is entering the business. All areas of finance — including payments and infrastructure, consumer and SME credit, and insurance — are thus changing.

The transformation allowed by digital finance can come from increased competition and efficiency gains in the financial services industry with the potential of huge benefits to customers. The significant likely difference to the lives of the 2 billion adults globally who are still financially excluded does not come, however, without risks. These risks should be addressed so that FinTech’s benefits can be fully developed.

FinTech increases financial inclusion

The World Bank Group’s goal of universal financial access — with at least a transaction account for all adults by 2020 — is even more feasible with the acceleration of FinTech. In a world where 40% of the population has internet access and where the poorest 20% of households are more likely to have access to a mobile phone than to clean water and sanitation, the potential for a dramatic change in access and use of financial services by people in emerging markets and developing countries is very real, with a concrete impact on their welfare.

When people have access to financial services, they can overcome income shocks. They can invest in skills, their families’ health and new income streams. With adequate finance, they can create a brighter future and protect their lives. The following few examples highlight FinTech’s growth and impact in recent years:

  • Tanzania more than doubled the percentage of adults with transaction accounts, from 17.3% in 2011 to 39.8% in 2014, primarily through e-money services.
  • India’s focus on digital IDs has been instrumental in adding 200 million new bank accounts.
  • In Brazil, electronic payment cards have reduced costs of social transfers in the conditional cash transfer program, Bolsa Familia, to under 3% of total payments.
  • Alifinance, a subsidiary of Chinese e-commerce firm Alibaba, is serving tens of millions of customers, assigning credit scores and making micro-loan decisions to vendors almost instantly based on the applicants’ digital footprint.
Yet FinTech carries a big challenge for us to regulate and manage risk amid such fast and fundamental transformation, and to make sure that all countries benefit.

A new risk landscape

With FinTech, regulators must adapt to the fast-changing landscape and to a new class of entrants, while ensuring a level playing field, protecting consumers and privacy, and guarding against money laundering and the financing of terrorism. New questions arise, such as whether encrypted money transactions would promote financial inclusion while aiding anti-money laundering activities by reducing cash transactions and allowing greater traceability.  Mexico’s approach, of making the information required from account holders proportional to the size and frequency of their transactions, has proved an efficient way to supervise the financial system while keeping transaction costs low for low-risk clients.

Investors in trends like peer-to-peer lending must be fully aware of the risks, which are potentially in the billions of dollars by some authorities’ estimates. Indeed, there are differences between a company that lends using its own capital, and for which the main policy questions center on privacy issues, and the more traditional questions for companies that lend using third-party money, engaging in what could be seen as essential bank activities.

For consumers, enhanced access to new financial products poses risks like over-indebtedness, especially where financial education is limited. This is why the World Bank emphasizes financial education for low-income people as access to financial products expands.

At the macro level, we need to safeguard financial stability. Should a massive failure occur in these new products, the loss in public confidence could compromise years of financial sector development and quickly erode people’s trust in money and banking. The 2008 global crisis has shown that financial systems bring development gains when they perform well but result in major social costs when they do not. Authorities in countries experiencing rapid expansion in FinTech have been aware of this and often partner with large service providers, like telecoms in Kenya.

This new risk landscape requires new ways of thinking about regulation and financial supervision. This is particularly true with respect to cybersecurity risks, where banks and regulators have to depart from traditional supervision processes. The combination of supervisory functions with technology is also key to increase the detection of illicit money flows, fraud and theft. The imminent need to regulate FinTech effectively, as well as apply regulatory knowledge in news ways, is a stimulating challenge taken up by national and international institutions, often with the private sector.

The technological changes we’re seeing, together with regulatory support, will help accelerate billions more people to access finance to make their lives better and start tapping the benefits of development.


Joaquim Levy

Former Managing Director and World Bank Group Chief Financial Officer

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