As World Bank staff working on financial inclusion, our days revolve around a critical question: what are the most promising ways to improve access to and usage of appropriate financial products for the underserved? A big part of our job is to track the wide range of experiences and learnings from around the world and incorporate them into our work advising policymakers and regulators. We thought it would be useful to share our current thinking, distilled into a list of the top eight approaches to accelerate financial inclusion. This list is from a policymaker perspective, and takes into account the fact that policymakers play a multi-faceted role in financial inclusion, balancing promotion, protection and stability.
First, two caveats. This is subjective list, drawn from our experience. We expect reasonable people to disagree with some of our choices and that’s OK – in fact, debate is welcome.
Second, country context plays a critical role in formulating appropriate approaches to financial inclusion. This list is meant as a general guide for what is impactful in most countries, most of the time.
- Foster a diversity of financial institutions. Inclusive financial sectors have many types of financial institutions beyond commercial banks – postal banks, microfinance institutions, credit cooperatives – that apply various business models and operate in different geographic regions to serve distinct customer segments. A legal and regulatory framework that allows for entry of diverse institutions and applies proportionate regulation and supervision tailored to their respective levels of risk is critical to reaching customers that aren’t fully served by commercial banks. Policies that promote a healthy, competitive environment and level playing field across all providers are also necessary.
- Facilitate the use of innovative technologies and entry of technology-driven, non-traditional institutions. We’ve both spent a lot of time in China recently, and no country better illustrates what can be achieved by innovative approaches driven by non-traditional players such as Alibaba (an e-commerce company) and Tencent (a social networking platform). In many countries, innovative providers are leveraging technology, existing customer networks, infrastructure, and big data to lower transaction costs and deliver financial products well-suited to the needs of low-income consumers. As noted in the G20 High-Level Principles for Digital Financial Inclusion, a clear legal and regulatory framework is needed to allow for new technologies and players, while also addressing the risks that arise from innovation. Close monitoring of market developments through a ‘test and learn’ regulatory approach can be employed to address this concern.
- Expand agent-based banking and other cost-effective delivery channels. Relying solely on brick-and-mortar branches has long been recognized as a key obstacle to financial inclusion. Regulatory approaches can help overcome this obstacle by allowing for the use of low-cost delivery channels such as local retail shops serving as agents for financial service providers and “lite” branches. Such approaches can cost-effectively expand the physical presence of financial service providers while providing meaningful benefits to those reached.
- Invest in supervision and leverage technology to optimize limited resources. A financial sector that is not well-supervised from a prudential or market conduct point of view is unlikely to be inclusive. Indeed, implementing many items on this list requires effective supervision. Yet we rarely come across a country where capacity constraints are not a perennial issue, meaning a risk-based approach to supervision is often required. Supervisors in Austria, Rwanda, and elsewhere are also turning to technology to help automate reporting and conduct supervisory analyses, an approach often referred to as “Regtech.”
- Implement risk-based, tiered AML/CFT requirements. According to the World Bank’s Global Findex, over 300 million adults worldwide cite excessive documentation as a major obstacle to opening an account. A flexible, risk-based AML/CFT regime, combined with a comprehensive, accessible national identification scheme (for example, allowing for digital identification or using biometrics) are critical to overcome this obstacle. Simplifying documentation requirements or adding exceptions for certain applicants (e.g. low-income) or products (e.g. small-value, low-risk transactions) can let the “good guys” in while still keeping the “bad guys” out.
- Encourage the development of low-cost, innovative financial products. The underserved face unique obstacles and have unique financial needs. Policymakers should establish regulatory frameworks that encourage the development of appropriate financial products, such as basic bank accounts and microinsurance, that address the needs of underserved, low-income customers. Customer-centric product design that overcomes behavioral barriers and increases utility should also be promoted.
- Strengthen financial infrastructure. Information asymmetries and lack of collateral are often obstacles to the underserved accessing financial services. Expanding credit reporting systems and collateral registries (including for movables) and improving the efficiency and accessibility of retail payments systems can increase access to financial services. The government plays a critical role in strengthening financial infrastructure, which serves as the underlying foundation to support financial inclusion, as the World Bank-CPMI Payments Aspects of Financial Inclusion (PAFI) report emphasized.
- Protect consumers by establishing rules for disclosure, fair treatment, and recourse. It is critical that consumers be protected from potential abuse and are treated fairly by providers. The World Bank’s Good Practices for Financial Consumer Protection emphasizes the need for providers to present customers with clear information on the terms and conditions of products via a standardized form in order to facilitate comparison shopping, help consumers make informed financial decisions, and avoid risks such as overindebtedness. Authorities should also put in place regulations that restrict abusive business practices and make recourse mechanisms easily available.
It is therefore an encouraging sign that more than 40 countries to date – including many of those critical to achieving Universal Financial Access - have developed national financial inclusion strategies (NFIS) to identify reforms linked to policy objectives, with implementation supported by multi-stakeholder coordination structures and robust monitoring and evaluation (M&E) systems.
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