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How to overcome the three obstacles to developing inclusive digital financial services

How to beat the 3 challenges to building inclusive digital financial services

Capital Markets and Banking

The COVID-19 epidemic has hastened practically every industry’s digital transition. Lockdowns, social alienation, and remote working have raised the need for digital payments, banking, and other financial services in most nations, allowing people and businesses to better manage their finances. As a result, in the quest of inclusive and fair economic recovery and growth, the demand for accessible and inexpensive digital financial solutions has never been greater. Significant hurdles remain in the development of inclusive digital finance as digital business becomes the norm.

The Forum has co-hosted a series of regional roundtables focusing on establishing partnerships that promote inclusive digital financial services, in conjunction with the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School, during the past several months. Each of the four roundtables, which covered Sub-Saharan Africa, the Middle East and North Africa, Latin America and the Caribbean, and Asia-Pacific, brought together leaders from fintech firms, incumbent financial institutions, central banks, financial regulators, and the development community to discuss the key challenges and opportunities.

Each location – and, to be honest, each jurisdiction – has its own set of circumstances that influence the development of digital financial services. Nonetheless, these roundtable conversations indicated that many stakeholders confront very similar problems in scaling up inclusive services in their particular nations and areas. It was also demonstrated that partnership-based solutions including both public and private sector players have the capacity to address many of these issues. Three of the most common issues, as well as some potential solutions, were discussed:

1. How should fintech companies deal with the regulatory environment?

Historically, financial regulatory frameworks have favored major financial firms with well-established and well-understood business strategies. Most fintechs want to operate in a safe and compliant manner, yet new financial-service providers frequently struggle to comprehend, much alone comply with, applicable rules, both inside and between countries. While many financial regulators have adopted tools such as innovation offices and regulatory sandboxes in recent years, businesses still confront a patchwork of rules from numerous agencies, as well as substantial uncertainty about how regulation will evolve in the future. Furthermore, fintechs must grow worldwide because to the relatively small domestic markets in many countries; nevertheless, the issue of comprehending and satisfying regulatory requirements is frequently magnified when operating in numerous jurisdictions.

So, what are the options? Each regional roundtable emphasized the need of open conversation and frank interchange between regulators and fintechs in tackling these issues. Regulators get a greater understanding of the technology and business models that drive innovation, while fintechs gain a better understanding of particular regulatory approaches and requirements, as well as the chance to explore how existing regulatory frameworks may impose an unfair burden. Regular communication isn’t revolutionary, but it may be incredibly useful in fostering innovator-regulator partnerships that inform evidence-based regulation. Many roundtable participants cited national or regional regulator-fintech forums as a low-cost, high-impact approach, which could be held in person or online.

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2. How can financial and digital literacy be promoted?

Despite progress in financial inclusion and the fast use of smartphones and other technology, financial and digital literacy remain impediments to the widespread and long-term use of digital financial services. Inadequate financial literacy, a long-standing issue throughout the world, has been exacerbated by a lack of digital literacy, with new consumer hazards emerging as a result of the increased usage of digital financial intermediaries, channels, and instruments. Participants from across the world discovered that a mix of tactics and interventions can assist provide the educational foundation needed to better safeguard consumers and investors, as well as enabling a more inclusive and long-term adoption of digital financial services.

“Top-down” approaches, which typically involve the central bank, regulators, educational authorities, financial institutions, fintechs, and the media; and “bottom-up” approaches, which generally focus on individual digital financial services providers embedding educational tools in the design and deployment of their products and services. Effective partnerships were seen as critical to success in both cases, including working with a diverse group of stakeholders from the public and private sectors, leveraging trusted media, and closely collaborating with civil society organizations to create relevant, engaging, and interactive educational content and experiences that address pressing gaps in financial and digital literacy.

3. How can digital financial infrastructure be developed?

The requirement for a more fit-for-purpose digital infrastructure to support the scaleable supply of digital financial services by both fintechs and banking incumbents was perhaps the most basic difficulty noted across geographies. Digital financial infrastructure encompasses critical technology components such as mobile and broadband networks for connection, as well as digital identification, data standards, and protocols for client onboarding, transaction processing, and privacy protection.

The development of digital economy infrastructure is a cross-industry, societal necessity that necessitates a concerted effort by governments, technology suppliers, infrastructure builders, and stakeholder organizations within the digital financial ecosystem. There have been substantial efforts in this area, notably the Forum’s EDISON Alliance, which fosters public-private collaborations around digital inclusion. However, forming collaborative, creative collaborations aimed at establishing national, regional, and global digital financial infrastructure may accomplish a lot more.

These difficulties reflect the dynamic and complicated ecology in which digital financial services operate. It is vital to approach problems from an ecosystem perspective, incorporating all major stakeholder groups from both the public and private sectors, in order to determine what sorts of partnership-based solutions will best solve them.

The Forum and the CCAF will continue to organize working groups resulting from this series of regional roundtables in the next year in order to both expand and deepen current collaboration models. A vibrant and sustainable digital financial services industry is required for an inclusive economic recovery, and this needs all of us to do our role in forming new collaborations to address common concerns.