The outcomes of harnessing digital technologies for financial inclusion will pay dividends for people at the bottom of the economic pyramid (BoEP) across the Asia-Pacific region. Innovative policy approaches combined with sharing of knowledge and evidence-based practice will give billions of excluded people new opportunities to participate in formal economic systems. As the potential benefits of digital finance are significant, the future of inclusion will depend greatly on how well governments manage the development of their digital economies. This is the key message from the ESCAP guidebook titled, “Policy Guidebook: Harnessing Digital Technology for Financial Inclusion in Asia and the Pacific”.
Financial inclusion is critical for the promotion of sustainable development and economic growth across Asia and the Pacific. Access to financial services can reduce poverty, enable entrepreneurship and business activity, and improve people’s overall wellbeing. For national economies, financial inclusion boosts growth and reduces income inequality. Given these enormous benefits, governments and private industry have made significant progress in improving access to formal financial services.
One of the most significant developments in finance over the last decade is technology driven innovation. This is unsurprising, given the digital transformation which was accelerated by the COVID-19 pandemic. The emergence of Digital Financial Services (DFS) has the potential to reach billions of new people at affordable prices. The delivery of traditional financial services using smartphones, tablets, and computers means people can conduct transactions remotely, enabling those excluded from formal financial systems to participate in the formal economy. Furthermore, the development of advanced biotechnology has narrowed the gap on ID theft of financial beneficiaries.
Such monumental outcomes mean DFS is here to stay, but governments and industry should be cautious in their optimism that DFS is the panacea for financial inclusion in the Asia-Pacific region. Policy interventions must consider people at the BoEP, and how DFS products, infrastructure, and programs might further entrench inequality.
Unintended consequences of poorly designed DFS can be avoided, especially through carefully considered and dynamic policy interventions. The existing literature tells us that for people who are poor, digital advancements are often constrained by both fundamental motivational issues (such as trust) and a lack of skills and capabilities in using new technologies. These constraints are often linked to broader social, economic, and cultural divisions. People unable to access mobile phones because of social, economic or spatial marginalisation may face new barriers if they are required to use a phone to access essential services. Simply making DFS more available will not lead to an increase in utilisation. Rather, physical infrastructure must be accompanied by social inclusion and social capital as well as digital literacy.
Across the Asia-Pacific region, governments play an important role in empowering the poor to participate in digital financial ecosystems, in enabling market-based solutions that specifically focus on the needs of the poor, and in ensuring a regulatory environment that protects the most vulnerable. There is already much that can be learned from Asia-Pacific countries about innovative approaches to financial inclusion powered by digital technologies.
For example, in Kyrgyzstan and China, national strategies act as centralised mechanisms that enable governments to set priorities and coordinate approaches to digital financial inclusion. In Kyrgyzstan, the strategy includes priorities that address a need for improved digital infrastructure as well as digital literacy skills. In China, the national strategy is being used to pivot from direct measures to market-based solutions.
These solutions can also be created through market participation by governments. In Bangladesh, bKash captured three quarters of the local market to become the second largest mobile money provider in the world. It did this by creating mobile money solutions that specifically targeted the poor, who traditionally were fearful of formal financial products. A public-private partnership between Bangladesh Bank and American-owned Money in Motion enabled both the creation and success of bKash, through an innovative pro-competition business model.
As the regulator of financial services and digital solutions, governments can innovate in how they approach regulatory matters. In Thailand, regulatory sandboxes coupled with development of interoperable systems enabled Fintech companies to test products within a specific set of rules and timeframe that takes into account the consequences of failure. In Papua New Guinea, the government is working in cooperation with the Government of Australia to develop blockchain technology solutions to promote financial inclusion to previously non-banked customers.
These kinds of policy mechanisms and public-private partnerships can have a very positive impact on the lives of the poor, and the technologies that can bring these policy mechanisms to life are plentiful; digital ID systems, simplified account opening processes, digitised Government-to-person payment systems, innovative products including digital wallets, and credit databases with alternate consumer data are all evidence-based options. As governments seek to harness technology to achieve financial inclusion, enhanced regional cooperation to identify and promote best practice will be critical to success.