Fintech and financial services: delivering for development

The financial industry worldwide 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 vehicles and expand 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 achieve that, a recent report from the World Bank – Fintech and the Future of Finance – explores the dramatic changes in the financial industry and emphasizes the need for policymakers and financial regulators to meet new challenges and support responsible innovation.

In developing economies, we can see enormous progress in terms of access to financial services. There has been a spectacular increase in the proportion of adults using financial accounts, rising by 30 percentage points between 2011 and 2021 to 71 per cent, which can be attributed in part 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 the World Bank’s Findex data surveys.

This is good news for economic growth and the reduction of inequality, poverty and informality. For poor people and small businesses without access to financial services as basic as a bank account, fintech opens up a new world of possibilities.

Fintech offers the ability to securely send and receive payments and access savings, credit and insurance products that can help grow businesses, reduce risk and plan for their future.

This revolution has particularly benefited women. Owning digital accounts increases women’s autonomy and position in the household, as they have direct access to government payments and wages, rather than depending 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 out fluctuations in income. Take the example of women who once had to rely on payday loans from loan sharks when they needed credit. These loans had an interest rate of between 10 and 20 percent per day – sometimes even more.

She can now take advantage of fintech services that provide microloans at more competitive rates, made possible by using alternative data and data analytics to assess her credit as long as the right safeguards are in place.

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

This cost reduction is possible because fintech makes the global financial system more efficient by overcoming geographical, physical and social barriers and by making information more accessible to consumers and suppliers. The cost 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 entrants to differentiate financial products and services and compete with traditional banks, lenders and insurance companies. Telecom companies, for example, are rapidly expanding their payment services. E-commerce platforms provide loans to sellers who sell through the platform.

Startups offer compliance software and services that enable virtually any company in any industry to offer customers credit cards and transaction accounts. Payments, lending and insurance products are being integrated into other products and services – from search engines to social media platforms, from shopping websites to business-to-business manufacturers.

Politicians globally have embraced fintech development with the aim of promoting innovation and growth in the digital economy. Governments and businesses relied on technology – especially mobile money and electronic payments – to maintain financial services and business activity during the Covid-19 pandemic.

For example, e-commerce and social media platforms in many parts of the world enabled small retailers to sell online, allowing them to continue operating amid unprecedented mobility restrictions.

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

INCREASED PERFORMANCE, INCREASED RISK

However, fintech also brings new risks to consumers, suppliers and the wider financial system. Digitization has created challenges for competition, financial stability, integrity, consumer and investor protection and privacy.

New areas of market concentration may hinder future competition. Digital lending outside credit reporting systems can lead to over-indebtedness among poorer consumers.

Unregulated or under-regulated fintech and large technology firms can abuse access to consumer data and market power. Crypto-assets, which have proven to be highly 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 may overshadow the benefits of fintech if regulators and supervisors do not fundamentally change the way they oversee the financial system. They need to shift to an approach that is 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 markets 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 how to deal with potential failures of such firms.

As we think about boosting global economic growth at a time of overlapping challenges, delivering financial services to the 1.4 billion unbanked adults around the world and many underserved MSMEs is a powerful solution to support entrepreneurial activity and build resilience.

It is important for policymakers to ensure that supervisory and regulatory frameworks are aligned with policy goals of innovation, inclusion, competition, integrity and stability, with a strong focus on consumer protection.

For fintech and financial services to contribute to robust and inclusive development, we must find the right balance between encouraging innovation and managing risk.

Mari Elka Pangestu is the World Bank’s Executive Director for Development Policy and Partnerships.