Digitalisation for financial inclusion

Inadequate access to financial services is a key development challenge across much of Asia. But as the region’s economies continue to grow and the mobile phone becomes near-ubiquitous, the continent has seen rapid strides made in the area of digitalisation of financial services.

We speak with Rosy Khanna, who heads the financial institutions practice in Asia for the International Finance Corporation, a member of the World Bank Group that’s focused on private-sector development in less developed countries, about why this is important, what it means for financial inclusion and the role of tech in remittances.

Unravel: Is the digitalisation of financial services a largely urban phenomenon in Asia, or is it really benefitting the unbanked (largely in rural areas)?

Rosy Khanna: It’s not just an urban phenomenon. The growth and adoption of mobile payments and lending among underbanked populations in rural areas is probably the greatest example to date of the impact that digitalisation has had on financial services. The number of registered mobile money accounts surpassed one billion in 2019. Many of those were opened by people who have entered the financial system for the first time without having to visit a bank branch, which are often few and far between in rural areas. Mobile wallets are already a major source of day-to-day discretionary spending payments worldwide and have emerged as the basic bank account for most people in emerging markets – and will continue to do so over the next 5 to 10 years, as will complementary digital products and services.

However, there are regulatory and digital infrastructure constraints in emerging markets that need to be addressed to unlock the full potential of digital. For example, digital enablers, such as digital identity and other digital infrastructure needed to push connectivity to rural and underserved areas. At IFC we recognise this, and we’re working with our Upstream teams to address these constraints to create an enabling environment that supports the growth of digital financial services, particularly to underserved and excluded segments of populations.

For example, in Bangladesh, IFC invested in bKash, a mobile wallet and payments services provider. Consumers and businesses can use mobile phones to deposit, withdraw, send and receive money. Since our investment, bKash has reached over 30 million users. WeLab, another IFC portfolio company, specialises in building credit scores by analysing mobile phone data and usage patterns. In a relatively short time span, WeLab has grown its user base to almost 40 million people. WeLab also helps traditional banks reach populations that were previously “unscored”, and therefore did not have access to formal credit lines.

Another example of technology broadening financial inclusion in emerging markets is national identity systems, which allow banks to leverage biometric ID programmes to verify customers at ATMs or service counters. For instance, India’s Aadhaar system provides real-time verification of identities using a fingerprint scan, iris scan or digital face print to enable the direct transfer of government subsidies and unemployment benefits to the unbanked.

In summary, the adoption of digital financial services leads to greater financial inclusion in both urban and rural areas, when paired with the right value propositions, and with the increasing access to mobile phones (almost 50% of people in Asia own a mobile phone, according to the World Bank). Urban users are often a critical part of persuading and educating their family, friends and staff in rural areas, and in the informal sector, to embrace digital financial services for their convenience.

Financial inclusion also demonstrates sizable economic benefits for emerging economies and strong upside for banks, and technological advances are dramatically reducing the cost of serving unbanked and underbanked segments of populations, according to research by EY. The scope of the opportunity correlates to the massive number of people and businesses that remain excluded from traditional banking systems: over 200 million in East Asia and the Pacific and more than 360 million in South Asia, according to the World Bank.

Unravel: In what areas are we witnessing the most transformational changes?

Ms Khanna: There are three key areas where we are seeing the most change in the financial sector. The first is digital transformation. We advise financial institutions in emerging markets on their digital transformation, and four key focus areas are emerging from our engagements with clients:

1. Digital enablers: how do financial institutions provide the best, most relevant digital solutions to their clients while maintaining sustainable growth.
2. Process automation: there is a real drive to internally automate to deliver better efficiency and cost savings, but in a way that also allows for the integration of evolving innovations such as detailed data analytics. Data-driven decision making is the desired goal.
3. Partnerships: financial institutions that may have been reluctant to forge partnerships with fintechs and FMCGs in the past are now aggressively pursuing these to enable access to a larger, more inclusive ecosystem.
4. Innovation: financial institutions are more prepared to innovate, but in a way that is comfortable for them, for their customers and for shareholders.

The second is user interface/ user experience (UI/UX) designs. Customer journeys and customer-centric strategies are taking centre stage. Over the last decade or so, technology companies such as Amazon, Google and Facebook have redefined customer expectations, offering services at our fingertips at any time. This is now increasingly being applied to the financial services industry, and we see financial institutions responding to this need and applying newer technologies to UI/ UX designs.

The third is risk management. The COVID-19 pandemic has led to a sharper focus on risk management and the use of technology and data in building better and more resilient risk management models and systems. In response to pandemic-related moratoriums, for example, institutions have had to build internal systems to monitor and account for every changing lending scenario.

Exhibit 1: Top banking priorities post pandemic and into 2021

Exhibit 2: Importance of digital banking transformation strategies

Unravel: How is digitalisation impacting remittances, a key feature in many Asian economies?

Ms Khanna: International remittances are an important source of income for the poor in many emerging economies in Asia and beyond. Remittance flows to low and middle-income countries are projected at $470 billion this year, according to the World Bank. The average global cost to send these funds in the form of cash is 6.9%. A fully digital transaction drops the cost to 3.3%.

Since the onset of the crisis, remittances have been falling sharply as major remittance-sending countries experienced lockdowns, hitting key service industries where migrants are employed. It is therefore more important than ever to reduce fees and increase funds available for remittance recipients, and digital enables this. For governments issuing emergency funds to citizens and businesses, digital payments can lower the cost to serve, strengthen accountability, improve the ability to track where government funds are spent and eventually evaluate the impact of interventions. Leakage, due to corruption and theft, can be reduced through digital payments so that intended beneficiaries receive the full value of funds.

Digital payments have increased during the pandemic, particularly consumer and merchant payments, which in many emerging markets is closely related to cross border remittances. These are costly through traditional payment networks, partly because of the process they must follow. Digitalising them using blockchain can make it 3 to 3.5 times cheaper to transfer than a traditional transaction using the Society for Worldwide Interbank Financial Telecommunication (SWIFT). For example, a customer making a remittance payment of $20,000 would incur an average fee of 7.1%, as calculated by the World Bank. That compares with an estimated 2%-3% via a blockchain-based remittance provider.

Currently, there is a challenge to regional payment interoperability, both domestically and internationally. However, we are seeing both governments and the private sector in Asia creating solutions to overcome this challenge. In Singapore, for example, the government and SWIFT are using blockchain technology to create trusted interoperability and exchanges of electronic trade documents across digital trade platforms from different countries. This plan is expected to provide more convenient and cost-effective cross-border digital trade for 11,000 SWIFT information technology users in more than 200 countries and regions around the world.

In the private sector, we are also seeing cross-border payment collaboration and partnership between regional mobile payment operators, particularly in finding solutions that enable SMEs and consumers in Southeast Asia to enjoy cheaper and near-instant cross-border mobile payments interoperability. For example, Liquid Group, a regional mobile payment services company based in Singapore, is spearheading the adoption of large-scale cross-border QR payments on its XNAP Network with a series of strategic partnerships across several markets in the region. In Vietnam, the recent partnership between Liquid Group and PayME, a mobile payment service from HSBC, enables SMEs from PayME’s extensive network to accept multiple QR payment apps from Liquid Group and its issuer partners across the region.