Access to finance remains a major sticking point in many parts of Asia-Pacific. Across the region, the uneven nature of financial inclusion is quite stark – compare a Singapore to a Laos, for instance. With COVID-19, more than ever before, access to financial services became extremely necessary. Although new and emerging technologies have proliferated in the region, financial inclusion remains a distant dream for many.
We speak with Arup Chatterjee, principal financial sector specialist, sustainable development and climate change department at Asian Development Bank, about what plagues the region when it comes to financial inclusion, some solutions, and what some in the region are doing right.
Unravel: Has the pandemic furthered the need for greater financial inclusion?
Arup Chatterjee: COVID-19 has widened the global wealth gap and amplified the need for financial inclusion. Moreover, it has exposed a pandemic of inequality by adversely impacting vulnerable groups, including segments facing limited access to financial services and resources, such as women, low-wage workers, and micro-small and medium-sized enterprises (MSMEs) with limited access to financial services.
Among other things, the pandemic has highlighted the need for more financial products at an affordable and sustainable cost, improving financial education and digital literacy levels, enhancing the confidence of individuals in the use of credit, savings, insurance, remittance products, and the security of online transactions, that is, e-commerce, payment of taxes, and the like.
It has also increased the urgency for financial services providers to walk the talk on innovative and sustainable finance solutions to reduce climate change-related risk and create a positive social and environmental impact besides ensuring equitable and resilient recovery.
Unravel: In Asia-Pacific, what are the challenges that remain to financial inclusion and how can they be addressed?
Mr Chatterjee: The Asia-Pacific region shows diversity in every aspect: economic condition, demographics, cultural practice, infrastructure development, institutional framework, and most significantly, the development of the financial sector.
There are demand-side constraints (for example, know-your-customer (KYC) regulatory requirements, KYC infrastructure) that deter or restrict individuals from signing up for formal financial services. There are also supply-side constraints (for example, ease of entry, the feasibility of last-mile distribution) that restrict suppliers from providing products and services, thereby limiting market competition.
Some constraints relate to the design, delivery, or servicing of specific products for the target segments, such as payments and transfers (for example, enabling critical volume, removing friction), credit (for example, credit infrastructure, credit risk assessment), savings (for example, building savings awareness and culture, savings access and convenience), and insurance (for example, building product awareness and culture, delivery and servicing).
And there are regulatory constraints arising from the nature of regulatory oversight, coordination between different regulatory bodies, and regulators’ handling of emerging data governance and customer protection issues.
Every challenge comes with an opportunity. However, when it comes to finding the best strategy for eliminating financial exclusion, there does not appear to be a “one-size-fits-all” solution. Fintech will be at the heart of navigating the “new normal”. There is a significant opportunity for mobile operators and other financial services providers across Asia. It will be essential to focus on three main areas:
- Unlocking digital identity initiatives
- Creating more relevant products targeted to the underserved by leveraging smartphones’ enhanced user experience and customer education capabilities
- Bridging the gap between offline customers and online merchants to reap the benefit of e-commerce products and carrying out transactions
Unravel: Although fintechs are proliferating in the region, financial inclusion is a pipe dream for many here – especially those living at the base of the economic pyramid and for women. What are your thoughts?
Mr Chatterjee: For economic security and prosperity, fair and equitable access to financial services is a prerequisite. While the massive advancements in fintech are an urban reality, it is still a hassle for significant rural populations to access fintech offerings seamlessly. Intermittent internet networks, low speed, and frequent power failures are still some of the problems that prevail. Customers are reluctant to use online financial products due to many reasons, including lack of awareness, tech-savviness, and knowledge of required documentation. Additionally, a trust deficit exists owing to cybercrimes and leakage of KYC details of users to unknown parties.
Fintech promises to close the gender gap in access to financial services. It enhances access to income and assets, provides control over economic gains, and empowers them to make financial decisions. However, a sizeable “fintech gender gap” persists. In almost every country, 29% of men use ﬁntech products and services, and only 21% of women do.
Some of these social challenges are control of mobility and the gender roles imposed on women to limit their economic participation and restrict earning and saving opportunities. In contrast, others are market constraints, such as low digital literacy, low entrepreneurial skills or market information, and lack of personal collateral or credit history. Other structural gaps lie in the ownership levels of mobile handsets, identity documents, and internet access. Gender-disaggregated data can provide insights to develop tailor-made schemes and redress these biases and blind spots.
Unravel: How important is financial inclusion in consolidating the post-pandemic economic recovery in the region?
Mr Chatterjee: To address post-pandemic recovery, several governments are implementing policies to directly transfer money from their social programmes to the bank accounts of households and MSMEs. Financial inclusion and the development of payment systems have proved very important in making this money available to households and businesses in need. Governments should now consider steps to quickly incorporate the unbanked families into the banking system to facilitate money transfer to help those financially excluded to cope with any future crisis.
A significant threat to economic recovery is the profitability and survival of MSMEs who have limited access to formal credit. Moreover, most financial transactions are recorded through banks, for example, deposits or cash withdrawals, wage payments, card transactions, and loan applications and approvals. Banking data, therefore, constitutes the only source of real-time, high-frequency information on businesses’ economic activities during the crisis.
The greater the financial inclusion in a country, the more valuable banking data is to track the economic and financial impact of the policies to achieve a fair recovery from the pandemic, using innovative financing techniques for greater access to capital and introducing digital technology solutions to broaden access to other financial services.
Unravel: Can you tell us of countries that are doing better in this respect than others? Please give us some examples of what they are doing right and what others can learn from them.
Mr Chatterjee: Sustainability, gender inclusion and efficient use of digital technologies are opportunities for a post-COVID recovery and advancing financial inclusion. Some key policy lessons that have emerged from interventions aimed at driving access are:
Digital Financial Services have played a crucial role in safely preserving access to financial services during a crisis. Countries with advanced technology and payments infrastructure are well equipped to mitigate the pandemic’s financial inclusion risks. Malaysia benefited immensely from its established digital payment systems and infrastructure covering systems like Shared ATM Network, InterBank GIRO, Financial Process Exchange, and DuitNow. These systems have enabled an effective response to the pandemic by supporting seamless digital payment options, including contactless, QR codes, and other efficient digital payments for individuals and MSMEs. The Reserve Bank of Fiji introduced its National Payment System Act in 2020 to boost payments through digital solutions.
The crises has accelerated innovation to drive financial inclusion forward. The Bank of Papua New Guinea (PNG) engaged with the private-sector digital trust framework YuTru20 concerning digital identification to enable access to the formal financial system for people previously excluded.
Access to formal financial services improved the resilience of MSMEs, especially by enabling them to access government support and stimulus packages during crises. Additionally, Bank Negara Malaysia set up a financing facility to incentivise SMEs to automate processes and digitise operations through a digital portal in the interest of efficiency and productivity.
With increases in access, policy interventions can advance digital ecosystems. For example, the Bank of Thailand invested in national digital identity programmes and other digital infrastructure, such as interoperable payment systems. This digital infrastructure helped deliver targeted large-scale fiscal support packages to informal sector workers and vulnerable population segments such as women.
Enhancing financial education and digital financial literacy is critical for consumer protection and for increasing trust. Therefore, the Reserve Bank of Fiji launched extensive financial literacy campaigns targeting impacted communities, including farmers and tourism workers.
Private-public partnerships and combined efforts between regulators and service providers also played an essential role in policy effectiveness and dealing with the financial access challenges.
Enhanced security and resilience of the digital payments and technology infrastructure are needed to manage risks from rapid digitalisation. Therefore, the State Bank of Pakistan (SBP) introduced its Measures to Enhance Cyber Resilience amid COVID-19, advising financial institutions to enhance due diligence and implement robust cybersecurity measures to counter cyber risks.
Non-bank financial institutions serving the disadvantaged are more vulnerable to systemic risk during a crisis. Bangladesh Bank launched a refinancing scheme aimed at MSMEs and farmers. The funds were made available at subsidised rates to commercial banks to lend to microfinance institutions (MFIs). MFIs will, in turn, provide these funds at a concessionary rate to clients and are not permitted to impose any additional charges except fees for admission, passbooks, loan forms, and non-judicial purposes.
With more population segments facing hardships, policy impacts helped vulnerable groups such as MSMEs, unbanked or underbanked women, and youth. For example, Kazakhstan had youth employment schemes in their budgets and COVID-19 economic stimulus packages.
The COVID-19 crisis highlighted how vulnerable countries are to catastrophic events and the importance of financial inclusion to build resilience to sudden shocks and changes, such as the ongoing climate crisis. Additionally, to enhance resilience, policies need to be gender inclusive and aim at reducing inequities in access to finance. The Indian government is using digital payments to provide a minimal universal basic income per month to all eligible holders of a no-frills account – Pradhan Mantri Jan-Dhan Yojana.
Incorporating inclusive green finance policies is critical while designing the green interventions concerning COVID-19 recovery. For example, responses to COVID-19 could integrate medium- and long-term policies and initiatives to support green MSMEs or their resilience building. There should also be specific considerations for women-owned or -led MSMEs in these policies.
Unravel: Much has been written about new and evolving technologies such as blockchain in furthering financial inclusion in the region. Have they made a difference yet?
Mr Chatterjee: New technologies are reshaping fintech and the future of financial inclusion. With the unfolding opportunities that digitalisation of financial services offers, fintech, blockchain, artificial intelligence, digital assets, Bitcoin, and machine learning is now standard.
The velocity and magnitude of change in the crypto space—crypto assets, central bank digital currencies, DeFi, Web3, the metaverse—is unlike anything we’ve seen in our lifetimes.
Blockchain-enabled transactions for financial inclusion have attracted enormous attention due to the promise of several innovative features such as payments tracking, low-cost secure ledgers maintaining an account holder’s transactional history, and trustless systems where one can eliminate third-party intermediaries. Moreover, the ledger also serves as a credit reporting mechanism. Still, even more importantly, the system not only connects borrowers to lenders but also connects all borrowers and lenders on the same network.
The magic of blockchain is a result of smart contracts: computerised transaction protocols that execute the terms of each contract. In theory, it means lessening the need for intermediaries and reducing the overall cost of financial transactions. Given that microfinance’s social mission mainly correlates to its financial cost, the future application of blockchain technology is immense if it can deliver on its promise by translating this cost reduction into lower interest rates.
While such innovations may carry significant promise, the path to widespread adoption faces numerous roadblocks. The fears include that technology is becoming too complicated for many consumers, consumer protection concerns related to security, privacy and discrimination risks, and consumption of too much energy.
The decentralised character of technology has raised questions about what entity can be regulated. For example, the International Organization of Securities Commissions has warned that decentralised finance may remove intermediaries such as banks and brokers, and other closely regulated institutions. The unintended consequence is that it may result in a situation where investors are deprived of advice, and there is a lack of capital controls, and compliance measures.
Most of the emerging new services replicate more traditional financial services and activities but with weaker regulation and increased risks for investors. These technologies will require buy-in from not only consumers but also governments, regulators and conventional financial institutions during a time when global banks are de-risking.
Arup Chatterjee is Principal Financial Sector Specialist, Sustainable Development and Climate Change Department, Asian Development Bank. His current work involves financial, governance, risk management, and regulatory reforms across different industries. He has held stints with the Bank for International Settlements in Switzerland, and Insurance Regulatory and Development Authority of India.