As the Information and Communication Technology (ICT) revolution unfolds, it will indeed bring benefits, but it will also bring risks and challenges. There are plenty of reasons to be cautious, responsible, and measured in the use of digital financial services but that should not stop the potential for great progress. Privacy concerns, for example, are real, and there could be a healthy societal debate on what data is and is not appropriate to use and for what purposes. But there is no question that banks can use the data that is increasingly available to rethink the way they deliver financial services for those who have been excluded in the past.
Apart from the agent related risks, the typical profile of the financially excluded or underserved customers introduces various risks including operational risk, digital technology related risks, consumer-related risks and financial crimes risk. There have also been increasing incidents related to breaches of cybersecurity or cyberwarfare. Some of the key issues on the policymaking horizon are:
Product- and model-specific issues in digital financial inclusion: Combining two or more financial products can actually compound their individual developmental value, as it enables to design incentives for customers to use their money productively. However, it may also result in operational risk for both the providers and customers that make supervision and regulations more complicated.
Consumer protection issues: Disclosure and recourse becomes unclear in the event of customers’ liability owing to the fact that multiple parties are involved in service delivery.
Increased need for cross-sectoral coordination and communication: Coordination and communication is essential not only between regulators and supervisors at both countries and global level but also between other stakeholders such as telco firms, technology providers and fintech companies.
Customer identity: New opportunities emerge in the digital context vis-à-vis inclusion and AML/CFT gains but challenges also exist in the form of privacy and fraud risks. In order to come up with a win-win solution, meaningful privacy principles should be formulated at both national and global level.
Despite the huge potential and well-established promise of digital financial services to drive financial inclusion, multiple challenges remain in making these sustainable. Banks need to focus on developing compelling products that proliferate active customer adoption. As the unbanked pool reduces over the next few years, due to both physical as well as digital initiatives, the next wave of growth is expected to come by focusing on the underbanked. Banks may also need to invest in creating user readiness on several counts to benefit from the growth of this segment for:
– Supporting platforms for e-KYC.
– Supporting mobile platforms and analytics to understand customer segments and needs.
– Familiarizing customers to new environment through demo version of software on banks’ website. This will enable users to give suggestions for improvements, which can be incorporated in its later versions wherever possible.
– Innovating distribution models that go beyond the brick and mortar and manpower intensive operating models
– Introducing customer service models like multi-lingual MFS application interface, symbolic imageries, voice based interaction for low literacy segments and simplified service offerings.
– Enhancing quality of service that is aligned to target customer ecosystem and needs.
– Basing innovation needs on already existing technological initiatives that are scalable and capable of integration with emerging disruptive technologies and models such as Prepaid Instruments (PPI), Point of Sale (PoS), kiosks, mobiles, payment banks, etc.
A more targeted and sequenced policy response is required to help us get to where we want to go. Further, focusing on needs and unpacking people’s usage decisions can help to design discrete interventions for specific segments of the population. By understanding that it is not useful to push fully functional bank accounts, or productive credit, to parts of the population that are unlikely to need – and hence use – it, already takes a long way to knowing where to focus policy attention and resources.
Thinking about financial inclusion targets and measurement in this light opens up new possibilities. Exploring the potential of different data sources, including supply-side and transaction data will unlock these possibilities. Finding new metrics for financial inclusion is an ambitious agenda – but one which is within grasp if all the stakeholders are on the same page.
The steps to move the market in the preferred direction of digital financial inclusion requires innovative thinking and fearless experimentation on part of all the stakeholders: commercial banks, exchange companies, post offices, microfinance institutions and even Islamic finance industry. The following ICT model could prove to be helpful in scaling mobile financial inclusion.
DIGITIZATION READINESS MODEL
1- A high-quality regulatory and business environment is critical in order to fully leverage ICTs and generate impact.
2- Similarly, ICT readiness—as measured by ICT affordability, skills, and infrastructure — is a precondition to generating impact.
3- Fully leveraging ICTs requires a society-wide effort. All stakeholders — the government, the business sector, and the population at large — have a role to play.
4- ICT use should not be an end in itself. The impact that ICTs actually have on the economy and society is what ultimately matters.
5- The set of drivers — the environment, readiness, and use — interact, co-evolve, and reinforce each other to create greater impact. In turn, greater impact creates more incentives for countries to further improve their framework conditions, their readiness for ICTs, and their use of ICTs, thus creating a virtuous cycle. Conversely, weaknesses in any particular dimension are likely to hinder progress in other services.
6- Finally, the ICT readiness framework should provide clear policy guidance.
There is a need for players to adopt a holistic approach for going digital and integrating business strategy with all constituents of their operating model ecosystem to create a remarkable customer experience. Given the constraints on capital and internal capabilities, players may need to make strategic choices around the digital model as well as the transition path they may need to take, in the short to medium term.