By: Ilian Vasco
With the understanding that current accounts should enable (i) end users to meet most of their payment needs, (ii) securely store some value and (iii) serve as a gateway to access new financial services, all to achieve greater financial inclusion, the Committee on Payments and Market Infrastructures and the World Bank designed in 2016 a guide composed of 7 principles governed by the premise: "financial inclusion starts with payments".
That guide described a framework for overcoming the difficulties encountered in accessing and using current accounts. It relied on a set of fundamentals necessary for the operation of payment systems and catalytic pillars, the latter being responsible for directing access to and use of these systems.
Since then, the Committee and the World Bank have continued to issue new tools and recommendations to achieve this goal. Along the way, technological innovation has paved the way for new forms of financial inclusion and positively impacted payment systems in particular. For this reason, the Committee and the World Bank felt it necessary and timely to produce this new report, which reviews fintech developments focused on payments, discusses how they can help achieve the goal of financial inclusion, and offers additional guidance by applying the principles of its first report to current fintech initiatives. Below is a summary of what the report details:
Relevant fintech developments
They start by looking at initiatives that impact on payments, describing their implementation in new products, services and channels. The section covers the analysis of technologies underpinning new products y new ways of access to the financial system.
It is important to clarify that these technologies are not limited to enabling novel forms of access to new products, but can be coupled with existing products in various combinations. And they can even initialise payments for new products through traditional accounts and payment instruments.
The graph encompasses many of the products and services that are easily identifiable to readers of this article: blockchain technology, facial unlocking of devices, swipe cards, multifunctional applications such as WeChat, neural network modelling, real-time analytics, etc. However, the opposite objective would be achieved if these developments accentuate the gap between financially included and financially excluded people. It should not be forgotten that the objective is to reach end users that the traditional financial system does not cover. How can we then ensure that fintech developments do not have the opposite effect? The report reviews this question in terms of the catalytic pillars.
Opportunities and challenges of fintech developments to boost access to and use of current accounts.
Account Design and Payment ProductsFor this pillar, the speed and availability generated by instant payment services, which have made it possible to execute transactions at any time, any day and almost in real time, stand out.
Another advantage is the ability to send payment requests as a reminder, giving users better control of their finances by knowing immediately the availability of funds, as well as meeting the needs of the financially underserved by offering them a close substitute for cash. For businesses, it reduces the risk of reversing transactions, so merchants can release goods or services faster and have higher margins by reducing merchant service costs. Lastly, it outlines the non-reliance on the entire infrastructure that accompanies traditional payment systems.
Of course, speed is an attraction for fraudsters. Mitigation strategies include imposing thresholds for individual transactions, periods between enrolling a new beneficiary and being able to send money to them, as well as using big data and artificial intelligence to detect fraudulent transactions in real time.
The paper takes a similar route to that of instant payments to demonstrate the potential of open banking to increase the utility of current accounts; the simplification of customer due diligence processes through digital identification; and the use of digital identification to increase the value of current accounts.[1]1]; and the use of digital currencies issued by central banks as a basic means of payments similar to cash but with tax advantages; and finally super applications covering a wide range of payment needs in the daily lives of their users (e.g. transport tickets, hotel bookings, restaurants, appointments and payments).
Note that for many of the above benefits, such as super apps, users' access to the internet and a smartphone is indispensable, so the availability and affordability of information and communication technology plays a key role. This is how the pillars and foundations are articulated.
Readily available access points: This section looks at how new products and services are reducing the demand for cash and physical access points. Most banks are migrating towards offering digital services while reducing their physical presence; some are even completely virtual and have no physical branches at all.
A paradoxical aspect of this issue is the disuse of cash as a result of digitalisation. Apparently this is what is intended to be achieved, but there is a risk that cash will be totally displaced and the elderly, people with disabilities, undocumented migrants, people living in poverty or rural communities will be excluded from many services where they will no longer accept cash.
The potential of e-wallets in combination with contactless technologies to expand the number of acceptance points at lower costs is also mentioned.
Financial Education: A clear concern here is that people's digital skills do not always keep pace with innovation, which would create a gap in terms of access. On the other hand, the use of artificial intelligence tools and machine Learning can help in making users aware of the conditions, risks and advantages of each product, through personalised advice, including voice and guidance on best financial practices.
Leveraging recurrent flows for large-volume payments: taking the considerable flow of international remittances as an example, fintech developments can contribute significantly to financial inclusion, as it will link both senders and recipients.
The synergy that could be achieved between transport systems and e-wallets in combination with contactless technologies is also discussed. Considerable amounts of the population access public transport systems, fintech developments aim to include them financially. However, the Committee recognises that the impact on financial inclusion is unclear.
Final considerations
The report concludes by addressing the role of the 3 basic fundamentals of harnessing fintech opportunities and their challenges. This section delves into the role of international authorities, regulators and governments, where a sense of cooperation is encouraged, as well as the need for regulation and investment, all to support private sector initiatives and control many of the emerging risks.
Finally, it ends by integrating in a practical way the 7 principles issued in 2016 (pillars and foundations) under a perspective specific to the digital era.
[1] In this regard, we recommend reading the recent FATF Guidance on the use of digital identification for customer due diligence.
