BY DR SOHA MAAD
Introduction
This article explores the horizon of digital financial inclusion in Arab banks. It presents a comprehensive overview of financial inclusion and its historical evolution towards digital financial inclusion, highlighting the essential components of digital financial inclusion and the entailed benefits and risks, the related regulations and needed supervision, the importance, and business models. The article reviews technologies to enhance digital financial inclusion. The article also shed lights on statistics about the digital divide in the Arab world and draws attention to the importance of bridging the digital divide gap and enhancing digital financial inclusion. The article references views and perspectives from the International Telecommunication Unit (ITU), the world bank, the G20, the G20 Global Partnership for Financial Inclusion (GPFI), as well as high level professional and academic resources about digital financial inclusion such as finextra, the International Banker, business insider and the Arab Barometer. The article concludes with efforts to enhance digital financial inclusion in Arab banks and bridge the digital divide gap.
FINANCIAL INCLUSION
In Wikipedia, financial inclusion is defined as the availability and equality of opportunities to access financial services. It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products. Financial inclusion efforts typically target those who are unbanked and underbanked, and directs sustainable financial services to them. Financial inclusion is understood to go beyond merely opening a bank account. An inclusive financial system can potentially lead to a stronger and more sustainable economic growth and development. As such achieving financial inclusion has become a priority for many countries across the globe.
Due to the lack of financial infrastructure many under-served and low-income communities are excluded from banking services.
While it is recognized that not all individuals need or want financial services, the goal of financial inclusion is to remove all barriers, both supply side and demand side. Supply side barriers stem from financial institutions themselves. They often indicate poor financial infrastructure, and include lack of nearby financial institutions, high costs to opening accounts, or extensive documentation requirements. Demand side barriers refer to aspects of the individual seeking financial services and include poor financial literacy, lack of financial capability, or cultural or religious beliefs that impact their financial decisions.
Historical evolution of financial inclusion
Houlin Zhao, International Communication Union ITU Secretary‑General, traced the historical evolution of financial inclusion in the ITU News issue about digital financial inclusion. Zhao indicated that financial inclusion has been a recurring topic of policy discussions since the late 1990s and early 2000s, when development finance organizations stepped up their support for microcredit which are small loans for people lacking a steady source of income. More recently, the concept evolved to include microfinance more broadly, along with access to basic financial services such as savings.
Financial inclusion today aims to make a wider scope of services, like savings accounts, credit, insurance, payments, remittances, and other financial products, available to everyone. Clients include “unbanked” individuals, as well as micro, small, and medium enterprises. Inclusiveness also means reaching them sustainably and at a reasonable cost.
Digital innovations have emerged as a key element. Mobile applications can give poor and remote populations, largely excluded from traditional bank financing, easy access to a broad range of services. Safer overall than carrying cash, digital services also promote transparency by creating audit trails and reducing fraud.
DIGITAL FINANCIAL INCLUSION
The World Bank Group defined digital financial inclusion as involving the deployment of the cost-saving digital means to reach financially excluded and underserved populations with a range of formal financial services suited to their needs and responsibly delivered at a cost affordable to customers and sustainable for providers.
The G20 Global Partnership for Financial Inclusion (GPFI) points out that universal access to financial services is today within reach thanks to new technologies, transformative business models and ambitious reforms. Financial instruments such as e-money accounts, along with debit cards and low-cost regular bank accounts, can significantly increase financial access for those who are now excluded.
The potential. The former World Bank Group president Jim Yong Kim foresees a big potential in enhancing digital financial inclusion; reaching billions of new customers, banks and a widening array of non-banks are offering digital financial services for financially excluded and underserved populations, building on the digital approaches that have been used for years to improve access channels for those already served by the formal financial sector. Digital financial services, including those involving the use of mobile phones, are now prevalent in many countries, with some reaching significant scale. As a result, millions of formerly excluded and underserved poor customers are moving from exclusively cash-based transactions to formal financial services including payments, transfers, savings, credit, insurance, and even securities, using a mobile phone or other digital technology to access these services. And the picture is continuing to shift rapidly with the emergence of ever more new technologies.
The components. The World Bank Group identified the essential components of digital financial inclusion as:
- digital transactional platforms enabling customers to make or receive payments and transfers and to store value electronically through the use of devices that transmit and receive transaction data and connect to a bank or non-bank permitted to store electronic value;
- devices used by the customers that can be either digital devices (mobile phones, etc) that transmit information or instruments (payment cards, etc) that connect to a digital device such as a point-of-sale (POS) terminal;
- retail agents that have a digital device connected to communications infrastructure to transmit and receive transaction details enabling customers to convert cash into electronically stored value (cash-in) and to transform stored value back into cash (cash-out).
- digital financial services offered by banks and non-banks to the financially excluded and underserved including credit, savings, insurance, and even securities.
The benefits. Having digital access to financial services may be transformational. The World Bank identifies benefits of digital financial inclusion for the financially excluded and underserved as:
- accessing formal financial services such as payments, transfers, savings, credit, insurance, securities;
- providing a path for the financially excluded into the financial system
- providing a path for the financially excluded into the financial system through government-to-person payments including conditional cash transfers, that can enable digital stored-value accounts;
- providing additional financial services tailored to customers’ needs and financial circumstances through the payment, transfer, and value storage services embedded in the digital transaction platform, and the data generated within it;
- reducing risks of loss, theft, and other financial crimes posed by cash-based transactions, as well as the reduced costs associated with transacting in cash and using informal providers;
- promoting economic empowerment by enabling asset accumulation and, for women in particular, increasing their economic participation.
The risks. While the years of experience with digital financial services often give providers significant advantages, the particular risks introduced by the new services are:
- introduction of non-financial firms deploying new technologies;
- new contractual relationships between financial institutions and third parties, including the use of agent networks and other outsourcing arrangements;
- different regulatory treatment of deposit-like products (compared to deposits);
- unpredictable costs to inexperienced and vulnerable consumers;
- use of new kinds of data and new uses of data introducing both new privacy and data security issues.
Digital financial inclusion carries risks for the same vulnerable financially excluded and underserved customers that benefit from the opportunities. These risks include:
- novelty risks for customers due to their lack of familiarity with the products, services, and providers and their resulting vulnerability to exploitation and abuse;
- agent-related risks due to the new providers offering services are not subject to the consumer protection provisions that apply to banks and other traditional financial institutions;
- digital technology-related risks caused by disrupted service and loss of data, including payment instructions (for example, due to dropped messages), as well as the risk of a privacy or security breach resulting from digital transmittal and storage of data.
The regulation and supervision. Customer uptake of digital financial services in many markets suggests that on balance risks may not be perceived to outweigh the benefits of being financially included. Nonetheless, the case is strong for appropriate regulation and supervision.
The key regulatory issues raised by digital financial inclusion relate to agents, anti-money laundering and countering financing of terrorism (AML/CFT) rules, regulation of e-money, consumer protection, payment system regulation, and competition. Many of these issues fall within multiple regulators competencies, requiring effective communication and collaboration among them.
The models of digital financial inclusion emerging in countries around the world introduce new market participants and allocate roles and risks. The engagement of mobile network operators (MNOs), as e-money issuers or as a channel for a bank or similar provider, presents certain potential risks that differ from approaches without MNOs.
Fintech is not the only channel through which innovation can drive financial inclusion. Co-ordinated governmental and regulatory action also plays a crucial role in inspiring greater financial access for the underserved. The Alliance for Financial Inclusion (AFI), for example, is a policy-leadership alliance owned and led by member central banks and financial regulatory institutions with the mission of empowering policymakers to increase the access and usage of quality financial services for the underserved through formulation, implementation and global advocacy of sustainable and inclusive policies. Its core vision is to make financial services more accessible to the world’s unbanked populations, and it has partnered with regulators, international organizations and private-sector leaders to achieve this, specifically by driving practical solutions and facilitating the implementation of impactful policy changes through its cooperative model that embeds peer learning, knowledge exchange and peer transformation.
Central banks and financial-regulatory bodies from more than 80 emerging and developing countries are just some of the AFI’s members, and in 2018, they signed the Sochi Accord (FinTech for Financial Inclusion). The accord pledges to strengthen the group’s determination and affirm its commitment to leveraging digital financial services and fintech for financial inclusion. It also aims to accelerate the access and usage of financial services with a special focus on closing the gender gap, managing climate change risks, mitigating of de-risking challenges, advancing the inclusion of forcibly displaced persons, reducing the financing gap for small businesses and lowering costs for cross-border remittances while simultaneously promoting financial stability and integrity.
The importance. Finextra, the independent newswire and information source for the worldwide financial technology community, highlights the importance of digital financial inclusion as a driver of change. Financial inclusion is a major global challenge that can be difficult to define. However, most commentators agree that it begins with access to mainstream financial products. In the U.S. an estimated 14 million adults are unbanked, and a similar number underbanked. Likewise, more than one million adults in the U.K. are unbanked. Virtually no country has 100% financial inclusion. Most banked consumers enjoy the convenience, certainty and security of digital banking and payments. Over 64% of American adults now use online banking; the volume of digital payments grew by 20% in first half of 2020 alone. While this is good news for banks and their customers, it also widens the divide between the banked and the unbanked.
Financial inclusion is both a challenge to be confronted and an opportunity to be grasped. There is no one-size-fits-all solution to solving the problems of underbanked populations around the world, but more affordable and accessible digital access to financial services could go a long way.
As customers gain access to more reliable financial services and advice, they are better positioned to grow financially, and empower themselves and their communities. Banks likewise benefit from new customer segments they can cultivate over the long-term. The overall economy is more likely to flourish, as more people are able to gain access to the financial system and begin to build wealth.
The business models. According to business insider research, evolving business models, regulatory policies, open banking, and new payment methods also have implications for financial inclusion. Such initiatives expand the breadth and depth of financial services in ways that support financial inclusion. For example, innovative ways of performing credit assessments can help people with thin or invisible credit histories gain access to credit which previously was unattainable.
With access to a holistic view of their financial position, people can make better informed decisions based on data and real-life events. Increased data sharing, which is made possible with open banking, will also help people manage their money more easily.
The Open banking model may support digital financial inclusion by improving the customer experience and offering smoother customer journeys. Moreover, innovation and digital technology will play a crucial role in adapting financial services to meet the needs of all.
DIGITAL FINANCIAL INCLUSION TECHNOLOGY
According to the International Banker, although digital exclusion is a major global problem, technology can also be an enabler to better solutions and better outcomes. With the right technology and business strategy, banks can promote financial inclusion by:
- Reducing barriers to entry with lower cost digital services. Compared to traditional banking, digital banking services are cheaper to manufacture, distribute and support. These savings can make banking services more cost-effective and affordable to those who need them most. Rethinking balance requirements and fee structures will also go a long way to making banking more accessible to a broader population.
- Removing biases. Systemic biases have contributed to the issues we’ve faced with financial inclusion for years, but these can be eradicated. Artificial intelligence (AI) – with proper scrutiny and oversight – offers a powerful tool that can be leveraged to remove biases from processes, systems, and decisions.
- Providing bespoke services that are easy to access and easy to use. With digital technology, banks can offer services that mimic cash, for example with real-time balances, immutable payments and intuitive budgeting tools. Banks can educate and encourage people to show them that it is actually easier and more convenient to use digital payments than physical cash.
- Fighting cybercrime and reducing the risk of theft or loss. Digital services offer a safe and secure alternative to holding cash, particularly for businesses that primarily engage with cash transactions. However, there are bad actors out there and banks must be supremely vigilant in ensuring security in the digital age. In addition to internal security measures, teach your customers about the warning signs and risks of identity theft and cybercrime. Everyone needs complete confidence in digital financial services – one bad experience will undermine trust, but robust security and informed consumers form the blueprint for building trust and loyalty.
- Harnessing the power of data. Leverage data to help educate and advise customers, particularly those with limited experience in financial management. Help customers of any income be advised of the affordability of purchases before they are made, and encourage customers to save with goals, rewards and incentives. Data-driven insights can enable every customer to see their true overall financial position to understand exactly what they can afford and when.
The International Banker report by Alexander Jones, identified key technologies that play a pivotal role in closing the digital divide gap and enhance digital financial inclusion, with fintech (financial technology) in particular driving financial services towards consistently greater levels of accessibility and democratisation around the world. Ultimately, this enables more people to access previously inaccessible financial products and services than ever before.
Key ways for achieving financial inclusion through technology solutions include:
- Developing an attractive and significant customer experience. By designing simple, elegant services, customers can conveniently access financial systems in an uncomplicated manner.
- Socialising financial products and services. Customers want to participate socially with their savings, as evidenced by the rise in the number of peer-to-peer (P2P) funding sites such as Prosper.
- Raising commitment between financial institutions and their customers. Banks must keep engaging in dialog with their customers to build loyal relationships and involve them in certain financial services.
- Boosting access to banking resources and improving financial health: Innovative tech-powered solutions can help people manage their savings better.
- Using blockchain beyond cryptocurrencies: As an immutable record of information and transactions, blockchain can enable financial inclusion through many applications.
- Using Big Data: the use of information and knowledge through the application of Big Data enables financial institutions to offer more customized packages of banking services.
- Using biometrics: Alternative user-identification and authentication methods such as iris recognition and selfie facial recognition do not only make access to financial services easier but ensure that user security is maintained.
- Rapid adoption of internet and smartphones. The digitization journey of financial services providers has been accelerated by the rapid adoption of internet and smartphones.
- Using mobile devices to digitise services and processes. Devices such as point-of-sale terminals, phones and tablets offer existing services (for example, customer registration and loan applications) at a lower cost and digitise processes to increase efficiency. Microfinance staff can also go paperless, provide new services such as savings collection and use mobile agencies (mobile branches, tablets) instead of physical branches.
- Partnering with a digital financial-services provider to digitise existing products, services and operations: This involves providing mobile-money transactions to those in need. Such transactions include customer registration, cash-in/cash-out, peer-to-peer transfers, electronic top-ups and bill payments.
- Developing agent networks to digitise existing products and services: This enables the control of the delivery channel to identify, recruit, train, brand and manage their agents, through which clients can deposit, withdraw and transfer money, repay loans and pay bills.
Fintech firms, global policy initiatives and microfinance are all leveraging innovative solutions to ensure that the most remote and most vulnerable have opportunities to access financial services that can ultimately improve their economic wellbeing. And during the ongoing COVID-era, such opportunities can be of critical importance.
The Arab World’s Digital Divide
The digital divide is defined as the gap between segments of society with regard to both their opportunities to access information and communication technologies ICTs and to their use of the Internet. As society has grown reliant on technology and the internet, those lacking digital literacy and access to ICTs face greater challenges and even outright exclusion integrating into an increasingly digitally-dependent economy and society.
Often, people who face barriers to mainstream financial services are also digitally excluded. Cash may be all they have access to, and thus they become further marginalized in the digital economy as the prevalence and use of cash continues to decline. The COVID-19 pandemic greatly accelerated decline of cash usage, with statistics showing that the global percentage of cash volume used at point-of-sale (POS) plunged from 52.6% in 2019 to 20.5% in 2020.
Today, digital inclusion is a prerequisite for financial inclusion. Those who are not connected are denied access to many services and invariably pay more for basic services and utilities. Financial exclusion affects a wide range of people of all ages. Those on low incomes are the most vulnerable. Age, education and background are just some of the factors that influence financial exclusion.
