The Promise Of Fintech: Financial Inclusion
The Promise of Fintech:Financial InclusionRatna SahayMonetary and Capital Markets DepartmentInternational Monetary FundCAFIN webinar series"Financial Risks, Innovation and Inclusion in a Post-COVID World"November 6, 20201
2OUTLINE1. Motivation: Why do we care about financial inclusion?2. Existing work & our contributionFINDINGS3. Is fintech increasing financial inclusion?4. What are the macroeconomic implications of digital financial inclusion?5. What are the constraints and risks to digital financial inclusion?6. Key takeaways & policy implications
31. MOTIVATION: WHY DO WE CAREABOUT FINANCIAL INCLUSION?
4MOTIVATION: WHY DO WE CARE ABOUT FINANCIAL INCLUSION?Inclusion-growth nexus: positive effect on economic growth2.9Marginal effect on economic growth(% points)32.525th FIMedian FI75th FI21.31.510.50.2025th FIMedian FI75th FIFinancial inclusion (“FI”) approximated by ATMs per 100,000 adultsSource: IMF Staff Discussion Note 15/17 (“Financial Inclusion : Can it Meet Multiple Macroeconomic Goals?”)
5MOTIVATIONFinancial inclusion reduces inequality, independent of depth Greater financial inclusion (payments) leads to lower inequality. Inequality falls more at lower depth.Gini (change in percentage points)Low depthSources: IMF Staff Discussion Note 20/01.Medium depthHigh 9.825th FIFI ATMs per 100,000 adultsMedian FI75th FI*-7.8
6MOTIVATION: WHY DO WE CARE ABOUT FINANCIAL INCLUSION?Financial stability: regulation and supervision can help ensure that financialinclusion (credit) and financial stability (Z-score) go hand-in-handBank stability (Z-score)40High Basel Core Principles3020Average Basel CorePrinciples100Low Basel Core Principles-1002004006008001,000Borrowers from commercial banks per 1,000 adultsSource: IMF Staff Discussion Note 15/17, updated estimates with Financial Access Survey data till 2019.Note: Bank stability is approximated by bank z-score, which captures banks’ distance-to-distress (the amount of buffers banks have against shocks to earnings) and isrepresented by the formula: ȥ. (x-µ)/σ where x is the observed value, µ is the mean of the sample, and σ is the standard deviation of the sample.
7WHERE DO COUNTRIES STAND?Financial inclusion: there is a long way to goSource: Global Findex Database
WHERE DO COUNTRIES STAND?Fintech is playing an increasing role in financial inclusionSource: G20 Financial Inclusion Indicators, World Bank8
92. EXISTING WORK & OUR CONTRIBUTION
10EXISTING WORK & OUR CONTRIBUTIONExisting work on fintech and financial inclusionTwo strandsFintech-enabledfinancial inclusionTraditionalfinancial inclusionExtensive microand macrostudies Focus on financial inclusion throughtraditional means. Use of fintech services have not beenincluded in financial ical studiesMacroeconomicstudies Majority firm-specific (M-Pesa, Ant Financial) and/or countryspecific micro-empirical work (Africa). Piecemeal approach: focus on one aspect. Macroeconomic literature virtually non-existent.
11EXISTING WORK & OUR CONTRIBUTIONGoal of new research: comprehensive cross-country analysisof the relationship between fintech and financial inclusionFocus: payments & mentDomesticpaymentsFintech2. What are the macroeconomic implicationsof digital financial inclusion?CreditInsurance1. Is fintech increasing financial inclusion?3. What are the constraints and risks todigital financial inclusion?Savings
12EXISTING WORK & OUR CONTRIBUTIONOur contribution: first macro study of digital servicesMacroliteratureon financialinclusionFintechNewresearch First comprehensive macro-focused empirical research: new financial inclusion measure isused for cross-country empirical analysis on fintech’s drivers and macroeconomic effects. New comprehensive measure of financial inclusion in payments: this includes access to andusage of digital financial services covering 52 developing and emerging economies. Addresses limitations of the data and empirical analysis: complement the quantitativeanalysis with interviews with relevant stakeholders.
13EXISTING WORK & OUR CONTRIBUTIONTwo-pronged approach: empirical analysis interviews with fintech stakeholdersInterviews70 stakeholders Fintech companies Banks Regulators Think tanksAll regions AFR, APD, EUR, MCD, WHDDataPayments: 52 emerging anddeveloping countries IMF Financial Access Survey World Bank Global Findex GSMA Mobile Money Database International TelecommunicationUnionCredit: 109 countries Cambridge Centre for AlternativeFinance: marketplace lendingdatabase
14EXISTING WORK & OUR CONTRIBUTIONComprehensive measure of financial inclusionComprehensive FinancialInclusion IndexTraditionalFinancialInclusionNote: The index is constructed using a three-stage principal component analysis.Digital (Fintechdriven) FinancialInclusion
153. IS FINTECH INCREASING FINANCIAL INCLUSION?
IS FINTECH INCREASING FINANCIAL INCLUSION?Digital financial inclusion in payments is growingeverywhere, even where traditional is notInterviews confirmfindings: Accessible: mobile phones Low cost Flexible User-friendly Efficiency CustomizationSources: IMF Staff Calculations16
17WHERE IS DIGITAL FINANCIAL INCLUSION EMERGING?Africa and Asia-Pacific are leading in adoption offintech paymentsFintech-driven Financial Inclusion Index20140.620170.50.40.30.20.10Source: IMF Staff CalculationsAfrica (19)Asia Pacific (12)Emerging Europe(2)WesternHemisphere (13)Middle East &Central Asia (6)
18Traditional vs. fintech: regions rank differentlyTraditional Financial Inclusion, 2017Digital Financial Inclusion, 2017Traditional F.I IndexDigital F.I. gingEurope (2)WesternAsia PacificHemisphere(12)(13)Middle East& CentralAsia (6)Africa (19)Africa (19)Asia Pacific(12)EmergingWestern Middle EastEurope (2) Hemisphere & Central(13)Asia (6)Source: Global Findex, FAS, GSMA, ITU, IMF Staff Calculations. Indices ranges from 0 to 1 where 1 indicates higher financial inclusion. Traditional and digital financial inclusion indices arenot directly comparable. Based on a sample of 52 emerging and developing countries for which data is available. The numbers in parenthesis in the LHS chart shows the number ofcountries included in each region.
19China dominates the global market forfintech credit, followed by U.S. & U.K Global Volume of New Fintech Credit, 2017(In percent of fintech credit) but it is growing rapidly even in otherparts around the worldGlobal Fintech Lending(In billions of USD)Sources: Cambridge Centre for Alternative Finance and IMF Staff Calculations. Full dataset for Emerging and Developing Europe, MENA and SSA not available for 2017.
WHAT IS THE IMPACT OF FINTECH?Fintech credit: low base, fast growth—especially consumer creditInterviewsHow does digital lending work? Alternative sources of data forcreditworthiness assessment No collateral requirementsWhy is digital lending growing fast? Speed SimplicityCustomer experience ConvenienceSources: CCAF and IMF staff calculations. Excludes non-sovereign territories. Full dataset for Emerging and Developing Europe, MENA and SSA not available for 2017.20
WHERE IS DIGITAL FINANCIAL INCLUSION EMERGING?Credit composition varies widely across regionsSources: CCAF and IMF Staff Calculations.21
224. WHAT ARE THE MACROECONOMIC IMPLICATIONSOF DIGITAL FINANCIAL INCLUSION?
23WHAT IS THE IMPACT OF FINTECH?Growth: digital financial inclusion is associated with faster growthImpact of Digital Financial Inclusion in Payments on Growth(In percent of annual GDP growth)Interviews: how does digitalfinancial inclusion supportgrowth? From digital payments to digitalcredit Consumer credit: consumptionsmoothing SME credit: working capital andinvestmentSources: IMF Staff Calculations.
24Implications of COVID-19 for digital financial inclusionA more rapid shift towards digital financial inclusion: SARS epidemic in 2003 Supportive measures: e.g. lowering fees and increasing limits on digitaltransactionsMitigate the economic impact of the COVID-19 pandemic, andsupport the recovery: Ensure continued access to financial services Deliver government support effectively and securely Support consumption, innovation and hence productivity through digitaleconomy developments.
25WHAT IS THE IMPACT OF FINTECH?Fintech companies are filling the gap left by traditional banks Fintech is “filling the gap”Interviews: various models Niche markets Competition (e.g. digital banks) CollaborationData: “filling the gap” More digital payments wheretraditional financial access is limited Higher digital lending where bankbranches are fewSource: IMF Staff Calculations based on a fractional logit regression for 52 developing and emerging economies.(2014-2017)
26WHAT IS THE IMPACT OF FINTECH? while big banks are responding to the disruptions from fintech2019 Tech Spending in Fintech(In billions of USD)Source: Bank disclosures, data compiled by Bloomberg, KPMG Pulse of Fintech Report and Innovate Finance Investment landscape report, based on Pitchbook Data.Note: VC investment data based on 2018 levels. Other economies include Canada, Hong Kong, Japan, India, and Brazil.
275. WHAT ARE THE CONSTRAINTS AND RISKS TODIGITAL FINANCIAL INCLUSION?
WHAT ARE THE ENABLERS, CONSTRAINTS & RISKS TO DIGITAL FINANCIAL INCLUSION?28Digital financial inclusion faces several constraintsConstraints: interviews Regulatory uncertainty Technological expertise – the “coders” Funding Financial & digital literacyFindings from data analysis Payments Digital infrastructure & mobile money agentsTrust/ familiarity with financial servicesQuality of governanceEfficiency of traditional financial institutionsCompetition in the financial sector Lending Borrower information Legal rightsSource: IMF Staff Calculations based on a fractional logit regression for 52 developing and emerging economies.
29WHAT ARE THE ENABLERS, CONSTRAINTS & RISKS TO DIGITAL FINANCIAL INCLUSION?Risks: new sources of financial exclusion?Financial ExclusionDirect Digital exclusion: Access to physical infrastructure Human capital Biases in historical data and/oralgorithms Credit procyclicalityIndirect Scaling back of MFIs and smallbanks Data privacy & cyber risks Gaps in safety net arrangements
30WHAT IS THE IMPACT OF FINTECH?Difference in Gender GapGender gap: fintech closing the gap but not everywhereHigher number indicateslarger gender gaps in usage ofdigital financial servicesSource: IMF Staff calculations.Note: ‘Trad’ stands for traditional financial inclusion. The gender gap is defined as the percentage difference between the male and female financial inclusion index. Higher values indicate alarger gender gap.
316. KEY TAKEAWAYS & POLICY QUESTIONS
32KEY TAKEAWAYS & POLICY QUESTIONS?Key Takeaways Motivation: positive impact of traditional financial inclusion on growth andinequality Trends: fintech has increased financial inclusion in payments, particularly in Africaand Asia; fintech lending focused on China, but low base everywhere Impact Growth: digital financial inclusion is associated with higher GDP growth Gender-gap: fintech closing the gap but not everywhere Banks: fintech filling the gap in traditional financial inclusion Business models: range from collaboration to competition betweenincumbents and disrupters Constraints/Enablers: infrastructure, financial and digital literacy, strength ofinstitutions and regulation, technological expertise, funding Risks: new forms of financial exclusion
33Post-COVID ImplicationsTo avoid likely acceleration of pre-existing risks Support inclusive recovery: invest in digital infrastructure for all, enhancefinancial and digital literacy Keep up regulations and supervision: consumer and data protection, financialintegrity, cybersecurity, and interoperability across users and nationalborders Invest in human capital: global shortage of “coders” and address new risks emerging. Ensure sufficient competition: retrenchment by smaller fintech companiescould lead to greater concentration and reduce financial access of smallcustomers
KEY TAKEAWAYS & POLICY QUESTIONS?34Policy questions: what can governments do to deepen financial inclusion?What regulations are needed for a safe development of fintech whichpreserves financial integrity?How to ensure a level playing field among players ofdifferent sizes?How to achieve financial and digital literacy?How to identify and address macrofinancial risks of digitalization, arising forexample from greater interconnectedness between banks and (oftenunregulated) non-banks?How to prevent digital financial exclusion, as political and social costs offintech excluding large segments of the lower income society can be large?How to achieve international cooperation to address data privacy,cybersecurity, and digital identification?
35Thank youQuestions and comments welcome
Motivation: positive impact of traditional financial inclusion on growth and inequality Trends: fintech has increased financial inclusion in payments, particularly in Africa and Asia; fintech lending focused on China, but low base everywhere Impact Growth: digital financial inclusion is associated with higher GDP growth
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