While coronavirus consumes economic headlines in the US, it’s global effects multiply. The pandemic is expected to disproportionately impact vulnerable populations. The World Bank estimates that between 40 and 60 million people will be pushed back into extreme poverty in 2020, the first such increase in two decades.
As years of progress threaten to become undone, global institutions such as the Consultative Group to Assist the Poor (CGAP) are responding. Part of the World Bank Group, CGAP was created to advance financial inclusion. It’s COVID-19 – Insights for Inclusive Finance is a valuable resource for any financial practitioner during these times.
Ivo Jenik a financial specialist at CGAP joins to share his global view and discuss what he sees as the implications of digital finance and financial inclusion in emerging economies.
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Mack: Welcome, Ivo. What long-term impact do you foresee on the consumer finance industry as a result of this crisis?
Ivo: Increased digitalization. Every major crisis that concerns the financial sector has implications for consumer finance. We have seen it with the decline in the supply of consumer credit after the Global Financial Crisis of 2008, for instance. Due to the health dimension of the current crisis that comes with social distancing and growing awareness of health risks associated with in-person social interactions, we’ll see a boost in customer preference for remote means of doing finance. And that means digital.
Mack: What signs do we already see of what this digital financial future looks like?
Ivo: First, out of necessity, many people will get more comfortable with digital financial services during the lockdowns and may simply stick to them even when the crisis goes away. This includes first-time users and customers who are traditionally hesitant to use modern technology, such as the elderly.
Second, governments are creating incentives for beneficiaries and financial institutions to open accounts as they make disbursement of covid-related social payments faster, easier, and cheaper. I have seen countries temporarily lowering requirements for customer identification, raising transactional limits, providers offering cashback for using digital channels. And there will be more.
Third, many more suppliers, as well as customers, will move to e-commerce platforms since the current situation has proven them more resilient and agile under pandemic scenarios. To sell and buy online, access to digital financial services is essential. All of this is to say that I expect the process of digitalization of finance, that was already underway before the pandemic, to speed up. This trend applies to all sorts of different financial services, such as payments, credit, insurance, and investments.
Mack: The response by financial authorities is undoubtedly important to all of this. As you scan the developing world, what are you seeing? How are financial regulators or policymakers responding to support consumer protection and financial inclusion?
Ivo: Policymakers will need to take a whole suite of important actions to support consumer protection, advance financial inclusion, and prevent the crisis from eliminating recent development achievements. In this context, CGAP has been thinking a lot about the impact on the microfinance industry.
Regarding consumer protection, consumer awareness and strong oversight are of utmost importance. There have been reports about an increase in cyberattacks and fraudulent activities, often targeted at vulnerable customers. Therefore, policymakers need to keep customers informed about the risks, new fraudulent schemes, and what precautions to take. They may set up a helpline and explore other channels close to customers like web, social media, and texting apps.
Importantly, supervisors need to increase their monitoring activity and perhaps test out new methods of market intelligence using RegTech solutions to enforce existing consumer protection frameworks. This is challenging as their resources are spread thin with many segments of the financial sector facing serious challenges. Yet, protecting consumers must remain a priority; otherwise it will take years to re-establish consumer trust.
Mack: Indeed, consumer trust once broken is difficult to regain.
What gives you optimism for financial inclusion amidst the current environment?
Ivo: I’ve already mentioned the push for digitalization that comes with the pandemic and initiatives such as G2P (government-to-people) social payments.
The immediate objective is to save lives and livelihoods, but these initiatives may have a long-lasting positive impact on financial inclusion too. Financial services providers, investors, regulators, all of them are trying to make most of the existing technology, infrastructure, and legal framework to cope with the crisis and help their clients to cope as well.
For instance, countries are modifying requirements for customer due diligence and it appears that the countries with a risk-based AML/CFT framework in place are better positioned to do so quickly. Similarly, in countries with a digital ID in place, providers can leverage that infrastructure to onboard customers quickly and remotely. One can also imagine that financial institutions with modern tech stack based on microservices, APIs, and cloud computing find it easier to cope with the fast-changing situation of nowadays, while working from home.
These examples illustrate where the crisis can help generate evidence to support innovation and push for faster adoption of modern technology. This is important because solving the persistent financial inclusion gap will require innovative approaches. CGAP has been championing some of those changes mentioned for a long time.
Mack: Is there any CGAP research you would recommend to others as helpful reading during this time?
Ivo: There is a lot. We have put together a resource hub ‘COVID-19 – Insights for Inclusive Finance’ where you can find information about CGAP’s response to the pandemic along with essays written by our leadership, blog posts, and other knowledge products.
Many of our pre-COVID publications are relevant as well. For instance, our work on the future of G2P payments that offers recommendations on how to digitize social payments and improve customer experience. Similarly, CGAP’s work on humanitarian cash transfers is relevant more than ever. There are also several publications focused on the question of the distribution of financial services, particularly in remote, rural areas.
I simply encourage readers to explore our website. We have also launched a ‘COVID-19 Resource Hub’ at FinDev Gateway website, where you can find additional information, including the tracker of trackers, effectively a list of resources provided by various organizations all around the world.
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Learn more about CGAP and resources for financial inclusion practitioners.