With the COVID-19 pandemic restricting the movement of people and goods, modes of transaction have shifted dramatically.
Growing use of digital financial services has turned crisis into opportunity, enabling previously unbanked people and small firms to join the financial system.
Regulations have evolved to keep up with technology, but specific policies are needed to make sure no one gets left behind.
"While digital financial inclusion was a development priority before the COVID-19 pandemic, it's really become indispensable now – both for short-term relief in terms of putting money in the hands of those who need it, but also as a central element of broad-based sustainable recovery efforts," said Mahesh Uttamchandani, Practice Manager for Finance, Competitiveness and Innovation Global Practice at the World Bank Group.
COVID-19 has had a profound impact on people's payment habits, with 60 per cent of financial authorities reporting an increase in digital transactions.
Simultaneously, the number of people receiving payments from governments quadrupled in the first half of 2020 as the global pandemic took hold.
Close to 70 per cent of financial regulators around the world identify financial technology, or fintech, as a high priority, aligning measures against COVID-19 with efforts to strengthen financial inclusion.
Digital cash transfers
Already a priority before COVID-19, digital financial inclusion has become more urgent as a policy goal, Uttamchandani said at this year's Financial Inclusion Global Initiative (FIGI) symposium.
The World Bank is working on around 170 COVID-related projects across 110 countries, including new or expanded COVID-19 cash transfer projects in over 55 countries, he added.
Key goals include digitizing cash transfers and payments, establishing faster payment systems, enabling digital identification and electronic 'Know Your Customer' (KYC) technologies, and protecting consumers from heightened risks.
Quick response
Countries and markets that were already investing in digital financial services were better placed to respond to the COVID-19 crisis, said Gregory Chen, Policy Lead at Consultative Group to Assist the Poor (CGAP).
Togo, for example, quickly rolled out its Novissi social assistance programme using machine learning and mobile money to deliver contactless emergency cash transfers. Pre-existing digital infrastructure made this possible for the West African country, Chen said.
Another key factor was regulators' pragmatic response to the pandemic.
"Very early on, a lot of the regulators realized that the banking system remained vital for economic activity," said Chen, adding that, by deeming it an essential service, "they figured out ways to keep the banking system and payment systems going."
Chen offered an example of this pragmatic action from regulators in the Philippines, where regulators enabled a cash transfer programme managed by one public-sector bank to be opened up to multiple providers of payment services, including mobile money operators.
KYC technologies
World Bank financial inclusion projects have helped to simplify due diligence and KYC provisions in markets as diverse as the Democratic Republic of Congo, Morocco and Nepal, as well as to implement fast-payment systems in Georgia, Madagascar and Indonesia, Uttamchandani said.
The World Bank's G2Px government-to-person payment initiative has also provided technical assistance for digitizing social benefit transfers in 35 countries.
Instruments for inclusion
In developed markets, accelerated digitization amid the pandemic has spawned new payment, loan and insurance products. European markets have seen a surge in contactless transactions, said Magda Bianco, Managing Director of the Bank of Italy, the country's central bank.
Instruments provided by intermediaries have also made credit scoring easier.
"This allows small companies, which typically do not have a credit history, to get into the market to get loans," Bianco explained.
Digital tools are also helping individuals enter the financial system for the first time, she added. "In some countries, new digital saving accounts have been introduced with no or very low fees."
Deepening digital divide
Access to digital services remains extremely uneven. Experts suggest that digital exclusion may partly correlate with income losses in the pandemic, with a disproportionate impact seen on low- and medium-skilled workers, the self-employed, and women.
GSMA – the GSM Association representing mobile network operators – says women are seven per cent less likely than men to own a mobile phone and 15 per cent less likely to use mobile Internet.
"Women make up 39 per cent of global employment but 54 per cent of overall job losses," Uttamchandani observed.
Gender disaggregated data could help to inform targeted policies and initiatives for financial inclusion, he added.
Cybersecurity risks
Digital uptake has, in parallel, increased people's vulnerability to identity fraud, online scams and other cybersecurity threats. Digital microcredit applications have also seen rising fraud in recent months. This is especially risky for new and unskilled users.
"Understanding risks are really important for vulnerable groups disproportionately hit by the pandemic, such as women, youth, the elderly people and migrants," Bianco said.
Promoting digital and financial literacy
Efforts to improve digital financial inclusion must include measures to protect consumers while providing the widest possible access. Digital and financial literacy are equally vital to make the system accessible to individuals, vulnerable groups, and micro and small enterprises, Bianco said.
Despite the pandemic, governments and institutions need to persist in collating updated information on financial inclusion, she added.
Comprehensive surveys have been difficult to perform during the pandemic. However, the G20's Global Partnership for Financial Inclusion (GPFI) platform – launched in 2010during the G20 Summit in Seoul, Republic of Korea – is now compiling case studies and analyzing best practices from various countries.
Not leaving anyone out
Unless industry keeps expanding and improving its digital financial service offerings, it "may unintentionally help to victimize some of the most marginal groups," Uttamchandani said.
Rapid growth in the use of digital financial services, when combined with low financial awareness, can lead to problems such as over-indebtedness. To avert such problems, service offerings must be tailored to each local market, he said.
Although access is improving, in every country there are people unreachable by digital finance.
"We still need to be able to respond to those populations and recognize both the power and the limits of digital finance," Chen cautioned.
"In doing so, we will have a much stronger response to the COVID pandemic and an opportunity to accelerate some of the positive parts of digital finance."
FIGI is a partnership of the International Telecommunication Union (ITU), the World Bank Group, and the Committee on Payments and Market Infrastructures (CPMI), supported by the Bill & Melinda Gates Foundation.
Revisit the discussions of the 2021 FIGI Symposium for unique insights on how how governments and industry are working together to overcome COVID-19 and connect everyone with life-changing digital financial services.
