Harnessing and balancing innovation: Payments in the fintech era
Providing everyone with a transaction account to send and receive money electronically is widely considered the first step towards financial inclusion. For the unbanked, such accounts are seen as the gateway to savings, credit, insurance and a host of other financial activities and services.
Ongoing advances in financial technology (fintech) have introduced new ways to expand access to financial services and the range of services on offer, both for experienced customers and for unbanked people gaining access to transaction accounts for the first time.
Alongside the traditional offerings, some banks have moved to support “open banking” in coordination with third-party online service providers.
Innovations in fields like big data analytics, digital identity and biometrics have ushered in new ways to assess creditworthiness and onboard new customers.
With transaction accounts now offered not just by banks, but also increasingly via mobile money providers and other non-bank platforms, a wide range of players can be involved in enabling payments.
For financial regulators, this raises a range of questions, with the imperative to spur fintech innovation being balanced against the responsibility to manage risks.
Guiding principles for Payment Aspects of Financial Inclusion (PAFI), released in 2016 and updated in 2020, rest on public and private-sector commitments to provide everyone with access to a transaction account, a suitable supporting legal and regulatory framework, and the necessary financial and digital infrastructure.
Fintech’s rapid rise to prominence in recent years has led to further review of PAFI principles, again led by the World Bank Group and the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements (BIS). This time, the institutions focused on detailing how the PAFI principles apply to the latest fintech innovations.
The latest report notes fintech’s potential to broaden financial inclusion through initiatives embedded in wider country-level reforms.
Inclusive payment systems depend on close coordination between regulatory authorities and industry players, both to harmonize oversight and establish resilient infrastructure for electronic payments.
The right balance is needed between increasing efficiency and ensuring safety, as well as between enhancing the customer experience and protecting personal data.
The movement towards increasingly digital financial life, industry experts caution, may deepen exclusion for some.
Source: Bank for International Settlements and World Bank Group (2020): Payment aspects of financial inclusion in the fintech era.
Tracking financial inclusion
To help national authorities apply PAFI guidance, the project provides guidance for diagnostic studies to track transaction account access and use. The toolkit allows comparisons against international benchmarks or within each jurisdiction over time as countries strive for more inclusive payment systems.
Morocco’s inclusion strategy
The PAFI toolkit forms part of a country-level self-assessment for Morocco’s financial sector, says Hakima El Alami, Director of Payment Systems and Instruments Oversight and Financial Inclusion Directorate at Bank Al-Maghrib, the country’s central bank.
Morocco is making fintech solutions part of its national Financial Inclusion Strategy — which aims to give all citizens and businesses fair access to formal financial products and services, she said during the recent Financial Inclusion Global Initiative (FIGI) Symposium.
Albania builds trust
Market access for new entrants also requires careful consideration, so that entities of all sizes enjoy equal opportunities for competition.
“From our perspective as a regulator, we need the market to have as many alternatives as possible, and this comes into force only with tools like a framework, infrastructure, and giving access in a secure and mitigated way,” said Ledia Bregu, Director of Payments in the Bank of Albania’s Accounting and Finance Department.
Bregu cited financial literacy as a key challenge, along with building customer confidence.
“When we speak about innovation and fintech, we need to build trust, so the new or unbanked part of the population has the same understanding and the same trust to use innovative tools to become more financially included.”
Financial inclusion can drive investment and economic development — important considerations for Albania and other relatively small economies in the Western Balkans, she adds. “At the end of the day we see it as a tool for economic growth,” says Bregu.
Mexico seeks network effects
Exponential tech growth means not only new services, but also new types of firms providing services, says Miguel Manuel Díaz, Director of Payment Systems and Infrastructure at Banxico.
This, he believes, has ramped up the pressure on central banks and other regulators.
According to Díaz, five key balances need to be maintained by authorities working to accommodate new types of industry players and services:
- Innovation versus risk mitigation;
- Economies of scale versus competition;
- Efficiency versus system security;
- Achieving diversity versus efficient system standardization; and
- Privacy versus security requirements.
Díaz sees two key tools to expand access to payment services while mitigating associated risks:
First, a central enabling infrastructure available to everyone. This supports competition among payment services and introduces network effects that help services reach as many people as possible.
Second, in-depth analysis to ensure the consistency of regulations with new market realities. For example, regulators may consider shifting from overseeing different types of institutions towards overseeing the different functions involved in providing a service.
South Africa recognizes limits of current regulation
While financial inclusion is a high priority today, this was not always the case in South Africa, says Pearl Malumane, Senior Analyst in the Policy and Regulation Division at the South African Reserve Bank.
“Over the years, the focus has always been on financial stability, but other regulators and also the South African Reserve Bank have come to realize the importance of financial inclusion,” she says.
“As a result, we have seen the growth of fintechs in South Africa, but we are aware that there are limits in our current regulatory framework. It is very restrictive in terms of what type of payment activities fintechs, or non-banks, are allowed to do.”
But the industry and its regulators need to persist in finding the right way forward, Malumane says. “Where fintech is enabled, it will enhance not only financial inclusion but also competition and innovation in the national payment system and throughout the country,” she says.