Digital Financial Service: Enabling access to finance amid COVID-19 pandemic situations

Dr. Shahadat Hossain: The current COVID-19 is not a global pandemic and public health crisis; it is making a severe effect on the global economy. Movement restrictions, physical and social distancing, and border closing in several countries not only affected normal life of people, but it also results in reduction of income and rising unemployment. Despite most governments failed to realize the risks of rapid spread of COVID-19 virus and resulting death of 1.92 million people, it affected not only the manufacturing and transportation industries, the wave of this virous also affected global financial markets including traditional financial institutions. Further, the recent outbreak and faster spread of a new version of coronavirus created new fear that the future of our world is yet uncertain to tackle this pandemic amid a few vaccines have recently started using.

Besides, access to financial services is crucial for poverty reduction and economic development. Countries that have deeper and more developed financial system have a higher level of economic growth, more production and employment, and less poverty and inequality. It can improve income of poor people, reduce vulnerability, increase resilience, and improve their standard of living. Despite these potentials, many people in developing countries lack access to basic financial services. For example, the last Global Findex Report reveals that 65 percent of adult population in the world’s poorest economies lack access to basic transaction account to send and receive money safely and efficiently. Although basic transaction accounts are gateways to receive other financial services such as savings, credit, and insurance, they are far from the reach of underprivileged people. In our country, Bangladesh Bank data shows that only 55 percent population have access to basic financial services from financial institutions.

To tackle the impact of present and post COVID-19 pandemic situation on the economic life of poor people and provide more access to financial services, financial service providers need to develop new and innovative financial services by adopting technologies innovations. Fintech is an emerging hype in the financial service sector that is based on technology to revamp financial services. In this digital era, most people, particularly the young generation, demands easy access, convenient, efficient, speedy, and specialized financial products, and services. Fintech encompasses specialized product and services using the advent of modern information and communication technology within the categories of lending, savings, money transfer, personal finance, equity financing, retail, and institutional investments, and many more.

Digital Financial System (DFS) is a step toward this fintech innovation that the financial service industry of our country is moving into. The ultimate destination for Fintech is to develop a full-fledged DFS ecosystem which comprises all the elements ranging from consumers to a platform for nationwide financial services delivery infrastructure. DFS is the expansion and creation of new business ecosystems by connecting the dots between the physical and virtual elements of business through the integration of man and machine using the latest development of information and communication technologies with the medium of finance. DFS allows the users access to financial services like banking and utility or merchant payments tailored to the needs of the consumers. DFS has the potential to reduce costs of offering financial services by maximizing economies of scale, increase speed, ensure security and financial integrity, and provide tailored services to satisfy the needs of the consumers.

DFS consists of a broad range of financial services that are accessed and delivered through digital channels. In Bangladesh, electronic fund transfer (EFT), interbank clearing of cheques through automated clearing house (ACH), automated credit information bureau for credit related information of prospective borrowers, adoption of core banking solutions for faster and efficient service delivery, agent banking, full or partial online banking, recently adopted mobile banking, and recently linking online banking account with mobile banking are a few examples of DFS offerings to customers. Globally, two few other recent examples of fintech hypes are cryptocurrencies (such as Bitcoin) using blockchain technologies and online platform-based crowdfunding. Cryptocurrencies are peer-to-peer electronic cash systems which allow online payments to be sent directly from one party to another without going through a financial institution. Crowdfunding is a way of collecting funds from a large number of public (termed as “crowds”) using internet-based (web-based) platform without the involvement of formal financial institution in raising the money.

By the end of 2020, at least 20 billion devices along with more than 5 billion people and businesses will be integrated through digital technology. With an increase in tech-savy generation, the potentials of DFS is also going to increase rapidly. In our country, DFS provides several benefits. Examples are: it has given us an easy access to formal financial services by signup through eKYC; easy credit rating by using apps or machine-based solutions to access credits easily; more funds for business or SMEs through market-place lending.

A recent breakthrough in the DFS era in Bangladesh is the investment by Ant Financial Services Group (owned by Jack Ma, the founder of Alibaba) under a technology sharing agreement by providing the world’s most-advanced payments technologies to boost market share of bKash. It boosted their competitiveness, increasing their regular users from 30 million to 40 million and keeping them well ahead of the competitors. DFS sector in our country is now more competitive; several banks are already providing mobile banking services using their bank led structure. In addition to bKash, few of the key market players are Rocket, SureCash, and Nagad. These MFSs have enabled us to use financial transaction facilities amid lockdown imposed by the government to use physical presence in bank branches. Not only the P2P transactions, G2P transactions are also made possible for the vulnerable people who lost their jobs or earning opportunities due to restrictions on social gatherings.

The main barriers for the traditional financial service providers (such as commercial banks) in providing access to finance to low income people are higher operating costs in providing a small amount of transaction or credit and savings products to these decentralized population, limited competition, and low infrastructure. The demand side barriers are volatile, small, and irregular income of poor people, information asymmetry problem due to the lack of proper identification and trust, formality in traditional banking channel, and geographical barriers. DFS providers have the ability to break these barriers and fill the demand gap of these poor people at the bottom of the economic pyramid through tailoring financial products and services accessible to the poor people. DFS can address and facilitate rectification of such a problem through a digital wallet which will remove the barrier of current entry through the promotion of all forms of transactions, payments, and financing i.e., loans, as well as allowing access to internet commerce. Taking a look at Bangladesh, in order to boost financial inclusion, Bangladesh Bank issued a draft guideline (2011) and granted permission to 28 banks to provide mobile finance under a bank-led structure. As of June 2017, 18 banks had already launched such services. The low cost, easy to access and convenient nature of mobile financial service (MFS) has significantly contributed to its inclusion to the country’s unbanked population.

Despite the growth and high potentials in providing access to finance, DFS has a few risks and challenges in its expansion. One of the risks is data privacy concerns arises from the data trails created by DFS which can expose them to unauthorized disclosure, misuse of personal data, and discrimination. Second, for a broader financial system, DFS may expose cyber-security and operational risks by hacking. Financial integrity of DFS could be threatened by the use of crypto-assets, pre-paid cards and other tools that may enable individuals to circumvent Anti Money Laundering (AML) or Combating Financing against Terrorism (CFT) controls. Third, DFS may pose challenges to competition authorities as large platforms leverage economies of scale and scope to increase concentration and dominate the provision of DFS. Fourth, risks at the level of individual institution or infrastructure could spill-over to the broader economy and pose macro-financial risks. Fifth, unequal access to technology and the ‘digital divide’ can exclude the poor, particularly women, from DFS. Finally, reaching large numbers of formerly unserved individuals with DFS potentially exposes them to predatory lending and over-indebtedness.

DFS needs a more robust set of supporting factors to be in place to ensure financial integrity, stability, and competition. First, conducive legal and regulatory framework are essential in its expansion. Regulatory authority and policymakers need to consider the above-stated risks posed by DFS and address them accordingly. Second, DFS requires enabling financial and digital infrastructure. Ancillary and technological developments are critical to the development of DFS that are compatible with anti-money laundering and other ‘know your customer’ requirements. Application Programming Interface (API) is critical to access data from different public and private systems to improve the speed, and reduce the cost, of providing DFS without compromising safety and reliability. Third, implementation of these requires ancillary government support systems. Particularly, the following issues need to address for a greater access to financial services through DFS: enabling digital connectivity and mobile phone penetration among people, guidelines to permit non-bank financial institutions to have access to national payment infrastructure and to issue electronic money, enable and regulate widespread network of agent banking in a digitalized way, enabling the use of digital and biometric ID systems by all the DFS providers, access to government data platforms, and bring the non-traditional financial service providers under regulation.

Author details: Dr. Shahadat Hossain in an Associate Professor of Finance, University of Chittagong. He obtained his PhD from Curtin University (Australia), Specialised MSc in Microfinance from Université Libre de Bruxelles (Belgium), MBA and BBA in Finance from University of Chittagong. His E-mail address is: shahadath@cu.ac.bd