Digital Finance and Inclusion in the Time of Covid-19: Lessons, Experiences and Proposals

Introduction

The COVID-19 pandemic has resulted in severe and protracted disruptions to the livelihoods of people all around the world, both in developing and developed countries. The pervasive effects of this pandemic, which have ended up affecting every aspect of our societies, keep unfolding as the crisis progresses, leaving profound marks on people’s livelihoods and countries’ economies that are expected to last for many years after the pandemic has ended.

As part of the global response to COVID-19, the digital finance industry has been playing a key role in developing and providing services and innovations that have mitigated, at least partially, the disruptions brought about by the pandemic on multiple aspects of people’s lives. In developing and emerging contexts, especially, there has been a strong surge in interest for the ample potential that fintech (i.e. financial technology) carries in preserving people’s livelihoods and businesses that have been, and continue to be, threatened by the pandemic, thereby enabling and sustaining – within societies – the flow of cash, credit, deposits, investments, salaries, government-to-persons (G2P) and peer-to-peer (P2P) transfers, among others, at national and regional levels.

The public and private sector’s response to the COVID-19 crisis has been promoting an overall acceleration of the digital financial inclusion process in developing contexts, especially in a number of countries (such as West African ones), where it was still lagging compared to regional trends (Peyton, 2020). On the side of the demand for finance, both developed and developing countries have experienced substantial growth in the subscription and use of digital financial services, as people have looked for alternative ways to run and manage the financial aspects of their lives, in light of extended periods of lockdown, physical distancing, and livelihood disruptions. On the side of the supply, traditional financial institutions (FIs) have been forced to radically re-think their business models and delivery mechanisms, by investing heavily in their digital channels, often ending up accelerating a process of gradual digitalization of their financial offer that was already in the making.

From a developmental perspective, this accelerated shift towards a digitalization of financial services can prove to be an unexpected boon for financial inclusion amid the disruptions brought about by COVID-19. Before the crisis, digital finance (and chiefly mobile money) had already proven to be a fundamental enabler of financial inclusion in developing and emerging economies, especially when it came to reaching and serving the most isolated and financially underserved individuals. In the wake of the pandemic, this rapid surge in interest for fintech solutions (on the part of governments, businesses and the general public) is bound to have substantial implications in terms of an increased potential for digital channels to promote financial inclusion on a global scale.

Serious concerns, however, exist on the implications of such an accelerated shift towards a cashless, digitally banked society. First and foremost, the risk of further widening the divide between those already capable of accessing digital financial services and those who – depending on the context – might not be able to such as rural people, women, the ultra-poor, migrants and refugees, indigenous people, the elderly, and the scarcely literate, especially considering that these categories often intersect. Furthermore, a series of related, critical concerns exist over issues of data privacy and security, transparency, predatory lending, and market monopolization, among others, all of which will be analyzed in-depth throughout this study.

Overall, even after the pandemic is over, the trajectory of digital financial inclusion on a global level is bound to be forever altered by this event, as the rapid surges in innovation and uptake of digital finance solutions are expected to leave lasting marks, not only on the fintech industry, but also on the overall attitude and approach that populations and governments have towards these types of technologies.

In light of these premises, this working paper has two main objectives:

1To provide a comprehensive overview of how the COVID-19 pandemic has been impacting on the digital financial ecosystems of low- and-middle income countries (LMICs), by accelerating, overall, a process of widespread digitization of financial services that was already partially ongoing in developing and emerging contexts. It aims to illustrate the advantages and risks associated with this surge in uptake and use, providing ideas on how to leverage the paradigm changes affecting the overall approach and perspective towards digital financial services – on the part of various stakeholders – to advance financial inclusion and development.

2To showcase how digital financial services have been used – in both traditional and innovative ways – to mitigate the impact of the COVID-19 crisis on LMICSs’ economies and societies, by both public and private actors, while also establishing a foundation for the longer-term digital financial inclusion of vulnerable citizens. It seeks to present not only innovations that have already been implemented and brought to scale, but also new proposals from key thinkers from the fields of development finance and fintech, which can inspire both policymakers and the industry towards new solutions that can aid in responding to this and future crises.

The intended audience for this study is quite broad, given the vast numbers of both public and private stakeholders engaged in response efforts against this crisis, as well as the myriad uses that digital financial services can have to mitigate the impact of the pandemic and keep vital services functioning during lockdown. Target audience categories include:

•Policymakers at the country and regional level can use this research to analyze the policy responses implemented by their counterparts in the context of the COVID-19 crisis, drawing inspiration for the design of their own bundle of policy interventions and collaborations in the digital finance arena. Policymakers can also draw from this study to anticipate and mitigate possible bottlenecks and constraints associated with their current policy approach to the crisis, in an attempt to curb potential side effects and inequalities in terms of financial inclusion, stemming from their initiatives.

•Development practitioners (and their agencies) can use the findings of this study to inform their own programmes, research, and capacity building associated with the pandemic response, as well as the overall promotion of digital financial inclusion, in developing and emerging contexts.

•Mobile money operators (MMOs), fintech companies and other FIs can use this information to identify the critical gaps in current and future demand for services generated by the pandemic, and subsequently respond to these gaps by expanding their offer of tailored digital financial products, taking inspiration for product design (or re-design) from the private sector’s experiences detailed in this study.

In order to achieve the aforementioned objectives, and assist the different target audiences in identifying the content most relevant to their work, the study has been structured into seven sections:

1The impact of the pandemic on digital payments and transfers. This section provides a general overview of the current and expected impact of the pandemic on digital payments and transfers around the world. It showcases the various measures adopted by policymakers and MMOs to promote the use of digital channels for payments and transfers at the country level, both as an alternative to the use of physical cash and as an overall tool for livelihood strengthening when faced with lockdowns and physical distancing.

2Fostering the use of digital payments to enable e-commerce and door-to-door delivery services. This section focuses specifically on the promotion of digital payment modalities to enable e-commerce and door-to-door delivery in the context of the response to the pandemic, as an instrument of livelihood resilience, provision of essential goods, and MSME (micro, small- and medium-sized enterprise) sector promotion.

3Ensuring timely payments of response staff through digital channels. The merits of digitizing payments for response workers active in the first line against the COVID-19 pandemic are examined in this section. The advantages that can be derived from such a process in terms of increased precision, safety and timeliness of salary payments to response workers, as well as the resulting benefits in terms of a strengthened field-level response to the pandemic are also examined.

4Transitioning to fully digital remittances during COVID-19. The specific focus of this section is on the impact of the pandemic on remittance flows sent by migrant workers from all around the world to their home countries. The challenges associated with developing fully digitized remittance transfer chains that can facilitate such flows in a global scenario characterized by extensive lockdown measures and widespread economic paralysis are illustrated.

5Enabling social safety nets by digitizing G2P transfers. This section focuses on the diffused implementation of digital government-to-people (G2P) cash transfer schemes in various countries of the world; these are mainly directed at vulnerable citizens that have lost their main sources of income due to the pandemic. It seeks to illustrate how the digitization of social safety nets can have extremely beneficial effects in terms of outreach, timeliness, precision and transparency of social cash transfers, thereby guaranteeing a basic layer of protection to the most vulnerable segments of the population.

6Providing digital credit solutions to mitigate the impact of the pandemic. The focus of this section is on the use of innovative and tailored digital credit products to assist small businesses critically affected by the pandemic in weathering its worst effects, as well as to promote a longer-term process of business digitization that can help them to remain competitive in a post-COVID world.

7Final considerations and recommendations. This section provides a series of final considerations on the role of the COVID-19 crisis in influencing the evolution of digital financial inclusion in developing and emerging contexts. It also provides a series of general recommendations directed at policymakers, development agencies and MMOs, which can assist them in developing a strategic response to the crisis that focuses on leveraging and promoting digital financial services as a fundamental tool for inclusion and resilience. The majority of these recommendations are also bound to be valuable in future large-scale, catastrophic events.

SECTION 1

The impact of the pandemic on digital payments and transfers

1.1 An accelerated process of financial digitization induced by the pandemic

Over the past 15 years, digital financial services have emerged as critical enablers of financial inclusion in both developing and emerging countries, allowing an increasing amount of previously unbanked individuals to save, borrow, pay and transfer money remotely. In particular, mobile financial services have emerged as an essential instrument for the promotion of financial inclusion, poverty alleviation and economic growth in LMICs, experiencing a meteoric rise in the past decade. To give an idea of the magnitude of this phenomenon, Figure 1 below shows the growth inthe number of registered mobile money accounts across macro-regions, from 2011 to 2018. While the growth in accounts has been substantial all around, the largest increases have been registered in Sub-Saharan Africa (almost 400 million registered accounts as of 2018) and South Asia (287 million).

According to the latest State of the Industry Report on Mobile Money from the Global System for Communications (GSMA), which provides a snapshot of the global mobile money landscape one year before the pandemic, mobile money accounts around the world totaled over 1 billion as of 2019. Mobile