FinTechs are transforming financial services worldwide. With mobile money and e-wallets, crowdfunding, alternative credit scoring, cross-border remittances and digital KYC, there is great potential for FinTech innovators to bring financial services to individuals, particularly in emerging economies, who have been underserved by traditional methods of banking.

By making processes faster, more efficient and more accessible, FinTech can reduce operational costs of and the physical barriers to financial services, thereby extending their reach to the estimated 1.7 billion unbanked adults in the world (an estimated 31% of the world’s adult population). However, these technologies are not risk free. Secure systems, stable interfaces and a robust, yet flexible regulatory environment are crucial to their effectiveness.

These issues and others were considered by an international panel at last week’s 2019 Annual Meetings of the World Bank and IMF. Monica Brand Engel, Co-Founding Partner, Quona Capital, Benjamin E. Diokno, Governor Bangko Sentral ng Pilipinas, Ashraf Sabry, CEO, Fawry, and Andrew Torre, Regional President for CEMEA, Visa Inc., discussed emerging opportunities and risks, the financial inclusion challenge, and regulatory strategies to foster inclusive innovation and financial expansion.

A full recording of the discussion can be watched here.

We followed the discussion with great interest and have summarised some of the key take-aways below:

Fostering innovation and managing risk

At the outset, the panel discussed the regulatory challenge of striking a balance between fostering innovation and maintaining financial stability. The panellists thought that great progress has been made in this area by regulators, central banks and governments; there is a real consensus around financial inclusion and digitising economies, with central banks and governments now having specific agendas that reflect this. There has been more regulatory clarity for new FinTech (for example, e-money licences, payment banks) and regulatory sandboxes, which allow FinTechs to get up and running quickly.

To move forward in this respect, the panellists thought:

  • incentives need to be aligned/created in the digital economy, for example, to encourage small merchants to take digital payments and reduce encumbrances to adopting digital technology;
  • greater access to data (for example, by opening government systems, use of ID systems and sharing economic data held by companies), would help to facilitate adoption of FinTech;
  • regulatory requirements for data localisation create a challenge for FinTechs that use cloud solutions (which are quick and scalable);
  • regulators need to move quickly to keep pace with changing consumer demands or risk ‘informal’ financial services being adopted;
  • it is necessary to maintain multi-stakeholder collaboration (banks, non-banks, FinTechs);
  • there should be stronger local and international inter-agency cooperation;
  • regulation should be risk-based, proportionate and fair, by not hampering beneficial innovation with unwarranted/excessive compliance requirements;
  • local and international markets should be opened up to boost competition; and
  • regulators and FinTechs should understand the new landscape from an ‘ecosystem’ perspective; there will be a role for established banks and traditional players as well as start-ups. Successful outcomes will marry legacy systems with new systems by understanding how they can work together and will also recognise their separate strengths.

Access vs usage

It was discussed that, even if users had access to FinTech solutions, in order to increase use of FinTech, many unbanked individuals and communities need to be convinced to give up a culture of cash. One panellist noted that cash is the most well-known brand in any country and it is a tough competitor (it settles immediately and there are no charge-backs). The panel agreed that consumers and businesses will gravitate towards FinTech solutions that are easy to use – convenience helps cultural change. The panel noted that FinTechs are now often taking a ‘digital only’ strategy, which lowers cost and extends reach, and they focus on superior user experiences and providing practical solutions to make people’s lives better.

Although superior solutions will increase the take up of technologies, the panel pointed out that consumers and businesses still need to be helped on that journey. FinTechs can help adoption by recognising the habits of individuals and communities. Offering solutions that incorporate customers’ established practices can ease the transition to using new technology that fits in with their lifestyle.

The panel considered that to aid this transition further, incentivising adoption and creating value for small merchants would be key (but not just in relation to payments – value for merchants includes lending, connection with suppliers, insurance). If new technology does not save merchants money or create efficiency, they will not use it.

Overcoming challenges and creating opportunities

The panel noted that in many markets around the world, too few sellers are included in consideration about the ecosystem. As well as providing a good consumer experience, there needs to be a convergence on standards for merchants, so that they can accept all forms of payment. The panel noted that closed-loop systems in some FinTechs have acted as a barrier to inclusion. However, some FinTechs operating on closed-loop systems have begun to open-up because they have realised that this limits the ability to scale globally or even locally– if they do not provide an open service, someone else will move in and provide the merchants the seamless service that they want.

Most of the discussion focused on payment providers, but the panel also highlighted the room for growth in the alternative lending industry (both to SMEs and individuals), InsurTech and personal financial management. Moreover, the panel has seen a rise in consolidation of different types of FinTech innovations and saw a lot of future opportunity in this area – for example, challenger banks that consolidate different innovations into one digital experience for the consumer. 

In the closing remarks, the panel thought that, in order to reach meaningful financial inclusion, the priorities of different players in the market must be appreciated. Whereas mobile and convenience are key for consumers, small merchants will be looking for opportunities that grow their business and large corporates are focused on being able to reach out effectively through digital channels. For legacy banks and other established players, their organisations will need to change from within in order to move fast and adapt, as well as embracing FinTechs and looking for opportunities to work together with them.