New reports set out a positive context for FinTech in helping the poor and unbanked – but only if providers tighten their belts in the crisis too. Chris Middleton reports.

Financial technology (FinTech) can help bring about financial inclusion by facilitating payments, but the opportunities come with significant challenges. That’s according to a new report by the Committee on Payments and Market Infrastructures (CPMI) and the World Bank.

The report, Payment Aspects of Financial Inclusion in the FinTech Era, makes clear the links between technology innovation and financial inclusion. For example, FinTech can improve the design and efficiency of transaction accounts and payment products, make them more accessible to the poor and unbanked, and lower barriers to entry in the financial market.

The report explains: “Financial inclusion starts with payments. They serve as a gateway to other financial services, such as savings, credit and insurance. Transaction accounts operated by a regulated payment service provider are at the heart of retail payment services. To improve financial inclusion, these transaction accounts need to enable end users to meet most, if not all, of their payment needs and to safely store some value.”

This builds on the guidance on the payment aspects of financial inclusion (PAFI), issued by the CPMI and the World Bank in 2016.

“Incorporating FinTech into the PAFI framework will help firms and policymakers extend payments services to the poor – the first step in expanding access to other important services, such as credit and insurance,” said Ceyla Pazarbasioglu, Vice President for Equitable Growth, Finance and Institutions (EFI), at the World Bank.

But not everything is straightforward. On the one hand, Technological innovation has “made major inroads into financial services, which has implications for payments and their key role in financial inclusion,” according to Sir Jon Cunliffe, Chair of the Committee on Payments and Market Infrastructures and the Deputy Governor for Financial Stability at the Bank of England.

But on the other, FinTech providers and applications are “not a panacea and there are risks that need to be managed”. These include operational and cyber resilience, the protection of customer funds, data protection and privacy, and digital exclusion among the poor and unbanked. If not adequately managed, these could actively undermine financial inclusion.

This underlines the need for effective regulation, oversight, and supervisory frameworks, says the report. The rise of FinTech demands increased international and cross-sectoral coordination – especially in light of the cross-border, cross-currency nature of many innovations.

Effective cooperation and coordination among central banks, financial supervisors, regulators, and policymakers will help avoid regulatory arbitrage and promote effective supervision.

“Particular attention should be devoted to promoting responsible innovation that does not exclude disadvantaged segments of the population, by encouraging designs that are tailored to the needs of these segments,” adds the report.

“To realise FinTech’s potential to improve financial inclusion, initiatives need to be appropriately embedded in wider country-level reforms and global efforts that seek to put the PAFI guidance into practice.”

Coronavirus: the provider challenge

This suggests that FinTech companies should be focusing on those parts of the community that have been overlooked by the mainstream banking sector. So how is the FinTech sector faring in the coronavirus crisis, which is undermining economies worldwide, locking down entire sectors, and pushing companies of every size and type to the brink?

2020 is “the year of FinTech apps as economic uncertainty reigns”, according to a report from mobile app marketing organisation Liftoff and mobile data analytics provider App Annie, which suggests that consumers and companies alike may flock to FinTech apps as money management becomes a key priority.

But to see the crisis as a simple case of cause and effect in this way would be a mistake. One reason for this is the deleterious effect that the pandemic is having on FinTech investments, according to market analysis firm CBInsights.

“The coronavirus outbreak has ended the growth-at-all-costs environment. Funding conditions have undergone a 180° shift, and the future of FinTech has changed dramatically,” says a briefing note from the company.

“To compensate, startups in the space will need to focus immediately on balance sheet health and cash flow management — which may prove to be difficult for the most aggressive growth stories.”

CBInsights data through to the end of March 2020 finds that total deals and investments in FinTech companies are down month-over-month, quarter-over-quarter, and year-over-year. Funding has fallen back to 2017 levels.

Investors are liquidating assets to fortify their cash positions and FinTech companies should be following suit, as raising funding in the crisis-hit market is likely to be “difficult – and expensive”.

A flight to cash will mean that FinTech companies will, like the customers they seek to serve, have to tighten their belts. The era of soaring valuations but zero profits may be over. However, that may make it less attractive for struggling providers to focus on financially excluded customers – at least, in ways that will actively benefit those people.

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