According to the recently published Global Economic Prospects, the global economy is expected to contract more than 5 percent in 2020 due to COVID-19. Globally, the deepest recession since 1980 has sent hundreds of millions into poverty. Recovery appears far away. The crisis has encouraged economic transformation and the adoption of digital business models, including increased usage of digital financial services.
Digital financial inclusion had been a priority for development before the COVID-19 crisis; it’s now essential both as a short-term solution and a key element in a broad-based recovery effort. Digital finance is not without its challenges, but it’s also a way to reduce risk and overcome obstacles.
The Global Partnership for Financial Inclusion has developed high-level policy guidelines (HLPGs), which the G20 finance ministers recently endorsed. World Bank Group set background reports for these guidelines – women’s inclusion in financial services, with Better Than Cash Alliance and Women’s World Banking and innovations within small and medium enterprises (SME) financing, with SME Finance Forum – leveraging insights gained from country advice as well as extensive empirical research. These documents highlight two issues: the importance and potential of digital technology and infrastructure and the possibility of accelerating digital inclusion by using large volumes of payments. Both documents are relevant as the world deals with COVID-19.
Digital technology and infrastructure for DFS
Digital development and DFS are built based on access to technology. Digital products and DFS are built on the foundation of access to technology, such as mobile phones.
In low and middle-income countries, women are less likely to own mobile phones (8 percent) or use financial services than men. Mobile money services such as M-Pesa, in Kenya, or MTN Mobile Money, in West Africa, can help close the gender gap more quickly than traditional banking products. Sixty-five million women in the Middle East and North Africa do not have bank accounts but mobile phones. This is a perfect opportunity to deploy DFS. Government policies encouraging women to own mobile phones could help bridge the gap between technology and financial inclusion.
Digital identification and electronic Know Your Customer technologies (eKYC) are also essential for achieving financial integration of digital policy and infrastructure. COVID-19 has prompted more countries to build this infrastructure. They are deploying online tools to create digital IDs to speed up health and relief services access. It simplifies eKYC rules, particularly in low-income countries.
The digitalization of small businesses improves their productivity and gives them better access to markets and finance. International Data Corporation’s (IDC) study of more than 3,200 SME chief executives from 11 countries revealed that 49 percent believe technology equalizes the playing field between small businesses and more giant corporations. Digitalization can boost a country’s economy from a macroeconomic standpoint. The digitization of SMEs across the ASEAN countries could increase the region’s GDP by $1.1 trillion.
Digitalization has many benefits for SMEs. It can increase efficiency, maximize profits, and create valuable data they can share with external partners, including financial institutions. Digital payments make a large amount of transactional data that can be used to evaluate risk and estimate income. Kopo Kopo, a Fintech firm in Kenya, offers merchants digital payment access through M-PESA. The company then uses Big Data analytics on merchant payment transaction data to provide SMEs various value-added products, including short-term unsecured loans. Accelerating digital payments for SMEs strengthens the ecosystem of financial inclusion for consumers. This is especially important in this period of social distance. Digital payments can formalize SMEs in emerging markets. This, in turn, leads to an increase in the economy’s overall output and the expansion of tax bases.
Digital payments are also a way to achieve financial inclusion for women, with solid evidence of government payments’ impact on women. Before COVID-19, many women (140 million) opened their first bank accounts because of government payments. These included public sector salaries, pensions, and safety net transfers. According to the Global Findex 2017, 20 percent of women with accounts opened their first bank account to receive digital government payments in Argentina.
The COVID-19 Crisis drives a massive shift toward digital markets and financial services. Handled responsibly, the digitalization of finance for individuals and firms can reduce costs and open up new market and livelihood opportunities–helping countries rebuild better after COVID-19.