Page 46 - Banking Finance June 2022

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That said, competition between traditional and delivering national services (pension, health, insurance, and
nontraditional providers, though nascent, is emerging. For social welfare payments) to digital financial services to
instance, purely digital banks are coming up, directly satisfying regulatory requirements on customers' identity.
competing for traditional bank customers and attracting Biometric identification has also been introduced in
new ones due to their technological advantages and low- developing Pacific countries, such as Papua New Guinea or
cost services. Similarly, fintech lenders now compete directly Samoa, allowing unregistered persons to use fintech-based
with informal money lenders, microfinance institutions, and payments. A key regulatory and legal issue in many countries
small banks in both payment and credit. Big banks, too, are is to balance between information sharing and privacy
beginning to feel the competitive pressure and are protection. Many fintech companies have expressed two
responding in different ways. Some are buying up small major constraints: uncertainty of the regulatory environment
fintech companies or investing heavily in fintech. This trend and lack of technological expertise the "coders."
could be further strengthened as they adopt to lockdowns
and social distancing measures to contain the COVID-19 Uncertainty or frequent changes in the regulatory
pandemic by accelerating the shift toward digital delivery environment was, in some sense, more of a constraint than
services. a clear road map with tighter regulation. In some countries,
the regulatory support measures, implemented as a
What Are the Factors that Enable and response to the COVID-19 shock, are designed to be
channeled mainly through the banking sector, which could
Constrain Digital Financial Inclusion?
further exacerbate these constraints. The shortage of
These include: technological expertise, the coders, is also increasingly
Customer identification, weighing on their minds, particularly in EMDEs. Further,
although many fintech firms rely on alternative data to
Digital infrastructure,
assess creditworthiness, they thought credit bureaus could
Financial literacy, and
help augment their assessments. Fintech firms seeking to
A supportive regulatory and legal environment for expand globally also noted the lack of universal credit scores
making progress in digital financial inclusion. and legal frameworks for loan recovery as impediments.

Customer identification is a first step for promoting financial Funding constraints, especially to scale-up, were also
inclusion. Financial services require accurate identification mentioned by many fintech companies, and is even more
of customers, including to prevent fraudulent activities. evident during the COVID-19 crisis. Initial support or funding
Many creative solutions are emerging: in EMDEs(Emerging typically comes through incubators or accelerator programs
Market and Developing Economies), telephone numbers are or from angel investors and crowdfunding. Some are
often used as a source of identification for providing basic increasingly being funded through private equity, venture
services such as payments; countries are developing capital, and hedge funds, while a few successful ones are
centralized database for customer due diligence already being publicly listed on stock exchanges.
identification. In some advanced economies, fintech
companies are working with regulatory authorities (such as Regulatory authorities are also facing wide range of
the Financial Conduct Authority in the United Kingdom.) to challenges. These includes catching up with the fast-
set up "digital portable identity" in order to help small changing landscape, facing budgetary constraints or lack of
businesses expand rapidly. expertise, and managing lobbying pressures from traditional
financial institutions. Regulators are also responding to the
These digital identities can be stored in smart phones and development of fintech by encouraging and adopting
used across institutions and borders. The introduction of the RegTech (The use of information technologies (IT) to
Aadhaar card in India, a national system of biometric enhance regulatory processes) and SupTech (the use of IT
identification issued to more than 1 billion people, has been to enhance supervision). From the financial service providers
a game changer. Its potential usage is high, ranging from perspective, the automation and data-driven analysis of

46 | 2022 | JUNE | BANKING FINANCE