FINTECH, FINANCIAL INCLUSION, AND CYBER RISK: TACKLING THE POST-COVID-19 CHALLENGES

On 15 October 2020, Toronto Centre convened a meeting of leaders in policy, supervision, and regulation from developing and developed countries to explore the impact of COVID-19 on financial inclusion. They discussed how to increase access to financial services for the poor and vulnerable, especially women, during the COVID-19 crisis, and how their organizations can help their governments provide quick and safe payments to help people during this crisis.

This was the third roundtable discussion hosted by Toronto Centre on this important matter. Previous discussions that explored the benefits of FinTech for financial inclusion and some concerns relating to risks arising from the use of FinTech to consumers, financial inclusion, financial institutions, and financial stability were held in October 2019 and April 2020 during the IMF and World Bank autumn and spring meetings.[1]

The discussion was moderated by Alan AtKisson, Assistant Director-General, Sida. He opened the discussion by emphasizing the importance and timeliness of this topic for the 1.7 billion people in the world without a bank account, of whom a disproportionate number are women. Six months on from the April 2020 roundtable, it had become clear that COVID-19 was not a short-term disruption but a world shaping event.

The discussion focused on how COVID-19 is accelerating the digitization of payments and the benefits and risks of this acceleration on people’s livelihoods. The group explored:

• The continued need for cash. Many people, especially women, are part of the informal financial system. They are paid in cash and pay for food, education, and shelter for their families in cash;
• How digitization increases the risk of fraud and scams, especially for people who have low literacy levels, and what the right balance of risk versus reward is;
• How digital technology is an effective and efficient way to reach rural and remote communities. It can be utilized for quick and safe government remittances to provide direct aid to help people during the COVID-19 crisis;
• The need for countries to build the foundational elements for inclusive digitization. Common elements that need to be addressed are ID requirements, connectivity, and financial literacy;
• The potential role for a central bank digital currency; and
• The role that central bankers, financial supervisors, and regulators can play to advance digitization in a safe and secure manner to help the poor, especially women, gain access to financial services.

RECORD OF PROCEEDINGS

Panel Session

Stefan Ingves (Governor, Riksbank; Chair, Toronto Centre) opened the discussion by focusing on the impact of COVID-19 on the reduced use of physical cash and the increased use of digital payments. This was partly because people have been afraid that cash might be contaminated by the COVID-19 virus, and partly because of pandemic restrictions and social distancing diverting consumption habits towards online shopping. This is likely to be a permanent shift – there may be some shift back to the use of cash once the COVID-19 pandemic is over, but habits have changed and people have invested in the equipment and knowledge to make digital payments. Indeed, COVID-19 has accelerated this shift to the use of digital payments.

There are benefits to this development, but also risks. With increased digitalization comes increased cyber risk. As both more transactions and more devices go digital, the possible attack surface increases. Malicious threat actors are given more opportunities and possibilities to attack. Phishing emails and other frauds and scams are on the increase. Meanwhile, some financial institutions may have become more vulnerable to cyber-attacks as a result of large numbers of their staff working from home under lower levels of IT security.

A second risk is to financial inclusion. Digitalization is important for financial inclusion, but there is also a risk that parts of the population, for various reasons, are unable to use digital technology to its full extent. These people will find it harder to make payments, as shops becomes increasingly averse to accepting cash, and harder to conduct their banking affairs, as banks close down their branch offices.

While it may not be a direct task of financial supervisors, Governor Ingves stressed the importance of ensuring that making payments is a basic right for individuals in society. There are several measures that could help to achieve this. One would be to provide legal protection for the use of cash, so it will always be possible to withdraw cash and to pay with cash. Another possible measure is to issue a central bank digital currency, and – if needed – to ensure that there are incentives for the private sector to develop easy-to-use solutions for segments of the populations with particular needs. Here, COVID-19 has forced central banks to speed up their thinking on these issues and to adapt more quickly to the new digital era.

Socorro Heysen (Superintendent, Superintendency of Banks, Insurers and Pension Funds, Peru; Board Member, Toronto Centre) observed that prior to COVID-19 the use of cash to make payments had been very high in Peru, followed by credit cards. Since COVID-19, the use of mobile payment applications had grown rapidly and has overtaken credit cards as a means of making payments. This has increased the risks of phishing and other frauds and scams, and of service interruptions, all of which may bring reputation and confidence issues for parts of the financial system.

In response, financial supervision and regulation have had to adapt, including through an increased focus on cyber security, outsourcing and business continuity, and an increased use of information from consumer complaints through close coordination with the consumer protection agency.

However, supervisors and regulators did not always have all the right tools to deliver good outcomes. For example, as lenders have imposed higher lending standards, and government support for borrowers is phased out, the supply of credit has decreased, especially to households and SMEs, with a disproportionate impact on women. Only well-capitalized banks will be in a position to increase their lending, but the availability of creditworthy lending opportunities depends on economic recovery. 

It was also important to promote digital financial literacy to help people to understand and to use digital channels for financial transactions. This is a shared whole-of-society responsibility for financial supervisors, financial institutions, and the Ministry of Education.   

Roundtable Discussion[2]

Digital payments and financial inclusion

Many participants noted the potential benefits of technology for a rural population, especially when spread across vast geographic areas (for example, the 270 million population of Indonesia, spread across 6,000 inhabited islands). This could be based on digital retail payment mechanisms with supporting platforms and other infrastructure. Or, as in many countries, it could be based on a system of agents replacing (or avoiding the need for) traditional bank branches. Both approaches had also been used during the COVID-19 pandemic to distribute government assistance to the poorest parts of the population. Again, however, increased use of technology carried risks such as cyber security, fraud, scams, and the selling and distribution of personal information.

Participants also observed that various building blocks needed to be in place to maximize the net benefits of digitalization for financial inclusion. This would vary across countries depending on the structure of their financial systems and the extent of digitalization, but common elements might include:

• The development of digital retail payment systems and digital ID;
• A basic financial infrastructure that allows digital channels, and the affordability of the devices needed to make digital payments;
• Connectivity and reliable utilities;
• Financial literacy;
• A framework for the digitalization of finance;
• A balance between encouraging innovation and maintaining financial stability and trust in the financial system. Sound supervision and regulation is of great importance for general confidence in the financial system, which is necessary for financial inclusion;
• A focus on financial inclusion and access to financial services to support economic activity;
• Cyber security standards and platforms for the sharing of information on cyber vulnerabilities;
• Taking the anti-money laundering perspective into account when promoting financial inclusion. One way to do this is through standardization;
• Reinforcing the potential of FinTech to improve financial inclusion by ensuring proper and adequate supervision and regulation of financial institutions using FinTech applications. This requires powers to expand the perimeter of regulation to cover new players, on the basis of same business, same risks, same rules; and
• Recognizing that the use of technology extends well beyond digital payment channels – for example, financial institutions are making increasing use of artificial intelligence and machine learning in their decision making, with potential consequences for exclusion, bias, and opacity.

Central bank digital currencies (CBDC)

Picking up on a point made by Governor Ingves, many participants commented on how COVID-19 and the growth of retail digital payments had moved CBDC from a somewhat arcane topic of discussion among central bankers to a potentially important element of the provision of cheap, reliable, efficient, and open retail payment systems (by both central banks and the private sector), potentially extending across borders and across currencies.

This in turn reflected the shifting nature of the drivers of CBDC, which now included both the prospect of restricted, monopolistic, and potentially unstable private sector initiatives and the importance of providing universally available alternatives to physical cash. Since private firms can exclude users for various reasons, it is important in this context to recognize the role of the public sector in ensuring financial inclusion and the ability to make payments for everyone. If central banks were to create CBDCs, we would have a method of payments that was specifically designed to ensure basic payments services for all – something that would be important for laying the foundation for financial inclusion in the future.

There was no global agreement on how to introduce CBDC, nor any road map to follow, although earlier transitions to wholesale payment systems may provide some indications of the path ahead. It was observed that some form of CBDC could be introduced quite soon by a central bank. 

Conclusion

The leaders concluded there is still much work to be done to foster access to financial services for the poor, especially women. COVID-19 is advancing the discussions and accelerating the implementation of digital solutions. Central bankers, financial supervisors, and regulators have a critical role to play to help to ensure it is done in a safe and responsible manner that is sustainable to protect and benefit all. This is consistent with the UN Sustainable Development Goals and objectives of poverty reduction.

[1] See the record of the October 2019 and April 2020 roundtable discussions.

See also the Toronto Centre Note on Supervising FinTech for Financial Inclusion that developed further some of the issues covered in the October 2019 discussion.

[2] The discussion was conducted under the Chatham House rule – the themes reported here reflect the sense of the discussion but do not attribute observations to individual participants.