The Centre for the Study of Financial Innovation, CSFI, is a global, nonprofit think tank that produces a number of resources and reports for the financial services industry based on collaborative work by industry professionals. On even years, the Banana Skins report details concerns from industry insiders and those outside the industry who share their concerns for potential disruptions in the way the financial services industry is providing services and meeting goals. The 2018 report, with specific reports for Banking, Insurance, and Financial Inclusion sectors, showed a surprising rise in concern over various aspects of technology in the financial inclusion sectors. Financial inclusion previously had been titled microfinance, but the name change reflects more accurately the industry efforts at providing comprehensive services to the financially excluded.
The 2018 Financial Inclusion report, titled Finance for All: Wedded to Fintech, For Better or Worse, lists the top three concerns from over 300 industry and sector professionals in over 70 countries. By far, the greatest concern was the disruption over the rapid evolution of new technology. The second and third concerns, new to this year’s report, were strategy and political risk. It was interesting that concerns over technology in the industry were top concerns for professionals in both developing and advanced economies.
While no one is questioning the significant improvement fintech has brought to the ability to provide services to the financially excluded in poorer countries, the rapid rate of new fintech development has brought some concerns. Specifically, there are concerns over the cost of new technology, products hitting the market with significantly greater speed, and the cost of staff to develop and run the new tech. The practice for many institutions is melding their core banking systems with new financial technology, but the rapid turnover of new products and systems is causing stresses. In addition, there is a perceived Wild West atmosphere, with a heavy-handed approach to selling new tech. No one wants to be left behind in a rapidly evolving market, but understanding the consequences of merging new fintech with core systems is not always well understood.
Part of the concern involves the changes to the customer interface between an older model of microfinance, which provided support and provision of services from staff experienced in the challenges of the local markets. These staff-heavy models were effective, but expensive and difficult to maintain over time. New models, which are increasingly digital-only, have less provision for support and education. The larger package of services that support financial inclusion efforts, such as identification, community development, education, and other supports is no longer standard practice.
It is not well understood if the increasing debt load and default rates among customers of MFI’s are related to the changing models of practice and the reduction in support services. But concerns over profitability by investors may be driving the push for less-expensive digital-only interface.
In addition, concerns are growing over the possibility of criminality with the loss of human to human interface, and data integrity and cybersecurity remain industry-wide concerns. With newly integrated systems, the possibility of breaches, hacks, system failures, and other catastrophic data integrity losses remain of grave concern. Compounding this issue of data security is the changing nature of regional versus state systems. Global financial markets are increasingly regional, and regularly cross borders, but states retain legal and regulatory control over financial services, currency, and trade. Political instability and rapidly changing regulatory environments have the potential to disrupt regional markets.
As 2020 rapidly approaches, many regions and states are entering a final push to reach or exceed the UN’s Sustainability Goals, especially those for financial inclusion of the traditionally excluded. One unique aspect for the developing economies, especially Sub Saharan Africa, is identification schemes for populations that are geographically isolated. India had been grappling with various national identification efforts, partly to support efforts at financial inclusion that includes various ways to make benefits payments more accessible to the rural poor. National identification, with new biometric technology or other new identification technologies, will play a particular role in financial inclusion for women in developing economies. Privacy and data integrity concerns may slow acceptance of biometric identification in developed economies. Many respondents for the 2018 Banana Skins report do not feel that current methods of digital identification, such as access to a phone or a password, are adequate for this type of identification.
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