Synopsis: The coronavirus pandemic may be wreaking havoc on public health and economies worldwide. However, it appears to serve as a catalyst in enabling financial inclusion.
The World Bank, in its Universal Financial Access initiative, seeks to enable financial inclusion among all adults who are currently unbanked or unable to access financial services. The group commits to bringing financial transaction access to one billion more people in 2020. Many think this goal is unachievable in the time of a global coronavirus outbreak and recession.But the World Bank does not appear to have intentions of changing targets.
Officials at the IMF also seem upbeat in their outlook on financial inclusion despite the health and economic crises. “The COVID-19 pandemic could be a game changer for digital financial services. Low-income households and small firms can benefit greatly from advances in mobile money, fintech services, and online banking,” wrote Ulrik Erisson, et al. in a study posted on the IMFBlog.
What is responsible for this seeming disconnect? Three things come to mind: the taller rise of ecommerce, increased reliance on FinTech, and favorable government actions and policies.
One of the welcome effects of enforcing community lockdowns and physical distancing rules enforced to address COVID-19 is the dramatic rise of ecommerce. Online buying and selling was already on an upward trend over the past years, but the coronavirus outbreak has given it an even more forceful push.
In April, CCInsights.org reported a 129% year-over-year growth in the combined e-commerce orders recorded in the United States and Canada. The same report revealed a 146% increase in all retail orders. It was around April when most of the COVID-related lockdowns were put in place.
So how does ecommerce growth correlate with financial inclusiveness? The answer lies in the need for buyers and sellers to have access to online payment methods. Without credit/debit cards, online wallets, or other similar financial tools, conducting online transactions would be extremely challenging.
Cash-on-delivery (COD) payment is an option, but businesses are slowly veering away from it because of the risks. In India, for example, online retailers such as Amazon and Flipkart have suspended their COD payment option. The decision was made in response to the state guideline on maintaining physical distancing and avoiding contact with things that may carry the coronavirus.
Aside from the COVID-19 transmission risk, several other issues hound the use of COD. Janio, an ecommerce logistics provider, accurately points out the drawbacks of COD while stressing the need to shift to online payments. “Once a merchant has established itself as a trusted seller…it should encourage its customers towards paying via digital payment means instead of COD. This is because COD disadvantages merchants in several ways,” writes Janio in a study. The disadvantages include unpaid purchases, the risk of theft, higher fees on COD deliveries, and longer cash conversion cycles.
Authoritative studies on the extent of ecommerce’s impact on financial inclusion are yet to be undertaken. However, it is not farfetched to infer that the popularity of ecommerce is convincing consumers to access financial facilities. Buyers face the need to use online banking or mobile payment systems to buy things while under quarantine. Businesses, on the other hand, need to adopt various online payment systems to serve more customers.
Greater reliance on FinTech
Financial technology is widely regarded as an enabler of financial inclusion. By offering various innovative solutions, FinTech allows people to engage in modern financial transactions not limited to the use of fiat currency. “Technological developments and increased interest from new players is leading to a fundamental re-imagining of the processes and business model of the financial services industry,” notes a World Bank research on FinTech and financial inclusion.
FinTech companies are responsible for most of the payment options used by ecommerce sites at present. FinTech innovations are behind the many systems offered as alternatives to cash and COD such as online wallets, mobile payments, and digital currencies. Digital currency is particularly important as it allows the unbanked to engage in online transactions more easily. It is considerably quicker to get a digital wallet and start using digital money compared to getting approved for a bank account application or having an online wallet verified to lift restrictions.
FinTech also introduced peer-to-peer loans and crowdfunding. These innovative solutions provide individuals and businesses new means to raise funds to address urgent needs, sustain business operations, or fund expansions.
Moreover, financial technology creates new opportunities for investments. “FinTech-fueled platforms allow users to invest small amounts of money and earn interest in a short amount of time. This has given opportunities for everyone who wants to increase their portfolio but can’t afford to lock their funds in for a long time,” says Prance Gold Holdings CEO Andre Gerald, as quoted in a study on bridging people together on financial inclusion through FinTech.
Supportive regulations and policies
As the pandemic and recession batter consumers, regulators are relaxing rules or adopting new policies that support financial inclusion. Perhaps the most high-profile example of a government effort to further financial inclusiveness is China’s decision to have a Central Bank Digital Currency (CBDC).
The world’s second largest economy is already home to the largest number of mobile payment users, which stands at around 45% of the population based on estimates from eMarketer. Still, the country is pushing for leadership in modern payment solutions by backing digital money.
China’s decision to introduce its CBDC amid a pandemic may not be coincidental. The country seeks to globalize its digital currency and in the process it is helping the unbanked in COVID-affected parts of the world gain financial access. More than ever, people need financial services to cope with the challenges of the new normal.
Nikhil Raghuveera, a nonresident fellow at GeoTech Center, affirms the idea that Central Bank Digital Currencies help promote financial inclusion. “Retail CBDCs can help remake the financial system into one that is more accessible to the unbanked and underbanked. Retail CBDCs are issued by a central bank directly to people without going through traditional bank accounts,” wrote Raghuveera in a study published on the Atlantic Council website.
Discovering silver linings while trying to survive a pandemic and recession is far from ideal. This is what is happening, though, in the context of financial inclusion. The pandemic has made virtually everyone more heavily reliant on online commerce and FinTech, driving financial inclusion incidentally. Government responses to the pandemic, on the other hand, have resulted in actions or policies that promote greater access to financial services.