The digital age can be a boon for inclusive finance

Illustration: Peter C. Espina / GT

Inclusive finance has always been a global challenge. There are an estimated 2 billion people in developing countries who do not have a bank account, and only 10 percent of adults in these countries have credit cards. In addition, only about 21% of people with a real demand for borrowing can obtain loans from formal financial institutions. In China, 72% of adults lack basic financial literacy, which may explain why the Chinese stock market is so volatile. The above data adds to the evidence that limited financial inclusion is a global problem.

So how do you define financial inclusion? I think there are four benchmarks to consider. First of all, it must be inclusive. This means that people from all walks of life can access financial services anytime, anywhere. Second, it should be affordable for everyone. Third, a diverse range of financial services must be available so that every customer can get what they need, including payments, wealth management, insurance, financing and credit. Fourth, it must be commercially sustainable. When discussing financial inclusion, it should be assessed using the above criteria.

Financial institutions were not born a snob with a tendency to despise the poor and win favor with the rich. They do indeed want to promote broader financial inclusion, but one of the challenges is to reach the users. Another challenge is to understand the users and recognize the risks. So far, inclusive financial systems have not been further popularized because the cost of reaching users, collecting information and filtering risks is too high.

Thanks to new technologies, mobile internet now enables users to access financial services anytime, anywhere, dramatically reducing the cost of user access. Big data and artificial intelligence help reduce the costs of collecting and processing information, improving the ability to detect risks, while cloud computing further reduces costs and improves the efficiency of risk recognition. Digital technology is changing the way we deliver financial services in a new era. It turns the idea of ​​financial inclusion into digital financial inclusion.

This era of digital financial inclusion is a golden time to develop inclusive financial services. Previously, consumers were limited to accessing financial services at specific times and places, but now these services are available anytime, anywhere through mobile internet.

Three key pillars – financial compliance, technology and scenario-tested services – are needed to further develop an inclusive digital financial system. This system is, after all, a type of financial service, which requires compliance. Identity authentication, anti-money laundering, information disclosure and risk control procedures are necessary to ensure compliance. Digital finance is now driven by technology instead of relying on tangible stores. In addition, digital finance must be tested on real scenarios.

While people see the enormous value that inclusive finance creates for their lives, they are also concerned about the risks it can bring, such as the risk of peer-to-peer (P2P) boss flight. Whenever there is a problem with financial services, more often than not one or two of the three pillars don’t work. For example, some P2P platforms in China do not follow the rules or are outright fraudulent, such as Ezubao, previously one of the largest P2P platforms in the country which has been shut down and arrests have over 95 percent of its loans online.

Meanwhile, some services are compliant but providers are technologically incapable. Without adequate big data capabilities, they cannot identify risks even if they can reach users. Finance must also be able to respond to various scenarios, otherwise service providers cannot effectively identify risks in a certain situation even if they are technologically capable.

But all-inclusive digital finance can certainly come with risks like the subprime mortgage crisis in the United States, the microfinance crisis in India in 2010, and P2P scams in China.

High-level principles governing inclusive digital finance have been proposed to the Group of 20 (G20) summit in the hope of guiding and promoting the development of services in the world. Hopefully countries recognize the value of inclusive digital financial services and promote them as a national strategy. But they should do it by balancing the risks and the benefits rather than going blindly.

In terms of supervision, moderate supervision and empowering supervision can help create an environment conducive to financial innovation and enable the market to play its role in boosting financial services and encouraging competition.

In addition, these principles also aim to promote the development of infrastructure for inclusive digital finance, for example by enabling the sharing of government data that can help identify risks through big data technology.

The author is chief strategy officer of Ant Financial Services Group, Alibaba’s financial services unit. [email protected]