Digital infrastructure and digitalization impact every aspect of finance, starting with access, availability and affordability. Mobile payment platforms have turned mobile phones into interfaces with the financial system and are now used by over 1 billion people. In 2017, 69 percent of adults had an account with a financial institution, up by seven percentage points since 2014. In many countries in Sub-Saharan Africa, over 60 percent of the adult population have a mobile money account. Digital payments systems in developing countries have often involved new distribution models (through networks of agents, and stable connectivity and power supply for them) and improved interoperability so that users of different platforms and systems can make seamless transfers that are as good as cash. For example, MTN and Orange, with the support of GSMA have developed Mowali, a system to enable interoperable transfers across Africa.
Digitalization has catalysed changes in existing banking systems. Digital identity and online account opening reduces bank account opening costs dramatically. Mobile payment systems have required changes in interbank clearing systems. A growing number of countries in Asia, Latin America, Europe and the US have implemented fast payment systems that make funds available instantly. Fourteen banks, including UBS, Barclays, Banco Santander, Credit Suisse, HSBC, Deutsche Bank, have invested over US$63 million in the most ambitious blockchain-based utility settlement coin ‘Fnality’ to make clearing and settlement more efficient. Central banks including Canada, China, Sweden, and Uruguay are seriously considering offering central bank digital currencies, and several have moved on from research to piloting. Banks are also using AI and advanced analytics to assess credit risk more effectively and extend credit to more borrowers.
Digitalization has the potential to enable every nut and bolt of financial processes to be unbundled and commoditized, including budgeting and financial planning, payment processing, point of sale machines, billing and invoice management, cashflow and liquidity management, invoicing, bookkeeping and payroll management. Digitalization has allowed processes and products to be redesigned for cross-border remittances, banking, foreign exchange services, retirement management tools, investment advice and management, stock broking, spread-betting, borrowing and lending. Digital innovations enable new business models such as financing models, cryptocurrencies, peer-to-peer lending, crowdfunding platforms, online marketplaces and aggregators, smart-devices linked and index-based insurance.
Noisy stock exchange floors are being replaced by algorithmic traders. One estimate suggests that 90 percent of equity-futures trades and 80 percent of cash-equity trades in the US are executed without any human input. Over a third (35 percent) of US public equities is run by computer-managed funds, with funds with human managers now accounting for only 24 percent. The conversion of financial assets into digital tokens could further transform the clearing and settlement of securities trades.
The coronavirus has triggered an unprecedented twin global health and economic crisis. With millions confined in their homes, the importance of the digital world has grown. Digital financing solutions have been used to provide social safety nets, maintain liquidity and ease financial pressure on businesses.
Digitalization is changing the financial sector and bringing in new players. Many existing financial institutions have digitalized their services through acquisition, in-house development, outsourcing and partnerships. Banks have invested over US$1 trillion in developing, integrating and acquiring emerging technologies. Mainstream financial institutions are developing digital first services, including for underserved clients and new markets. There is an increasing trend towards open source initiatives in the financial industry. Open source projects and shared standards allow interoperability and open innovation rather than tying companies into proprietary technology and locking data into incompatible formats.
Mobile operators and new innovators have become key players. In 2018, ‘fintech’ investment hit record high US$120 billion, representing about a third of global venture capital funding. Meanwhile, fintech and telecom companies are also acquiring banks, such as Lending Club’s recent purchase of Radius Bank and Telenor’s acquisition of Tameer.
To date, the relationship between incumbent financial institutions and innovative start-up firms appears to be largely complementary. Partnering allows fintech firms to viably operate while still being relatively small and benefitting from access to incumbents’ client base. Incumbents benefit from access to innovative technologies. For example, BBVA Bancomer in Mexico has run pilots with fintech startups through their open sandbox project to test new types of data for alternative credit scoring and to drive customer engagement through automated SMS messaging.
Digital retailers and social media platforms are moving into financial services. They are able to amass large volumes of data, which allows them to offer highly relevant, personalized financial services directly or in partnership with traditional financial companies. Ant Group, a related company of the Alibaba Group has launched services including mobile wallets, savings accounts, personal investing, lending, and credit scoring serving 900 million people in China, by partnering with financial institutions. Its Yu’e Bao cash management platform uses liquidity prediction and management technology to help fund managers plan and execute investment strategies.
Other established tech giants are also increasingly venturing into financial services. Apple has moved from ‘Apple Pay’ mobile payment services to providing credit through ‘Apple card’, online retailers undertake small business lending. Facebook is consolidating its payment products under a new brand Facebook Pay in addition to developing a global cryptocurrency Libra which will use Facebook’s digital identification infrastructure. Google is reportedly planning to expand into banking. Ride hailing platforms such as Grab and Uber are moving into financial services, including offering credit lines and insurance products to drivers.
In public finance governments are making investments to digitalize their financial systems. This goes beyond government IT systems to developing interoperability between public and private sector information systems, mandating digital identification, and undertaking digital (financial) literacy education. The Government of Benin, for example, is working with Estonia’s IT solutions provider to roll out a secure, interoperable data exchange platform to facilitate digital service delivery. Digitalization has boosted efficiency and transparency of budgets, payments and procurement enabling cost savings, efficiency gains, and improvements in accountability. According to a CGAP estimate, switching from cash to electronic delivery of government benefits generates roughly 40 percent in savings per transaction.