108.11台灣銀行家雜誌第119期 / By Olga Rakhmanina
Not So Fast, Please: Financial Exclusion In The Digital AgeBankers Digest
Recent advancements in technology and digital innovation promise to make our financial lives easier as we make payments with a tap of our bank card and manage our accounts from the mobile phone. Yet, behind the hype of digital progress as a key promoter of financial inclusion lies the risk that some people may be left behind if this exciting technological revolution fails to consider the needs of all segments of the society. Financial innovation spurred by digital technology is changing the world before our eyes. Whilst impact in the established markets is somewhat limited to increased convenience and new functionality, transformation in the emerging countries has been far more significant. Access to the formal financial sector in places with historically significant unbanked population now allows people and companies to spend and save more efficiently, build credit history and reduce financial crime. The Word Bank estimates that about 1.7 billion people around the world were unbanked in 2017 - that is, they did not have an account with a financial institution or a mobile money provider. The number is daunting, but it represents considerable improvement on 2011 when only 51% of adults had an account (compared to the latest 69%). According to Nikkei Asian Review, over 50% of Southeast Asian small and medium enterprises are either not being catered for by credit services or were being underserved . New technology offers significant potential to bring outsiders into the regulated financial world: About two-thirds of unbanked adults have a mobile phone which has the functionality necessary to access formal financial services. Policymakers and financial institutions, however, need to be mindful of challenges and barriers that technology may create in the new contexts, such as disrupting access to the basic financial infrastructure, undermining consumer protection, threatening privacy and data security, as well as failing to serve vulnerable groups. No Cash, PleaseIt is not exactly breaking news that developed economies rely less and less on cash as debit and credit cards as well as online banking have long become a part of everyone’s daily life. What is worrying policymakers, however, is the speed with which cash is disappearing as a payment method, which is primarily driven by disappearance of bank branches and ATMs and compounded by the increasing number of places no longer accepting cash. If you are a customer, tapping your card on the terminal offers undisputed convenience compared to the need to withdraw and carry banknotes; businesses like it too as cashless transactions reduce the risks associated with holding and transporting cash. In its recent report, The Economist estimated that running cash infrastructure in rich countries, including minting, sorting, storing and distributing, amounts to 0.5% of GDP. Cashless transactions do not just incur less cost, they also minimise the risk of theft or fraud, prevent tax evasion efforts and allow to build credit history . Some countries, such as Sweden – which reportedly has the lowest cash use in the world – are particularly advanced in reducing reliance on cash. However, their seemingly unstoppable progress towards the world where there is no place for bills and coins has raised an important question: Is the society truly ready for the cashless future? A quick answer to this question is no. Cash continues to play an important role in some communities; its hasty disappearance might have devastating effects on people’s ability to manage their daily lives. As industry observers point out, the question is less about the desirability of introducing cashless society, but more around how to prepare for it to ensure it is fully inclusive and works for all financial needs. Moving fast in tune with the times just because cashless world works for some segments of the society – often young, urban and relatively affluent consumers – risks leaving millions of people outside the new financial landscape. In the UK, concerns around decreasing usage of cash have led to the Access to Cash Review, which published its findings earlier this year. It concluded that the country – which has a long history of electronic transactions – is noticeably unprepared for a completely cashless environment: Around half of the UK’s population would find living without cash problematic and 17% think that this would be near impossible. The report points out that although some demand for cash will disappear with time as more and more shops accept cashless forms of payment, certain people will maintain preference for banknotes and coins. For instance, cash makes budgeting easier and going into debt more difficult; it helps track payments where carers make purchases on behalf of people they look after; and cash is easier to use for people with some disabilities. As the report highlights, ‘technology is often designed for the mass market rather than for the poor, rural or vulnerable. It’s clear from our research that, if the technological revolution continues apace, millions are likely to be left behind’ . Turning back to Sweden, Bloomberg reported that cash in circulation in 2017 had been at the lowest level since 1990 and more than 40% below its 2007 peak. Furthermore, 36% of the population leads cashless lives and 25% of Swedes pay in cash once a week only (a significant drop from 63% four years ago) . Swedish society is adapting accordingly with a large number of shops, restaurants and public facilities no longer accepting payments in cash. Such a rapid drop in cash usage has led to an effort by lawmakers to mandate certain banks to handle cash and offer withdrawals. The idea was rejected last year by the competition and financial authorities with some voices calling for the responsibility to ensure continuous access to cash to be put at the government’s door instead . This highlights an important issue. To quote the UK’s Access to Cash Review again, ‘there is little point having access to cash if you can’t use it’. The Central Bank of China, for instance, had to issue a reminder in December 2018 that rejecting cash as a payment method was illegal, largely because of its worries over population losing confidence in cash. It also added that the practice is particularly unfair to the elderly and those living in less developed parts of the country . Denmark has legislation which obliges payees to accept cash, subject to some limited exceptions, and the right to cash payments has been tested on a number of occasions in Norway . According to the report by The New York Times in February 2019, New Jersey and Philadelphia have introduced measures to ban cashless stores, while New York, Washington, Chicago and San Francisco are considering similar measures . Crating VulnerabilitiesThere is an irony in how digital financial services contribute to greater financial inclusion in some parts of the world but threaten to reverse the progress in other places – often developed countries with mature financial infrastructure – by leaving behind those who rely on cash payments and brick-and-mortar branches for managing their daily needs. Ignoring this problem risks creating more vulnerability deepening the existing concerns. Policymakers recognise that whilst digital technologies offer great potential across the world, they also carry significant risks that require careful consideration and management. The Group of Twenty (G20) has developed High-Level Principles for Digital Financial Inclusion which promote a number of actions for ensuring financial inclusion. For instance, they call for creation of simple digital tools for vulnerable consumer groups that can minimise the risk of mistaken transactions or unauthorized use. Recognising that future success of digital technologies depends on the ease of adoption, the document encourages governments to ensure appropriate telecommunications and power infrastructure as well as expanding broadband network and data coverage into less served areas . This is particularly essential for rural areas, where customers see their bank branches disappearing but access to digital services unreliable or non-existing.There is also a growing concern around consumer protection as customers may be unfamiliar with risks associated with digital products and channels. As more and more people are brought into the fold of formal financial services, they may lack some basic financial education about how the system operates and how to protect themselves. As Organisation for Economic Co-operation and Development (OECD) and G20 point out in their policy guidance on Financial Consumer Protection Approaches in the Digital Age, ‘access to financial services alone is insufficient. Rather, fostering widespread usage and understanding of responsible digital financial services is critical to individual, national and global welfare’ . In other words, digital tools may allow financial services to be offered in a way that leads to irresponsible behaviour on the part of both consumers and providers. The policy guidance specifically highlights the risk of over-indebtedness among vulnerable consumers where, for example, immediate credit offers play on the desire for instant gratification. This scenario, in fact, could apply to the vast majority of individuals as the ease with which financial technology allows money to be spent today encourages impulsive decision-making with negative consequences for the account balance. The Big Impact Of Small PrintTechnological advances in financial services raise important questions about confidentiality and data privacy. Whilst electronic transactions enhance transparency of the financial world, an increasing number of consumers are becoming concerned about their banks’ ability to monitor their spending habits every step of the way, which will only intensify in the purely cashless environment. Recording and analysing transaction data – down to the daily coffee consumption – will enable institutions to understand their customers better than they do so themselves, profile them and determine the services that they offer. Research demonstrates that consumers continue to value the anonymity of cash for certain transactions – not because they harbour criminal intentions, but because of the understandable desire to keep certain elements of their lives private. Policymakers also highlight the importance of ensuring that data protection regulations keep up with the digital innovation in financial services. In its Financial Consumer Protection Risk Drivers framework document, OECD identified technological developments as a threat to consumer data and privacy, since digital services have made sharing their data even easier for individuals. Educating consumers about protecting their data privacy is gaining prominence, especially as financial landscape is changing with transactions involving more and more parties . Disclosure should help consumers make informed choices on how they want their data to be handled and to what extent they want a personalised service built on full access to their lives. As The Economist put it, ‘some customers will favour free services that track their purchases; others will want to pay to be left alone’ .Advanced analytics of the continuously growing wealth of data facilitates more precise analysis of consumer behaviour which optimistic observers say will enhance customer experience and extend financial services to the so far excluded parts of the society. There is a less upbeat view, however, as detailed overview of consumer habits and purchases may enable financial institutions to identify and exclude clients that don’t fit company’s narrow criteria. Insurance is a frequently quoted example where big data facilitates granular segmentation of consumers to spot those that the insurer will want to retain on its books and those it will want to remove. Undesirable consumers are not necessarily rejected outright, but they may be offered insurance premiums at unaffordable levels which has the same effect as direct exclusion. All these aspects demonstrate that technology itself is neutral; it is how companies choose to deploy it that will either make it a force for good or simply maximise their profits without regard to the impact on their consumers. Financial regulators have a daunting task of keeping up with the pace of digital innovation and the industry’s continuously changing landscape. Whilst consumer financial education remains the cornerstone of ensuring individuals and businesses make informed decisions, policymakers around the world are also cognizant of the urgency posed by the potential financial exclusion in the digital age, whether it is caused by moving away from the traditional financial infrastructure or development of more effective analytical tools which can restrict access to those consumers who need essential financial services most.