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The Crossroads of Financial Inclusion & RegTech

In recent years we have seen first hand how the Regulatory Technology (RegTech) industry has grown exponentially, increasing not only compliance standards, but also cost savings and efficiency expectations across a vast array of industries and practices. Though RegTech is currently most prevalent within the Financial Industry, we have recently seen a trend of this tech expanding into other industries such as, but not limited to the legal, healthcare, and sustainability industries.

But as RegTech and FinTech adoption rates continue to soar, it is also important to pay special attention to how RegTech can potentially benefit global financial inclusion goals.

Financial inclusion can be broadly defined as the availability and equal opportunity of access to banking and other financial services. Its primary goals include providing access to financial solutions to everyone regardless of their income, saving, or spending capabilities, and is a process by which individuals & businesses alike can have access to affordable & timely financial products & services (e.g. Loans, Equity, Insurance products, etc.).

Financial inclusion efforts are typically targeted towards unbanked or underbanked populations, and attempts to direct sustainable financial services that go beyond merely opening a bank account towards these population groups. Having more inclusive financial systems has long been linked to stronger and more sustainable economic growth, thus, achieving financial inclusion has become a top priority for many countries around the world.

In recent years, a great deal of progress has been made towards financial inclusion, which has been on the rise globally. Since 2011, over 1.2 billion adults worldwide have gained access to a bank account, and between 2014 and 2017, the global share of adults who have an account with a financial institution rose from 62% to 69%. This figure was 54% to 63% in developing economies in the same time frame.

Technological advancements, such as digital transactions, an element of FinTech, vastly facilitate the achievability of global financial inclusion goals by allowing financial services to become increasingly digital.

But this progress, whilst great, is not enough. There still is some way to go to achieve global financial inclusion. The World Bank estimated in late 2019 upwards of 1.7 billion adults worldwide still remain unbanked, with approximately 66% of the unbanked population having access to a mobile phone and the internet, the minimum requirements to access internet banking.

It has also been noted that approximately half of the unbanked population are women living in rural areas, belonging to economically disadvantaged households, or are not active members of the workforce. In developing nations, the average gender gap in account ownership currently exists at approximately 9%. The fact that women in these nations are statistically less likely to own and operate a bank account hinders the ability of these women to effectively control their financial lives. Once introduced to the financial system, it is likely that account holders will go on to use other financial services such as insurance or credit for a variety of reasons.

Since the early 2000s the term ‘Financial Inclusion’ has gained massively in importance and traction, with the World Bank identifying its direct correlation to poverty. The United Nations has also identified the significance of financial inclusion as an enabler in achieving the 2030 global Sustainable Development Goals, and has defined the global Financial inclusion goals as follows:

  • Access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance.

  • Sound and safe institutions governed by clear regulation and industry performance standards.

  • Financial and institutional sustainability, to ensure continuity and certainty of investment.

  • Competition to ensure choice and affordability for clients.

But what is RegTech’s role in financial inclusion? What developments have been made in this field so far? How can we accelerate this process within countries which have more relaxed regulatory standards and less knowledge of technological innovation?

Undeniably, as previously mentioned, recent advancements in technology such as the invention and widespread nature of mobile phone-centric Digital Financial Services (DFS) and its variants in over 90 countries, has been a successful driver in meeting the financial inclusion goals in many developing nations.

Access to DFS has massively facilitated access to financial services, especially for those living in rural areas, as it effectively brings the bank to the customer instead of the customer having to travel long distances to reach the nearest bank. DFS also encourages more competition between banks, which drives innovation, as it grants potential consumers located in non-metropolitan areas more freedom of choice with regards to the financial services they engage with.

Unserved populations are generally characterised by their lack of access to a basic bank account, limited or no access to financial services, and a heavy reliance on a cash economy. In the past, little attention had been paid to these isolated, low-income communities, but with the rapid changes in technology and huge disruption within the financial services sector caused by RegTech & FinTech, Financial service providers have since broadened their horizons to also accommodate the larger, unbanked, population.

DFS plays a key role in financial inclusion in developing nations by reducing costs, and offering basic financial services at greater convenience in rural and underserved areas. However, the interdisciplinary nature of DFS complicates supervision responsibilities. Multiple regulators such as the nation's central bank, financial intelligence unit, and telecommunication regulators are all involved in the regulation of DFS. The task of coordinating between these, and other regulatory agencies in order to monitor new market participants and technologies is a momentous and nearly impossible responsibility for regulators in developed nations, and an even greater challenge for those in developing nations. RegTech can assist regulators in this process directly by impacting the supervision of the DFS ecosystem, and can address critical DFS processes such as agent monitoring. An example of such has already been employed by the Central Bank of Nigeria.

In addition to this, RegTech can also be used to assist in achieving financial inclusion goals directly. For example, Nepal’s Central Bank (NRB) launched a financial inclusion portal to track financial inclusion progress in the country over the span of a number of years. This portal provides real-time data to map financial access and identify gaps in provision. Data collected, sorted and presented through this portal assists the Nepalese Central Bank in their decisions in approving new Bank branches, as well as determining the most appropriate locations, the number necessary, and helps them to track their overall Financial inclusion progress on a national level.

An example of how RegTech can also be beneficial in a reporting capacity in the promotion of financial inclusion in developing nations can be found in Tanzania, where non-bank DFS providers need to report all transactions to both the Communications Regulatory Authority and the central bank. RegTech has been used to automate this reporting process which involves huge quantities of data that would not be manageable by human employees, without dedicating large teams and lots of time.

RegTech not only helps to improve day-to-day operating efficiencies by automating components of supervisory and regulatory tasks that are often tedious and tie up high-skill labour, but also has the potential to significantly enhance internal reporting processes, and reduce the number of errors made. Unlike the legacy systems currently employed in the financial systems of many developing nations, RegTech can facilitate the collection & organisation of big data in fast and integrated manners, allowing for the automated extraction of actionable information at a moment’s notice. With the assistance of RegTech, market participants would be able to report increasingly large volumes of data more frequently to regulators, who in turn will be able to more effectively process and analyse this data with their own RegTech-employing systems.

In central banks, RegTech can assist in directly improving efficiency & effectiveness of internal processes, and can be effective in monitoring rapidly evolving financial markets, even when the market itself may lack the appropriate infrastructure to supervise and monitor this process. This enhanced understanding of market participants and technologies may assist a central bank in its decisions in introducing new regulations and legislation.




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