No 9 FSI Briefs Covid-19: Boon and bane for digital payments and financial inclusion Nana Yaa Boakye-Adjei July 2020FSI Briefs are written by staff members of the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS), sometimes in cooperation with other experts. They are short notes on regulatory and supervisory subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS or the Basel-based standard-setting bodies. Authorised by the Chairman of the FSI, Fernando Restoy. This publication is available on the BIS website (bis). To contact the BIS Media and Public Relations team, please email pressbis. You can sign up for email alerts at bis/emailalerts.htm. Bank for International Settlements 2020. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 2708-1117 (online) ISBN 978-92-9259-413-8 (online)Covid-19: Boon and bane for digital payments and financial inclusion 1 Covid-19: Boon and bane for digital payments and financial inclusion 1 Highlights Authorities around the world have moved to encourage the use of digital payments in response to Covid-19. Some of these measures facilitate the use of digital payments during lockdown, while others provide longer-term support for fintech players and financial innovation more broadly. For emerging market and developing economies, the measures respond to the unexpected opportunity to further promote financial inclusion objectives through the use of technology. To increase their effect, these moves should include measures to combat financial crime and protect consumers. 1. Introduction With an estimated worth of more than USD 127 billion, fintech is one of the fastest-growing emerging sectors globally, employing thousands of people and generating new sources of revenue for economies worldwide. 2 In 2020, the importance of fintech has been compounded by the role digital payments can play in curtailing the spread of Covid-19. That said, the economic burden of Covid-19 on some fintech and digital payment providers has been stark, with reports of dwindling transaction volumes as economic output slows. For the lucky few, increasing demand for their services has them actively recruiting talent. 3 But this isnt the case for all, which as in other sectors have looked to government stimulus packages for support. For emerging market and developing economies (EMDEs), where financial inclusion levels can be as low as 10%, 4 fintech and digital payments are also under threat, but the market potential is more obvious. Technology is bringing financial services to many who would otherwise have only limited access or none. 5 Covid-19 has presented an unexpected opportunity to make further use of digital channels to reach these underserved groups, improving financial inclusion. This brief compares the approaches taken by authorities in different countries, examining the different drivers for supporting the fintech industry during the pandemic. Section 2 looks at measures to facilitate use of digital payments during lockdowns. Section 3 explores measures to safeguard the 1 Nana Yaa Boakye-Adjei (nboakyeadjeiworldbank), World Bank Group. This Brief was prepared by Nana Yaa Boakye-Adjei in the context of her secondment to the BIS Financial Stability Institute. The author is grateful to Marc Hollanders, Harish Natarajan, Jermy Prenio and Mahesh Uttamchandani for helpful comments and insights and to Esther Knzi and Dung Tran for administrative support. 2 The Business Research Company (2019). 3 Gringoli et al (2020). 4 World Bank (2017a). 5 Pazarbasioglu et al (2020).2 Covid-19: Boon and bane for digital payments and financial inclusion fintech sector and promote innovation in payments, as countries tentatively move towards relaxing quarantine measures and begin to restart their economies. Section 4 concludes. 2. Measures to facilitate use of digital finance during lockdown Measures during lockdown have focused on ensuring that communities continue to have access to payment channels and instruments and, to a lesser extent, on curtailing any potential infection through the handling of cash. 6 Table 1 outlines the measures taken by selected countries, which were chosen based on the link that these policy decisions have to their broader objectives regarding fintech (eg as a method of increasing financial inclusion and/or as a sector to support economic growth). Table 1: Financial inclusion levels and digital finance policy measures in response to Covid-19. Selected policy measures Table 1 Jurisdiction Financial inclusion level Policy measures 2017 Declaring CICO essential services Reduction/ removal of fees Relaxation of KYC procedures Increased transaction limits Egypt 32.8% x x Ghana 57.7% x x x India 79.0% x Jordan 42.5% x Kenya 81.6% x x x x Pakistan 21.3% x x x Russia 75.8% x x Singapore 97.0% x Source: World Bank Findex; national information; authors research. 6 Auer et al (2020). Box 1 Covid-19 measures taken by EMDEs The Alliance for Financial Inclusion, a member-owned network of central banks and financial regulators, surveyed its member countries to review measures to mitigate the economic impact of Covid-19. Of the seven regions in which member countries are located, the Sub-Saharan African (SSA) economies (where financial inclusion levels are among the lowest in the world) have undertaken the most policy reform work in response to the pandemic. Forty-four institutions from the SSA regions have made a total of 34 policy interventions in response to Covid-19. In digital finance, SSA is where the vast majority of policy interventions have taken place, followed by the Middle East and North Africa and Latin America. The policy response to enhancing the use of digital channels appears to have been more extensive where financial inclusion is a major development focus. Source: Alliance for Financial Inclusion Dashboard.Covid-19: Boon and bane for digital payments and financial inclusion 3 Designating cash-in/cash-out networks as essential services In some jurisdictions, banks and payment service providers (PSPs) were designated as essential service providers. For banks, this extended to their branch network albeit with a reduced number of locations operating. For non-bank PSPs that operate agent networks, their designation as essential service providers did not necessarily extend to these networks, limiting cash-in/cash-out (CICO) services for customers. For many EMDEs where services such as mobile money have taken off, CICO networks can be extensive, with thousands of locations operating daily. For some authorities, allowing such extensive networks of independent agents to continue operating was seen as potentially undermining the lockdown effort. However, preventing even a reduced network of agents from operating (eg in rural and underserved areas) would hinder non-bank payment services from extending financial services (including the disbursements of government and social benefits) to customers. 7 Authorities have taken different approaches to this policy challenge, taking local circumstances into consideration. In India, authorities declared all agents to be essential services, taking the view that this would support the channelling of USD 22 billion to vulnerable and poorer segments of society during the pandemic. This approach presented unforeseen challenges, given that many agents offer a range of non-financial services that were not deemed essential, 8 thus creating confusion among agents and law enforcement as to which agents should remain open. In Pakistan, authorities introduced tax waivers for service providers, with the view of incentivising agents to continue serving customers in low- access rural communities. These tax waivers were implemented to offset the likely reduction in revenue for agents that did remain open, as economic activity faded. 9 Reduction or waiving of fees In some countries, measures to cut or waive fees have been implemented at the service provider level. The Central Bank of Kenya has taken this approach, given the significant proportion of the countrys GDP that passes through mobile money platforms such as MPesa. The central bank required that mobile money providers offer free services for low-value transactions (of less than KES 1,000 (equivalent to USD 9.35) 10 ). 11 Fees for facilitating transfers between mobile money wallets and bank accounts were also waived. 12 In consultation with the industry, it has been agreed that these measures would be extended until the end of 2020. 13 Other countries have implemented policies at the payment systems level. These measures extend to a broader range of transaction types, including person-to-person, government-to-person and person-to-business transactions. The fee waiver is extended to financial institutions participating in the payment system, which then provide a free service to their customers. In Russia, for example, the central bank has waived fees for sending funds from one bank account to another via the fast payment 7 Narain et al (2020). 8 Hernandez and Kim (2020). 9 Ibid. 10 All currency equivalents used in the paper are based on the most recent available end-of-month rates in the BIS US dollar exchange rate statistics. 11 AFI (2020). 12 Central Bank of Kenya (2020a). 13 Miriri (2020).4 Covid-19: Boon and bane for digital payments and financial inclusion system. 14 In Pakistan, the State Bank has waived all fees for electronic fund transfers through its Inter Bank Fund Transfer System as well as making large-value payments through the real time gross settlement system (RTGS) free of charge for banks. 15 In all three examples, fees were removed to encourage the general population to use digital payment channels, as part of the governments response to the pandemic. For Kenya and Russia, where financial inclusion levels are above 70%, it could be argued that the impetus was mainly to ensure that consumers had sufficient payment options during lockdown periods, with the added benefit of mitigating any potential risk from handling cash. Even so, Kenya has added 1.6 million users of mobile money channels since it introduced these relief measures. 16 In Pakistan however, where financial inclusion is extremely low, at 21% of the population, policy choices were likely influenced by the scope for increasing adoption of digital channels among those who otherwise wouldnt access or use them. Relaxed KYC procedures to facilitate remote onboarding and use of digital channels Know-your-customer (KYC) regulations, while essential to maintaining the integrity of a financial system, can have unintended consequences. According to the World Bank, 40% of adults in low-income countries still lack a formal means of identification, making it difficult for them to access financial services. 17 The application of a risk-based approach to KYC procedures has had a significant impact, allowing individuals who are deemed low-risk to access basic forms of financial services with limited to no identification. But many still remain outside the financial system. The lockdown measures and the risks associated with cash have forced many central banks to reassess their KYC requirements. For some authorities, following consultation with their industry, it was deemed appropriate to relax KYC account-opening measures to allow transaction accounts to be opened remotely. The government of Ghana, in a directive published on 19 March, outlined a series of measures to “facilitate more efficient payments and promote digital forms of payments” for a period of three months. One measure was to stipulate that all mobile phone subscribers should be permitted to use their existing mobile phone registration details to apply for a minimum-KYC mobile money account. This would allow all mobile phone subscribers to open a mobile money account utilising their subscriber identity module (SIM) registration. The decision to use SIM registration data was based on the datas strength and robustness, recognising potential risks that might arise from this process. It was agreed that customers registering for mobile money using SIM data could access only minimum-KYC accounts, but transaction limits were increased to take account of the restrictions on movement. Users had an increased transaction limit of up to GHS 1,000 (USD 179), a maximum account balance limit of GHS 2,000 (USD 357), and an aggregate monthly transaction limit of GHS 6,000 (USD 1,071). These limits were increased from GHS 300 (USD 54), GHS 1,000 (USD 179) and GHS 3,000 (USD 536), respectively. 18 Many of the measures implemented by the Bank of Ghana are being retained by service providers for the remainder of 2020. During the quarantine period, the Central Bank of the Russian Federation authorised banks to open accounts remotely with simplified KYC rules. The provision was limited to individuals who were 14 World Bank (2020). 15 State Bank of Pakistan (2020). 16 Central Bank of Kenya (2020b). 17 World Bank (2017b). 18 Bank of Ghana (2020).Covid-19: Boon and bane for digital payments and financial inclusion 5 either making or receiving “socially important payments” (which included social transfer, alimony, insurance reimbursements and mortgage payments). Small and medium enterprises were also granted permission to open accounts remotely with simplified KYC rules provided that they were opening accounts to receive grants or loans that would safeguard the salaries of their employees. 19 In a circular of 18 March, the State Bank of Pakistan stated that the biometric verification required when customers activate internet and mobile banking services would be suspended until further notice. 20 Russia and Pakistan have implemented measures that let users access payment channels from home. This is also the case in Ghana, although the Ghanaian approach goes further, allowing anyone with a mobile phone to open an account from home on limited KYC information thus bringing traditionally underserved or excluded groups (particularly those with limited means of identification) into the formal financial system. It is important to note that Covid-19-related cyber crime and fraud has increased in a number of jurisdictions. 21 KYC processes for onboarding customers can only be relaxed after reviewing the potential risks and ensuring that these are sufficiently mitigated. The Financial Action Task Force (FATF) outlines key considerations for authorities in this regard, including the value of digital ID for remote KYC verification. 22 A number of countries have sought to expedite their digital ID programmes to allow for remote access without compromising financial system integrity or consumer protection. Egypt, for example, has been working on an eKYC solution to let customers open bank accounts electronically without visiting a b