Committee on Payments and Market Infrastructures World Bank Group Payment aspects of financial inclusion in the fintech era April 2020 This publication is available on the BIS website (bis). Bank for International Settlements 2020. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-345-2 (print) ISBN 978-92-9259-346-9 (online) Payment aspects of financial inclusion in the fintech era April 2020 iii Table of contents Foreword . 1 Executive summary . 2 1. Introduction . 4 2. Fintech developments of relevance to the payment aspects of financial inclusion . 6 2.1 New technologies . 7 2.1.1 Application programming interfaces . 7 2.1.2 Big data analytics . 8 2.1.3 Biometric technologies . 9 2.1.4 Cloud computing . 9 2.1.5 Contactless technologies . 10 2.1.6 Digital identification . 12 2.1.7 Distributed ledger technology . 14 2.1.8 Internet of things . 14 2.2 New products and services . 15 2.2.1 Instant payments . 15 2.2.2 Central bank digital currencies . 18 2.2.3 Stablecoins . 20 2.3 New access modes . 20 2.3.1 Electronic wallets . 20 2.3.2 Open banking . 21 2.3.3 Super apps . 23 3. Opportunities and challenges of fintech developments in driving access to and usage of transaction accounts . 25 3.1 Transaction account and payment product design . 25 3.1.1 Instant payments satisfy the demand for greater speed and end user control. 25 3.1.2 Open banking has the potential to augment the usefulness of transaction accounts . 28 3.1.3 Digital ID simplifies customer due diligence . 29 3.1.4 The design of central bank digital currencies can aim at providing universal access to a basic means of payment . 30 3.1.5 Super apps cover a wide range of payment needs in their users daily lives . 31 iv Payment aspects of financial inclusion in the fintech era April 2020 3.2 Readily available access points. 32 3.2.1 New products and services change the demand for physical access points and cash . 32 3.2.2 Electronic wallets in combination with contactless technologies can expand the number of acceptance points at low cost . 33 3.3 Awareness and financial literacy . 34 3.3.1 End users digital capabilities do not always keep pace with product evolution . 34 3.3.2 Big data analytics can break down knowledge barriers or reinforce exclusion patterns . 35 3.4 Leveraging large-volume recurrent payment streams . 36 3.4.1 Cross-border retail payments innovation can benefit from a mix of fintech developments . 36 3.4.2 Electronic wallets in combination with contactless technologies could support the efficient use of transaction accounts for transit payments. 38 4. The role of the basic foundations in harnessing fintechs opportunities while addressing the challenges . 39 4.1 Public and private sector commitment . 39 4.1.1 Fintech developments call for increased international and cross-sectoral coordination between authorities . 39 4.1.2 A collaborative approach to fintech is key to making an impact . 40 4.1.3 Regulators initiatives such as sandboxes, innovation hubs and innovation offices can foster the development of the fintech ecosystem . 41 4.2 Legal and regulatory framework. 43 4.2.1 Adapted and new licensing frameworks enable new players to leverage fintech for innovative services . 43 4.2.2 Data frameworks need to ensure privacy in the fintech era . 45 4.2.3 Fintech developments may challenge the applicability of current oversight concepts and standards . 46 4.2.4 Fintech developments should not compromise the effective protection of end user funds . 46 4.2.5 Regulatory technologies can support authorities in fulfilling their supervisory and oversight tasks and market participants in meeting requirements more effectively and efficiently . 47 4.3 Financial and ICT infrastructures . 49 4.3.1 Fintech developments highlight the opportunities and challenges of non- bank access to payment infrastructures . 49 4.3.2 Fintech goes hand in hand with raising the bar for the cyber resilience of PSPs and financial infrastructures . 51 Payment aspects of financial inclusion in the fintech era April 2020 v 4.3.3 Interoperability and geographical coverage of financial infrastructures can benefit from fintech developments . 53 5. Review of the PAFI guidance with focus on fintech . 55 6. Conclusions . 61 Annex A: Members of the task force . 62 Annex B: Acronyms and abbreviations . 64 Annex C: References . 67 Payment aspects of financial inclusion in the fintech era April 2020 1 Foreword In 2016, the Committee on Payments and Market Infrastructures (CPMI) and the World Bank Group published the Payment aspects of financial inclusion (PAFI) report, which looked at financial inclusion from a payments perspective. The PAFI report envisaged that all individuals and businesses should have access to and use at least one transaction account operated by regulated payment service providers to: (i) perform most, if not all, of their payment needs; (ii) safely store some value; and (iii) serve as a gateway to other financial services. New applications of technology to financial services, often referred to as “fintech”, have accelerated in recent years. These developments have implications for how transaction accounts are provided, accessed and used as they underpin new products and services, such as instant payments, and enable new access modes, such as electronic wallets. The CPMI and the World Bank Group have been analysing fintech developments in various contexts. For example, the CPMI has issued reports on digital currencies (November 2015), fast payments (November 2016), distributed ledger technologies in payments, clearing and settlement (February 2017) and, with the Markets Committee, central bank digital currencies (March 2018). The World Bank Group, together with the International Monetary Fund, published the Bali Fintech Agenda, which offers a framework for the consideration of high-level issues by individual member countries. In October 2018, the CPMI-World Bank Group PAFI task force reconvened to deliberate on the experience gained from the implementation of the guiding principles and the accompanying key actions for consideration and the challenges ahead. In this last regard, the task force has produced this report to provide additional guidance on recent fintech developments that have relevant implications for PAFIs underlying objectives. The CPMI and the World Bank Group are very grateful to the members of the task force, its co-chairmen Marc Hollanders (Bank for International Settlements) and Harish Natarajan (World Bank Group) and the co-leads of the fintech workstream, Maria Teresa Chimienti (European Central Bank) and Thomas Lammer (Bank for International Settlements and formerly European Central Bank). Jon Cunliffe Ceyla Pazarbasioglu Chair Vice President Committee on Payments and Market Infrastructures World Bank Group 2 Payment aspects of financial inclusion in the fintech era April 2020 Executive summary Financial inclusion starts with payments. They serve as a gateway to other financial services, such as savings, credit and insurance. Transaction accounts operated by a regulated payment service provider are at the heart of retail payment services. To improve financial inclusion, these transaction accounts need to enable end users to meet most, if not all, of their payment needs and to safely store some value. On these key premises, the Committee on Payments and Market Infrastructures and the World Bank in 2016 issued guidance on payment aspects of financial inclusion (PAFI) (CPMI-World Bank (2016), as laid out in the first section of this report. The 2016 PAFI report outlines seven guiding principles for public and private sector stakeholders and contains possible key actions for countries that wish to put these guiding principles into practice. Since then, the PAFI framework has been adopted as the analytical underpinning for designing and implementing country-level actions and global efforts to improve access to and usage of safe transaction accounts. Technological innovation has made major inroads into financial services, especially payments. The pace of innovation has substantially increased in the past five years, leading to the “era of fintech”. This report defines fintech as advances in technology that have the potential to transform the provision of financial services, spurring the development of new business models, applications, processes and products. New technologies are at the core of fintech, which in turn has implications for payment product offerings and access modes. Section 2 of the report provides an overview of fintech developments that are relevant to the payment aspects of financial inclusion. Fintech presents both opportunities and challenges in improving access to and usage of safe transaction accounts, as discussed in Section 3. Fintech can be leveraged to improve the design of transaction accounts and payment products, make them ubiquitously accessible, enhance user experience and awareness, and achieve efficiency gains and lower market entry barriers. At the same time, these benefits come with certain risks in terms of operational and cyber resilience, the protection of customer funds, data protection and privacy, digital exclusion and market concentration. If not adequately managed, these risks could undermine financial inclusion outcomes. This underscores the importance of effective regulatory, oversight and supervision frameworks. In addition, particular attention should be devoted to promoting responsible innovation that does not exclude disadvantaged segments of the population, by encouraging designs that are tailored to the needs of these segments. Accordingly, as financial inclusion strategies seek to harness the benefits of fintech, it is equally important to address the attendant risks. Section 4 discusses the important roles of stakeholder commitment, the legal and regulatory framework, and financial and information and communication technology infrastructures to that extent. First, fintech developments call for increased international and cross-sectoral coordination, especially in the light of the cross-border and cross-currency nature of certain fintech innovations. Effective cooperation and coordination among central banks, financial supervisors, regulators and policymakers can help avoid potential regulatory arbitrage and promote effective oversight and supervision. Second, continued efforts by authorities to keep pace with innovation will help to avoid gaps in regulatory, supervisory and oversight frameworks, and to address challenges in their application to new business models. Finally, fintech developments have highlighted the opportunities and challenges of broadening payment service providers access to payment infrastructures and the need to raise the bar for cyber resilience, and created momentum for cross-border interoperability. The 2016 PAFI guidance for advancing financial inclusion through payments was formulated in a technology-neutral and holistic way, and continues to be relevant in the era of fintech. Stakeholders aiming to leverage the fintech potential in a responsible way for achieving the PAFI objectives can take further actions that seek to harness the potential of fintech, while mitigating its accompanying risks. Section 5 sets out these fintech-focused key actions, and places them in the context of the 2016 PAFI guidance. These key actions are based on the analysis carried out in this report and on country experiences. Both the fintech specific extensions and the original recommended key actions for consideration are not intended Payment aspects of financial inclusion in the fintech era April 2020 3 to provide a one-size-fits-all blueprint, as different country conditions may warrant different and customised approaches. In conclusion, fintech can support improved access to safe transaction accounts and encourage their frequent use. However, it is not a panacea and there are risks that need to be managed. To realise fintechs potential to improve financial inclusion, initiatives need to be appropriately embedded in wider country-level reforms and global efforts that seek to put the PAFI guidance into practice. 4 Payment aspects of financial inclusion in the fintech era April 2020 1. Introduction 1. In 2016, the Committee on Payment and Settlement Systems (CPMI) and the World Bank published a report on payment aspects of financial inclusion (hereafter, PAFI report) that looked for the first time at financial inclusion from a payments perspective. The PAFI report envisages that all individuals and businesses have access to and use at least one transaction account 1 operated by a regulated payment service provider (i) to perform most, if not all, of their payment needs; (ii) to safely store some value; and (iii) to serve as a gateway to other financial services. However, a number of barriers affect transaction account access and usage. To address those barriers, the PAFI report outlines a framework (the “PAFI house”, Figure 1) comprising foundations, ie the critical enablers for payment systems and the provision of payment services, and catalytic pillars, ie the drivers of access and usage. Both foundations and pillars contribute to the end objective of achieving universal access to and usage of transaction accounts. The PAFI report analyses each component of this framework and provides suggestions in the form of guiding principles and key actions for consideration. 2 The PAFI framework has since been used as a basis for the design and implementation of global initiatives, country-level reforms and developing surveys and measurement tools to track progress on access to and usage of transaction accounts. Framework for the guidance on payment aspects of financial inclusion Figure 1 Source: CPMI-World Bank (2016). 2. More recently, institutions and organisations with an interest in financial inclusion have emphasised the potential of fintech for increasing financial inclusion, while recognising that it also comes with new challenges. The International Monetary Fund (IMF) and the World Bank have acknowledged the 1 A transaction account is broadly defined as an account held with a bank or other authorised and/or regulated service provider (including a non-bank) which can be used to make and receive payments. Transaction accounts can be further differentiated into deposit transaction accounts and e-money accounts. 2 The PAFI guiding principles and key actions for consideration can be found in Section 4 of the 2016 PAFI report and they are listed together with key actions for consideration focusing on fintech in Section 5 of this report. Payment aspects of financial inclusion in the fintech era April 2020 5 potential of fintech to support the Sustainable Development Goals (SDGs) in general and financial inclusion specifically. The Bali Fintech Agenda, adopted in 2018, features 12 elements that look at fintech issues in a hol