New, better and more affordable digital financial services needed to bridge the digital gap

#CriticalThinking

Digital & Data Governance

Picture of Alvaro Martin
Alvaro Martin

Head Economist of Digital Regulation at BBVA Research

The scale, depth and speed of the digital transformation in the economic sector is astounding in almost any activity. Arguably, industries that rely most heavily on information flows and have less regulatory barriers to entry experience the challenge, or opportunity, of digitalisation at earlier stages. Nevertheless, eventually all sectors will be impacted by the irruption of digital technologies.

Empirical observation shows that certain technologies follow exponential growth patterns or an exponential cost reduction in their adoption. Consequently, the diffusion of these technologies is accelerated and often reaches a critical mass of individuals over relatively short periods of time. For instance, the fast deployment of cellular networks and the widespread adoption of mobile phones have made it possible for almost five billion people to be connected in barely two decades, according to the latest figures by the GSM Association.

The potential of mobile technologies to reduce poverty and inequality has been extensively discussed. Their application within broader financial inclusion strategies is a particular case that raised high expectations following the success of a Kenyan M-Pesa, a mobile-phone based money transfer service. The use of mobile technology to make payments, access credit or manage savings is a reality across the globe today.

Cloud computing is also increasingly fuelling artificial intelligence and machine learning algorithms

While many users still have access to so-called feature phones with basic capabilities, the adoption of smartphones and Internet connections is on the rise with 3.8 billion Internet subscribers globally. The combined power of mobile devices and Internet connectivity has already been transformational for the early adopters ‒ usually the wealthiest, youngest and most educated ‒ by providing them with access to a whole range of online services, from video streaming to mobile banking. Fortunately, evidence shows that the gap generated by cell phones and Internet access in developing countries is narrower in terms of timing than in the adoption of other technologies.

The quality and reliability of online services, as well as the overall user experience, have improved dramatically since the surge of another exponential technology: cloud computing. The cloud offers distributed computing power and storage capabilities, available on demand. In terms of scalability, flexibility and cost it is currently the preferred technology to deploy new digital services, and its variable cost structure makes the launch of innovative ventures easier, as it also reduces upfront investment.

Cloud computing is the underlying technology in data-driven organisations in which the available datasets can be exploited through big data analytics to make smart decisions. These analyses provide better insights on complex phenomena, such as inequality or financial decision-making, and allow for a better understanding of the policy and business issues to be addressed.

Cloud computing is also increasingly fuelling artificial intelligence and machine learning algorithms that bring a new range of opportunities, including automated advisory, natural language interfaces, optimal asset allocation or fraud detection, to mention just a few. Although machine learning is not completely risk-free ‒ the ethical, legal and economic impacts of automation are still being assessed ‒ it has the potential to lower the cost of serving the bottom of the pyramid, expanding the supply of advanced advisory services and increasing equality.

In the trade-off between greater control on risks and more competition and efficiency, consumer protection must be preserved in all cases

As explained, cloud computing is the cornerstone for much of the digital innovation to come, and will have an impact in expanding the adoption of affordable, high-quality digital services for all. Many industries are already making good use of these capabilities, but only recently are they being applied to financial services. The reasons for this include an intrinsic high level of complexity of legacy systems, as banking has historically been one of the largest investors in ICT, but also the constraints imposed by the existing regulations.

Broadly speaking, the regulatory framework applicable for the use of cloud computing in financial services often requires some sort of data location, which is against the distributed nature of cloud infrastructures and services. This restriction can be imposed by privacy laws preventing cross-border personal data flows, but also by financial authorities willing to keep oversight of financial data stored in their own jurisdiction. Financial supervisors also ask for a tight control of the operational risks associated with any outsourcing agreement, as it is the case with external cloud service providers. This is a fair concern for the sake of financial stability, but supervisory practices are sometimes unfit for the specificities of cloud outsourcing. In the most extreme cases, regulation completely forbids the use of public clouds ‒ those accessible by any third party ‒ by financial institutions.

If policymakers want to unleash the potential of digital technologies and bring new, better and more affordable financial services for all, they should embrace cloud computing and avoid imposing excessive burdens to those willing to innovate. In the trade-off between greater control on risks and more competition and efficiency, consumer protection must be preserved in all cases, especially when protecting the most vulnerable individuals or communities.

On the other hand, financial stability and integrity objectives should not be forgotten, but there are numerous risk-based approaches to regulation for financial inclusion, such as e-money and basic deposit accounts, that pave the way for a rapid adoption of cloud technologies.


This article is from the Development Policy Forum discussion paper ‘International development and the digital age’, in which international tech and development experts consider how to use new technologies to achieve the Sustainable Development Goals and generate ‘digital dividends’ for the developing world. The discussion paper will also build on the Policy Insight debate ‘Making the digital revolution work better, faster for development’, which was held on 7 November in Brussels.

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