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Will the Covid crisis improve financial inclusion?

The restrictions imposed on people's movement by the Covid-19 pandemic forced many to turn to digital financial services for the first time. This could have a knock-on impact on financial inclusion across the world.

financial inclusion digital
Digital banking has risen in popularity during the Covid-19 pandemic, but what will this mean for financial inclusion levels? (Photo by Tolga Akmen/AFP via Getty Images)

Digital financial inclusion has become a key topic amid the Covid-19 pandemic, as people around the world have faced challenges in getting physical access to financial services during lockdowns, forcing them to rely on the digital world.

With regards to a definition, the World Bank states that “digital financial inclusion involves the deployment of the cost-saving digital means to reach currently financially excluded and underserved populations with a range of formal financial services suited to their needs that are responsibly delivered at a cost affordable to customers and sustainable for providers”.

And with a high number of customers being underserved as a result of the Covid-19 lockdowns, investors are making strategic changes and re-organise their footprints in a bid to protect their revenues but also to win new clients.

Indeed, some financial services providers have won new clients during the pandemic as a result of the enforced rise in digital banking that it has brought about, with customers increasing warming to the high number of online or mobile products and services that have been launched in the past few years.

Data from the Fidelity National Information Services shows that there was a 200 per cent increase in new mobile banking registrations in April in the US, while mobile banking traffic rose by 85 per cent.

Financial inclusion and the Covid recovery

The lockdowns brought with them long waiting times for those opting for telephone banking, while many bank branches were forced to close down. This led to people of all ages across the world discovering the benefits that digital banking offers, with many exploring new technological tools and financial apps that they would have shied away from only a few months earlier.

The influence of digital transformation on financial services has been rising rapidly over the past few years, through the shift to online and mobile banking as well as digital payments, the launch of digital challenger banks, the rise of fintech companies, the appetite for blockchain and digital currencies, as well as the wider use of artificial intelligence, cloud computing and data analytics. This is important as financial inclusion plays a key role in attracting foreign direct investment (FDI), given how it can increase gross domestic product growth and help to bring down poverty levels.

Digital financial inclusion brings with it a swathe of other benefits according to the World Bank, such as access to formal financial services, the lower costs of digital transaction platforms, the manner in which digital financial services can be tailored to customers’ needs and circumstances, and the reduced risk of theft and other crimes that are more common to cash-based transactions. The promotion of economic empowerment by enabling asset accumulation also boosts the participation of women in the financial system.

Technology and the digital world are among the drivers of FDI within financial services. Thus, foreign investors are looking for opportunities in this area, with an eye not just on the current restrictions brought about by the Covid-19 pandemic, but also looking for anything that can accommodate customers’ needs in the case of a future disruptive event.

A mixed picture

The financial services sector has been strong when it comes to attracting greenfield projects over the past few years, with data from United Nations Conference on Trade and Development (UNCTAD) showing that there were 1,028 financial services and insurance projects globally in 2019, up from 997 the year before and 891 in 2017. However, these figures are a long way down on the peak years of 2007 and 2011, which saw 1,736 and 1,677 projects, respectively.

The data also shows that the value of announced greenfield FDI projects in financial and insurance services declined in 2019, despite the increase in the number of projects over the same year.

However, with the Covid-19 pandemic bringing much of the world to a standstill, UNCTAD expects global FDI to drop by up to 40 per cent during 2020 and 2021.

UK on the up?

In spite of this bleak backdrop, the UK, home to one of the world’s most important financial centres in London, is expected to continue to thrive when it comes to attracting investment to the financial services sector.

Research by consulting firm EY finds that “investor sentiment suggests that the UK is expected to continue outperforming the rest of Europe in attracting post-pandemic financial services investment. Although sentiment is mixed, 40 per cent of investors believe the UK will be more attractive for financial services FDI post Covid-19, compared to just 8 per cent who believe Europe as a whole will be more attractive after the crisis.”

However, a number of countries are expected to struggle, especially the developing nations, where people faced larger challenges to access digital banking as the Covid outbreak accelerated. Many of these countries have struggled because of a lack of digital infrastructure or digital literacy.

With the pandemic changing the way in which people think about and utilise financial services, it is time for investors and governments to think holistically and long term about this new reality and adapt to the new circumstances. Financial innovation and digital transformation can be crucial tools in improving levels of financial inclusion, which would in turn help to address a number of inequalities and potentially help to minimise the gap between the developing and developed world.