The current pandemic’s heavy impact on health and economic systems might result in
unprecedented social development stalling. Financial technologies have supported
countries to respond to a crisis of such magnitude and unfolding speed, especially when
it comes to emergency financial support. These technologies digitize and simplify
payment processes, making transactions, and disbursements accessible to all
businesses and individuals. Governments and financial service providers should create
momentum to improve institutional, legal, and technical financial infrastructures. The
new landscape has the potential to build a more resilient process of economic
Managing the disruption caused by the Covid-19 pandemic has required concerted efforts from all spheres of society, and a focus on the most acutely affected by the situation – “the most vulnerable, low-wage workers, small and medium enterprises”. In particular, governments are disbursing emergency financial support to prevent businesses and individuals from losing income, which is critical to their subsistence. Although these emergency financial policies take various shapes depending on the country, they share two key requirements: quick payments and a minimum of red tape. It is precisely in these loci that financial technologies are playing a key role.
In the current Covid-19 crisis, micro, small and medium enterprises (MSMEs) are facing ripple effects either on their supply chain or on their demand levels, threatening businesses‘ liquidity and continuity. To try keeping MSMEs’ lights on during these turbulent times, governments are putting in place measures such as wage support, soft loans, and credit lines with joint guarantees. For instance, in countries such as Ecuador, Peru, Colombia, and Jordan, financial technologies are enabling quick and straightforward payment processes, reduced transaction costs, and shortened distances between the funding sources and their intended beneficiaries. Considering that MSMEs account for 70% of the employed workforce worldwide and for about 60% of GDP in nearly all OECD countries, this swift support is critical to ensuring a certain level of financial resilience and alleviating the impacts of the economic recession.
Immediate financial support is equally important for those in the informal economy. The International Labor Organization (ILO) estimates that 2 billion workers, or about 61% of the global labor force, carry out economic activities outside the formal arrangements provided for by law. In the current Covid-19 crisis, informal workers and unregistered entrepreneurs limited to no capacity at all to generate their means of subsistence. This is aggravated by the fact that, in general, these workers have no banking or savings account, and are not protected by insurance. Digital finance technologies, such as mobile account opening and electronic payments, equip informal workers to keep providing goods and services to their communities. Moreover, these financial technologies allow informal workers to build a credit history and, potentially, access special financing options offered by governments or third parties.
To attend an unprecedented demand for financial relief, national payment systems are involving more financial service providers, and especially those that rely on financial technologies. In particular, fintech-based solutions have been instrumental to help governments identify recipients more accurately, provide these recipients with mobile account opening and cashless transaction services, as well as enable remote due diligence.
Because of the suitability of fintech-based solutions to provide emergency financial support, it is critical that governments create momentum for improving their institutional, legal, and digital payment infrastructures. Equally important, governments and providers of financial technologies should coordinate responses. For instance, at the same time that regulatory changes are necessary to allow a fast-track entry of new players (eg. regulatory sandboxes), the providers of digital financial services should ensure large-scale, technological capacity for national payment systems (ie. improved distribution networks).
While coordinating efforts to alleviate the impacts of economic recession, governments and providers of financial technologies should also keep sight of the basic criteria for inclusive, customer-oriented services: the security and privacy of customers; simple mobile interfaces; tailored communication channels, and information campaigns. Such criteria are key to ensuring that the digitization of financial services does not exclude or harm those excluded from the digital world, or even limit their right to make well-informed choices.
Fore more information on the Sustainable FinTech project by foraus, visit www.sustainablefintech.ch.
Picture: Photo by Bongkarn Thanyakij retrived from Pexels