How to Balance Financial Innovation with Stability

More people have a mobile phone than a bank account. Photo credit: ADB.

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Digital technology is key to increasing financial inclusion, but it comes with new challenges and risks.


Regulators face the difficult task of balancing the potential benefits and risks of digital finance, which promises to improve people's access to savings and credit.

"The adoption of digital finance will have a significant impact not only on financial inclusion, but also on inclusive economic growth," says Alfred Hannig, executive director of Alliance for Financial Inclusion, in his keynote address at the Asian Development Bank’s 2nd Asia Finance Forum in Manila in November 2017.

He cited a 2016 study by McKinsey World Institute that shows the widespread use of mobile phones to provide financial services could increase the gross domestic product (GDP) of emerging economies by $3.7 trillion (the equivalent of Germany’s GDP) by 2025, and create 95 million jobs across all sectors.

According to the study, nearly 80% of adults in these economies had a mobile phone in 2014 and almost 90% have access to a network. Yet, only 55% had financial accounts.

There are however fewer women than men who own a phone, Hannig adds. "There are also strong economic incentives to close the gender gap in mobile phone ownership and usage. There are approximately 775 million potential female users of mobile money in East Asia and the Pacific,” he says.

Implications of Rapid Technological Adoption

In Asia, Hannig notes that countries have been more inclined to develop digital financial services using bank-led models and have seen a rapid uptake by the targeted population, citing the cases of Pakistan, Bangladesh, and Indonesia. He says the Philippines is one of the exceptions in the region where telecommunication companies have led digital finance.

However, the rapid pace of technological innovation and adoption also presents challenges for financial regulation and supervision. They need to promote market competition and innovation while preserving the stability and integrity of the financial system. 

"There is no doubt that leveraging digital financial services and fintech for financial inclusion goals come with new risks, such as those stemming from unfair lending practices related to unmonitored use, and those related to the analysis of big data or increased systemic vulnerabilities due to threats of cybersecurity," Hannig says.  

"The Financial Stability Board earlier this year published a report on the Financial Stability Implications from FinTech highlighting particularly that the rapid pace of change makes it more difficult for authorities to monitor and respond to risks in the financial system," he adds. 

The report identifies three priorities for international collaboration among financial regulators:

  • the need to manage operational risk from third-party service providers;
  • mitigating cyber risks; and
  • monitoring macrofinancial risks that could emerge as financial technology or fintech activities increase.

“Collaboration among regulators—and dialogue between regulators and innovators—will be the norm,” says Hannig. "Systematic coordination and collaboration between regulators have become a main feature in emerging and developing countries that have made major strides in financial inclusion, oftentimes under the framework of a national financial inclusion strategy."

Four Potential Elements of a Strategic Approach

Hannig says the Alliance for Financial Inclusion sees four elements of a strategic approach toward balanced regulation of digital finance.

1. Enabling test-and-learn approaches

These include measures such as regulatory sandboxes, innovation hubs, or regulatory laboratories or RegLabs. These allow financial innovation while ensuring consumers are treated fairly, and their personal information is adequately protected.

Applications could include tiered know your customer (KYC), eKYC (including digital identification), and RegTech, which uses information technology to enhance regulatory processes.

The Philippines is as an early example of test and learn. 

2. Peer learning and knowledge sharing among regulators

Upscale what pioneers and champions have learned. Focus on reinforcing usage of digital financial services through innovation and technology with implementation of key policy enablers. 

3. Additional and systematic regulatory guidance

Develop better policies for financial inclusion based on successful experiences of emerging economies, and in collaboration with global standard-settiing bodies and experts in the field.

4. National Financial Inclusion Strategies

Several countries have established national strategies for financial inclusion that include digital finance. These facilitate sharing of financial inclusion targets with the public, collaboration and coordination across regulatory domains, and cooperation along the financial inclusion value chain.

At the forum, the Alliance entered into a memorandum of understanding with the Asian Development Bank to work more closely to enhance peer learning and knowledge sharing in advancing financial inclusion policies in Asia, including technical cooperation for capacity building on digital finance for countries.

"This will allow many of these activities to be scaled up," says Hannig.


Alliance for Financial Inclusion. 2017. Digital finance is key to increasing financial inclusion in Asia Pacific. News article. 10 November.

Financial Stability Board. 2017. FSB issues a report on the financial stability implications from FinTech. News release. 27 June.

McKinsey & Company. 2016. How digital finance could boost growth in emerging economies.

Related link

Event: 2nd Asia Finance Forum: FinTech and Sustainable Development

Lotte Schou-Zibell
Advisor, Office of the Director General, South Asia Department, Asian Development Bank

Prior to her current position, Lotte was Regional Director of the Pacific Liaison and Coordination Office. She was also Chief of Finance Sector Group of the Sustainable Development and Climate Change Department. She provided technical leadership on inclusive finance, finance sector development, and infrastructure finance; and in developing sector policies, strategies, operational plans, and directional papers. She leads innovative pilot projects using digital technologies. Prior to joining ADB, she was Director for International Economic Policy at the Swedish Ministry of Finance, a financial supervision and regulation expert at the Swedish Financial Supervisory Authority and central bank, and an IMF consultant.

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