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CGD’s work in technology and development focuses on the macroeconomic implications of technology change as well as technological applications for specific development challenges.
Technological advances are a driving force for development. But policy choices determine who benefits. CGD focuses on three key questions around innovation, growth, and inequality: How can governments use existing technologies to deliver services more effectively to citizens? How can international institutions help create and spread new technologies to tackle shared problems like climate change and pandemics? And how can policymakers ensure advances in artificial intelligence, automation, and communications bring shared benefits and not greater global inequality?
Hundreds of millions of people around the world don't have a legal record of identification. Legally, they don't exist. Most of them are in the developing world—and they can't access services like healthcare or education, or get food rations or fuel subsidies. But what happens when more than a billion people get a digital ID in just five years?
“I don’t think people have fully internalized the agency that this gives,” says Nandan Nilekani, co-founder of the tech giant Infosys, on this week’s podcast. “The fact that you can go to any PDS [Public Distribution System] outlet to get your rations, go to any BC [business correspondent] to withdraw money—the bargaining power shifts from the supplier to the consumer.”
Nilekani is the founding chairman of the Unique Identification Authority of India, which devleoped Aadhaar—India's biometric ID system that has changed how the country's government provides services and subsidies.
According to Nilekani, 1.18 billion people are currently enrolled in Aadhaar, 12 billion dollars have been transferred using the platform, half a billion bank accounts have been linked to the platform, and India has saved 9 billion dollars by cutting down on fraud and waste.
But opponents of the system say that Aadhaar erodes people’s privacy, pointing to an Indian Supreme Court ruling that privacy is a constitutional right. “Yes, privacy is a fundamental right,” Nilekani says in the podcast. “However, the state can circumscribe certain privacies of people for certain good goals. . . . When the Aadhaar case gets taken up, it will pass the Supreme Court with flying colors.”
Hear his full response below.
For Nilekani, Aadhaar is just the beginning of a new era of innovation, built on digitally-enabled “societal platforms.” He is already putting this approach to work in the area of education, as the Co-founder and Chairman of the EkStep Foundation, and sees great potential for private development as well: “The next wave of innovation will be private innovators using this to come up with ideas which we can’t even fathom,” he says.
Listen to the full podcast at the top of this page and be on the look out for forthcoming CGD research on Aadhaar—including the results from a massive on-the-ground survey of Aadhaar users. In the meantime, you can hear more of what Nilekani had to say about Aadhaar on our website.
With aid budgets shrinking and even low-income countries increasingly faced with cofinancing requirements, this is the right time for global health funders such as the Global Fund and their donors to formally introduce Health Technology Assessment (HTA), both at the central operations level and at the national or regional level in recipient countries. In this CGD Note, we explain why introducing HTA is a good idea. Specifically, we outline six benefits that the application of HTA could bring to the Global Fund, the countries it supports, and the broader global health community.
The IMF Fiscal Affairs Department is launching a new book entitled Digital Revolutions in Public Finance. The event’s panel discussion will center around fundamental questions raised in the book, which makes the case that by transforming how we collect, process, and act on information, it can expand and reshape the way we operate within the frontiers of policymaking, allowing us to do what we do now, but better—and perhaps before too long, even design fiscal policy in new ways. The book also explores the institutional challenges and capacity constraints faced by countries seeking to benefit from the digital revolution, as well as privacy and cybersecurity concerns, which call for greater international cooperation and regulation as information increasingly travels across borders.
Regulators in emerging markets face new challenges in an unchartered territory as fintech (financial technology) industries continue to grow and expand in their respective markets. Part of the regulatory challenge stems from the difficulty in pinpointing what exactly a fintech is. Broadly, a fintech can be described as any business that uses technological innovation to provide a financial service or product. This can range from payment and transfer platforms, mobile banking, or insurance services to varied providers of credit, money management, investing, trading, crowdfunding, financial advisory, and more. Clearly, there is a wide variety of models in which fintechs can operate, all bearing varying degrees of risk, which makes regulating them difficult. At the same time, as this industry develops, there is tremendous potential for improving the provision of financial services to large segments of the population by taking advantage of new technological developments. This means that regulators must be proactive to embrace the benefits of new technologies while mitigating risks for consumers. To achieve this goal, pro-financial inclusion regulations need to be compatible with the traditional mandates of financial regulation: stability and integrity of the financial system, and consumer protection.
However, this is easier said than done. It is precisely the difficulties encountered by emerging markets’ regulators in balancing socially desirable innovations and possible risks that are accountable for the slow development of fintech regulations in these economies. To address these problems, the framework developed in CGD’s report, Financial Regulations for Improving Financial Inclusion can support regulators’ efforts. This approach, based on three main principles, encourages the private sector to successfully adopt and adapt digital finance solutions for low-income populations while circumventing risks.
1. Similar regulation for similar functions
The first principle for pro-inclusive digital financial regulation is that of same regulation for similar functions. This can level the playing field amongst alternative providers so that there is fair competition between those offering functionally-equivalent digital services. Fair competition enhances efforts by providers of digital financial services to identify and expand their services to previously underserved individuals and firms. In this context, emerging markets can examine Australia’s FinTech regulatory framework as a model that incorporates this principle. In Australia, regulations depend on the type of business model. For example, marketplace lending providers face varying regulatory obligations based on their specific functions. If a fintech platform is structured as a management investment scheme, where money is collected from various investors and used in a common enterprise, then special licenses are issued and certain regulations may be avoided. On the other hand, if the platform provides consumer credit, then regulations are stringent and the same type of license is required as other credit institutions. This way fintechs can consistently be regulated by their functions, not their institutional forms.
2. Regulation based on risk
The second principle emphasized in the CGD report is that of regulation based on risk, which means that the stringency of regulatory requirements should reflect the risk of the activity in which a fintech is engaged. The greater the risks of the service to users (fraud, abuse, misuse, inappropriate products sold, etc.) or to the stability and integrity of the financial system, the greater the regulatory burden should be. This can be illustrated by examining risk varying activities fintechs may provide. For instance, if a fintech provides a platform that connects individuals (the so-called person to person (P to P) model) to carry out simple payments or transfers, then risks are relatively low. However, if a P to P platform is used in the provision of credit by connecting individual borrowers and lenders, then risks heighten through potentially uninsured defaults, and operational and fraud risks. These risks are further intensified if a fintech is involved in financial intermediation and maturity transformation. In the case of large operations, this can lead to greater financial instability risks in the case of insolvency. As a rule, the closer fintechs’ operations are to those of a banking model, then the greater the convergence should be between fintechs’ and banks’ regulations. This is imperative to avoid financial perils. For instance, in 2015 a Chinese P to P fintech lending company (Ezubao) abused a deficient regulatory framework in China to operate a massive Ponzi scheme, which led to significant losses for many small investors. Since the incident, Chinese authorities have instituted tighter risk-based regulations. Emerging markets can avoid similar financial calamities by applying this regulatory principle to fintechs so that financially inclusive technologies are safely promoted.
3. Balance between ex ante and ex post regulation
Finally, the third principle that emerging markets should implement when designing fintech regulations is that of balance between ex ante and ex post regulation. The focus of this principle is to specify clear rules of the game ex ante and use authority ex post to intervene after a problem or market failure has been identified. This demands that emerging markets regulate fintech based on exposed risks, rather than preemptive speculation. Imposing restrictions too early can inhibit fintech innovation, but acting too late can lead to deep problems, such as system inefficiencies or rooted monopolies. Consequently, the right balance between initial rules and progressively established rules for activities as markets and supervisory capabilities develop is necessary. Emerging markets can study some of the approaches taken in this regard in developed nations thus far. For instance, Singapore has taken the regulatory “sandbox” approach to help providers and regulators to learn from their interactions and market developments in a more controlled and secure environment. Here, regulators restrict the operating space and time of fintech until their safety and soundness is determined. Once the risk level is assessed, then the regulator can approve or deny the fintech’s participation in the market.
A unique opportunity for financial inclusion
Current fintech developments present a unique opportunity for the promotion of financial inclusion and stability in emerging markets. However, without the appropriate regulatory framework for these developments to advance, the benefits may not be fully experienced. Some emerging markets have already begun to act upon this realization, as with Mexico—the first Latin American country to draft a fintech law. This law aims to regulate the rapidly growing fintech industry in Mexico. It still stands to be approved by Congress so its potential applicability to other emerging markets cannot yet be assessed. As Mexico and other emerging markets continue to move forward in their efforts to regulate fintech, the recommendations in the CGD report can serve them well.
On October 4, CGD convened a private roundtable on women and financial technology in development alongside Monica Brand Engel, co-founding partner of Quona Capital (which invests in financial technology solutions in the developing world), and Wendy Jagerson Teleki of the International Finance Corporation. An engaged set of participants from MDBs, government, civil society, and the private sector joined Engel and Teleki in exchanging ideas on how to increase women’s representation in financial technology (or “fintech” for short) leadership and improve access to financial services for women. Because the discussion was under Chatham House Rules, we won’t quote anyone, but a number of valuable points on and ideas for a better path forward emerged.
Globally, business remains depressingly gender-unbalanced. The World Bank’s enterprise surveys suggest that only about 20 percent of medium and large firm managers worldwide are women (and the figure isn’t much different in rich countries). Two particularly unequal sectors are finance and technology. The IMF suggests only 2 percent of bank CEOs are women, and a recent analysis of global patents suggests that only 15 percent of patents involve a woman inventor, with the share even lower in IT. So perhaps it is unsurprising that fintech companies are in a pretty grim place when it comes to employing women—especially in leadership. More than one discussant suggested that they frequently came across company boards in the sector without a single woman, and that they were the single woman on a number of boards. Why do so few women hold positions of power in fintech, and what can we do to change this bleak picture?
One participant suggested we know the macro case for greater women’s economic empowerment in terms of economic impact and development progress, and we know the micro case in terms of improved provision of services and outcomes for individual women and families in terms of earning, learning, and health outcomes; but company leaders need more, and more specifics, on the meso case—the business case for gender equity that includes better returns to shareholders, for example.
The discussion covered both better provision of financial services to women and better representation of women in firms that provide financial services—with the clear understanding that the topics are linked. Firms that recognized the benefits of a diverse client base were more likely to understand the value of having women in leadership—and vice-versa.
On the provision of financial services, a growing number of companies are recognizing the value of developing banking products with women customers in mind. And there were a lot of studies and examples to point to around the business case for those services. But it takes more than anecdotes, however convincing; banks frequently need engaged, long-term support to roll out new products for their markets (and there is a role for smart design of accompanying women’s empowerment projects including high quality business management and jobs skills training).
On greater women’s representation in fintech leadership, a recent Harvard Business Review survey based on US experience suggested limited or mixed impact of diversity training, hiring tests, and grievance systems, but better results from targeted recruitment. In the discussion, there was some skepticism towards enforcing board quotas, but on the other hand, there is evidence that the impact of quotas in discriminatory environments can often be to replace mediocre men with better women.
Mirroring the survey results, participants discussed the benefit of firms going the extra mile to find women for positions—leaving jobs open until a qualified woman applied, using ownership interest to place women on boards of directors, and targeted job searches using personal networks and contacts. And the discussion highlighted the importance of actively building pipelines—looking out for women to fill positions from intern on up. Again, while some participants felt mandating female board membership as a condition for investment was a step too far, positively judging companies with diverse boards as part of an investment decision could have both a financial and development impact.
And, especially given how few women there are in the sector today, men need to step up. Mentoring a pipeline of women employees shouldn’t be a burden that women in an organization carry alone. Men should be thinking about opportunities to better serve women clients. Men should be searching their networks for women candidates and recognizing and countering the role their own and others’ biases play in hiring and HR decisions.
On that note, it was a disappointment that there were so few men in the room for the discussion. At about 90 percent women, the roundtable saw even worse gender parity than at the average CGD event on gender. It was yet another indication of how far fintech—and the business community more generally—has to go towards equally involving and empowering women and men. And, in a sector known for its innovation and forward-thinking, a huge opportunity exists to transform the way we do business for profound social (and economic) impact.