Advances in financial technology are disrupting market and regulatory ecosystems in unforeseen ways. Each year, D.C. Fintech Week gathers the brightest minds for discussions spanning the fintech ecosystem. Topics of interest include crowdfunding, online lending, cryptocurrencies, cybersecurity, AI, open banking, and more. The dialogues help foster a spirit of collaboration between different regulatory, private, and academic institutions that is otherwise difficult to attain.
An annual series of conversations convened and hosted Georgetown University law professor Dr. Chris Brummer, it is one of the few panels open to the public where top officers from the Bank for International Settlements, U.S. Treasury Department, and SEC can engage in meaningful dialogue with economists, Bitcoin traders, academics, civil rights activists, and digital infrastructure providers. The 5th Annual event took place in Washington D.C. from October 18-21, 2021, and was hosted the Institute of International Law, Georgetown University, The Institute for Financial Markets, and the Bank for International Settlements.
Conversations on the second day of the event covered the topic of financial inclusion and its importance in the future of finance and technology. Many notable diplomats, regulators, and academics took part in the events. These included Kristalina Georgieva (The current Managing Director of the International Monetary Fund), Augustin Carstens (General Manager of the Bank of International Settlements), Reza Baqir (Governor, State Bank of Pakistan), and more. Dr. Chris Brummer took part in many insightful conversations with these individuals to discuss what financial inclusion means in the context of financial technology.
The World Bank defines financial inclusion as having “access to useful and affordable financial services” that make the day-to-day lives of individuals and businesses easier. Access to a bank account is the primary step towards financial inclusion. It enables individuals to store, send and receive payments through transaction accounts.
There are 1.7 billion adults worldwide without access to a bank account. Many of these individuals reside in developing countries, which lack the necessary infrastructure and regulation to facilitate access to banking.
Financial inclusion is also necessary for small and medium enterprises (SMEs). A key constraint cited SMEs across the Middle East, Central Asia, and North African regions is limited access to credit.
According to Kristalina Georgieva of the IMF, access to digital payments fosters financial inclusion in three ways:
- Fintech helps narrow gender gaps faster than traditional financial models. Women constitute a greater share of mobile phone users in comparison to men in developing countries like the Philippines, Botswana, and Tahiti, etc. The inclusion of women means better opportunities for families, communities, and states.
- Digital payments offer the first step in formal financial inclusion. Previously informal participants can access loans and other financial facilities i.e. becoming part of the formal economy.
- When users can have access to savings to payments it benefits everyone. However, the benefit is particularly visible for lower-income households.
Although there are several advantages to the rise of financial technology, it also presents several challenges. Uneven access to infrastructure, lack of regulation, cybercrime, and institutional capacity can all present themselves as hurdles to financial access and inclusion.
An important part of the financial inclusion infrastructure is digital identity, a point observed Augustin Carstens. In this regard, Dr. Brummer had an exciting conversation with Reza Baqir, Governor State Bank, Pakistan, who in turn spoke about the 9 million Pakistani citizens who are regarded as overseas Pakistanis and contribute to at least $30 Billion in remittances each year. The government of Pakistan recently launched a digital onboard service called Digital Roshan Accounts, to curb the use of informal channels to send money. These digital accounts allow overseas Pakistani’s to remotely open a bank account in one of the participating banks in Pakistan. A central ID database called NADRA is used. That database allows officials to verify the identity which allows customer due diligence to be carried out. These accounts cannot be fed cash but only bank transfers, which then ensures the use of proper banking channels.
Pakistan is a fascinating case study when it comes to financial technology and its effect on improving gender gaps. It is seeing an explosion in the growth of mobile and internet banking, accelerated COVID. In the last 4 years, the average annual growth of mobile phone banking has been about 44%. Out of an overall banking penetration of 62% (82 Million unique accounts), only 20 Million accounts belong to women. The central bank of Pakistan has launched a strategy for banking on equality, which is a policy designed specifically to reduce the gender gap in financial inclusion. There is now a mandatory provision to provide gender desegregated data on deposits, credit, and a whole host of instruments to track progress better.
Dr. Chris Brummer also hosted a virtual session with his colleague Kimberley H. Johnson (Fannie Mae’s Executive Vice President and Chief Operating Officer) to discuss her role in leading the company’s digital transformation and on a broader scale, Fannie Mae’s part in promoting financial inclusion.
The Federal National Mortgage Association, commonly known as Fannie Mae, is a United States government-sponsored enterprise and helps provide mortgage financing and reliable housing information. Dr. Brummer was interested to know what automation can mean for economic opportunity and inclusion in the context of Fannie Mae.
During the start of the pandemic in March 2020, unemployment rose drastically, reaching 14% during the early days. This was concerning to institutions such as Fannie Mae because unemployment is directly correlated to missed housing payments. In response to the unemployment crisis, Fannie Mae launched a forbearance program. In a very short period, customers were educated on its use and were allowed to benefit from it. This short turnaround time would not have been possible without technology to update systems, get on the cloud, and have different streaming data platforms.
Dr. Brummer also pointed out how rethinking and deploying data in the rental space has been a larger part of Fannie Mae’s success and has been important in addressing the challenge of wealth and income inequality. There has been a history of racial discrimination in housing due to existing policies and how they have been enacted.
Fannie Mae recognized that buying a home requires a credit history which is built through numerous methods. Many individuals who buy houses have parents who co-sign, student loans that they pay, and credit card debt. All of this builds a credit score which goes towards signing a mortgage. In underrepresented communities of color, there are few parents cosigning agreements, or large credit lines being given and paid back, or even documented college tuitions. This makes it difficult to sign a mortgage. However, these communities do have documented evidence of rent being paid.
Rental payments are not included in FICO scores, however, Fannie Mae now allows borrowers to opt into allowing verification of their assets. Their banking data can be accessed to verify whether payments that match their rental payment amounts are being made consistently over time. This allows individuals to build credit scores and to sign mortgages.
The development and expansion of digital financial services through advanced technologies are creating unlimited possibilities for growth. This growth is not restricted to fintech or economies, but also the quality of life for those who have been excluded from financial growth.
To be a part of more interesting conversations like this you can join in on ‘Fintech Beat Podcast’ – where Dr. Brummer brings together brilliant minds every Tuesday to tackle the challenges erupting at the intersection of finance, tech, and policy. Dr. Brummer is a premier thought leader in international finance, digital technology, and financial services. His many roles include serving as a member of the Commodity Futures Trading Commission’s Subcommittee on Virtual Currencies, and a member of the Consultative Working Group for the European Securities and Markets Authority’s Financial Innovation Standing Committee. He resides in the District of Columbia with his wife, attorney Rachel Loko.