The transformational opportunity from digitalization is to enable citizen-centric finance, which would put the economic power in the hands of the people using digital technology. This future pathway is not secured. There are barriers to securing sustainable citizen-centric digital financing and also emerging risks which will have uneven effects, possibly benefiting some whilst harming others.

Towards a Citizen-Centric Financial System

To scale up from early signals of digital financing aligned to the SDGs requires citizen-centric finance that empowers people as buyers, savers, investors, borrowers and lenders, as well as tax-payers and the users of public services and infrastructure.

Digitalization’s heartbeat is the valued aggregation of many small parts. Digitalization enables large amounts of data, to be cheaply collected and quickly analysed and used. It enables servicing the hard to reach mass market at lower cost. Massive volume of payments data can enable automated lending. Cheap aggregation of small amounts of money can mobilize smaller-scale crowdfunding as well as larger scale financing, exemplified by Kenya’s M-Akiba retail bonds or UK’s PrimaryBid that allows retail investors to participate in corporate equity fundraising.

Citizens can be informed and empowered through digitalization. Citizens are the ultimate owners of all financial capital. Yet the opaque complexity of modern finance has, as we have argued above, stripped out their effective agency in most financing decisions. Digitalization is potentially a game changer in reconnecting citizen’s priorities with financing decisions.

Digital finance increases financial inclusion. Digitalization can first and foremost empower citizens by providing basic financial inclusion. While the vast majority of account owners have an account at a bank, a microfinance institution, or another type of regulated financial institution, mobile money accounts are also growing and reaching new customers, particularly in Africa and least developed countries. Digital finance has enabled millions of women, youth, rural residents, people with low incomes, and small business owners to save safely, borrow cheaply, invest securely, and insure easily. There is further potential to reach other groups such as the elderly and forcibly displaced people. The broader development impact of greater financial inclusion has become a topic of some debate, highlighting the need for adequate consumer protection safeguards. However, what is clear is that digitalization has enhanced citizen’s ability to manage their finances and their agency within the formal financial system.


“Digitalization’s heartbeat is the valued aggregation of many small parts.”




New entrants and traditional financial institutions are diversifying the range of financial services available to currently ‘underbanked’ citizens who lack appropriate and affordable options. They are also devising solutions to help customers improve financial management through automated reminders, alerts, and nudges. For example, research shows that people save more when savings products are supported by two-way SMS, mobile learning platforms, and commitment mechanisms like default contributions and locked savings pots.

Citizens care about more than financial returns and, if they are given information can make decisions which steer their money more effectively towards their goals. Digitalization enables citizens to be more informed and engaged in steering the use of funds intermediated by public or private intermediaries on their behalf. Financial intermediaries can and need to play a critical role in connecting financial markets to individual end-users in an efficient way and in mitigating many risks for end-users. However, while intermediaries optimize risk adjusted financial returns within any given investment universe, citizens have broader concerns, most directly including the fear of job loss and the health and safety of their families, through to broader issues such as climate change. Wider disclosure of companies’ environmental and social impact, reliable information on global supply chains and production processes, and open data on public budgets and projects allow citizens to direct their own financial decisions in line with their values. Responding to customer demand, banks such as Dutch Triodos Bank, German UmweltBank AG, Indian YES BANK, BNP Paribas, ING Bank, and Société Générale are increasingly offering sustainable products such as green deposit and savings accounts, funds, lending and mortgages.

By making more and better data available and actionable, digitalization enables citizens to make more informed financing decisions, expressing both their direct financial and non-financial interests. Environmental, social and governance data is increasingly being produced, standardized and used by financial intermediaries. European Union (EU) regulations require pension funds to consult with intended beneficiaries, in shaping their investment strategies and mandates, digital data and technologies offer a means to do this effectively. In 2018, over 50 percent of shareholder resolutions filed in the US focused on environmental and social issues, greater access to data can further inform SDG-related shareholder resolutions. Credit Suisse suggests that ‘responsible consumption’ could amount to US$4.5 trillion annually by 2030. Robo-advisors, including DBS’ digiPortfolio, are playing a role in democratizing investment management services by reducing commissions and lowering capital thresholds.

Citizens and their representatives have used open data to hold governments to account for the use of public finance. Open government data standards and portals and information crowdsourced from citizens allows civil society organizations, media and parliamentarians to track public spending on social services or infrastructure projects. For example, in Mexico, citizen groups used the Budget Transparency Project to push for more sustainable transportation, in Argentina, women’s rights groups insisted on adequate budget allocation for action on gender-based violence after identifying budget gaps, and in Colombia information on projects funded with mining royalties published on MapaRegalias platform improved project completion rates and increased the number of irregular cases brought to courtRegistries of company ownership are being made public enabling citizens, regulators, law enforcement and potential business partners to more easily see who they do business with and identify any government connections. The Open Corporates database aggregates information from public registries and to date covers 160 million companies, with 1.2 million users a month.

Digitalization creates new ways for citizens to connect and to act collectively through aggregation of individual financing decisions. Digital platforms and marketplaces connect producers and consumers, capital holders and capital seekers and allow them to make deals together. Integration of sustainability information into online shopping sitesand greater convenience in accessing sustainable products and services have boosted sustainable consumption. Crowdfunding platforms and peer-to-peer lending has opened new avenues for aggregating atomized interests, enabling citizens to overcome trust barriers and free riders to act collectively in financing things they value. Through special-interest platforms, citizens have mobilized and funded each other’s sustainable development projects ranging from renewable energy to legal cases to protect the environment and human rights.

UK-based crowd-sourcing platform, Abundance, for example, is offering small investments in sustainable municipal projects to residents of these city areas. Alipay Ant Forest platform has 550 million users who have collectively reduced carbon emissions by over 12 million tons by May 2020. Digital currencies and assets are being used to tokenize sustainable behaviours and natural capital, allowing citizens or citizen groups to back them. Digital community currencies such as are testing ways to unlock citizen choice in consuming and supporting local businesses and economies.


What are the Barriers ?

Today’s patterns do provide some indications of tomorrow’s possibilities.

The Task Force highlighted eight key barriers to digitalization of financing:

  1. Lack of basic access: 750 million people lack broadband connectivity, 1 billion lack formal IDs
  2. Capability gaps: illiteracy, poverty, social norms and lack of digital capabilities hinder uptake and usage, and reinforce inequality
  3. Access to appropriate digital financial services: lack of affordable, secure, relevant digital financial services
  4. Patchy data to support financial decision-making and digital financing innovation, particularly in relation to low income countries
  5. Siloed and non-interoperable IT systems hinder use of data to price risk, describe impacts and underpin accountability
  6. Talent shortage hinders digital financing innovation, particularly in less developed countries
  7. Weak regulatory capabilities undermine the establishment of enabling policy and regulatory environment for digital financing innovation
  8. Incumbent resistance to disruption, disintermediation, and digitally-enabled transparency of their activities and rewards

Today, for example, 750 million people remain without physical access to a mobile or broadband network. Poor ICT infrastructure in less developed countries are often compounded by economic, educational or energy access limitations. Challenges such as basic mobile device ownership or high service costs caused by market distortions continue to exclude the poor in digital finance, as does lack of education or consistent access to reliable energy sources. In low and middle-income countries, women are 23 percent less likely than men to use the internet. This gap is growing and is largest in the Least Developed Countries (LDCs). While it is likely that access to affordable internet connectivity will expand, deliberate efforts are needed to close gaps in inclusion, including the gender gap.



The advance of digitalization may be an inevitable aspect of this moment in human history. But its future pathways and impacts are by no means set in stone


Nearly half (45 percent) of digital financial accounts created in the spirit of financial inclusion have not been used over the past year, due to barriers including usability, costs, safety and security concerns, relevance, skills gaps and societal norms. Women, rural residents, low-income people, especially in LDCs, remain disproportionately excluded. Women and girls are less likely to have the education, skills and confidence to participate in digital financing, largely due to poverty and cultural norms. The elderly, a growing segment of most populations, will face increasing challenges as the pace of technology-driven financial innovation accelerates.


Digital finance is likely to come to all countries, and to be available to most people. Yet most countries will remain the recipients not the suppliers of such services. Shortages of entrepreneurial and tech talent, or a lack of resources to support their efforts, pose challenges for many countries, but will be most marked in less developed countries. Tech talent in particular is highly competitive. Women are systematically underrepresented in IT, finance, fintech, and in regulatory and policy making positions. An industry that intends to serve women but has no women in its leadership and technical positions will miss complementary perspectives and will likely fail to serve the entire population.

Policy makers and regulators in most countries also struggle to keep pace with the rapid evolution of digital finance, again notably in developing countries. Such gaps, if not overcome, at best cement dependency in those countries on the enterprises and regulatory norms of better endowed countries.



What are the Risks?

Citizens’ benefits come with increased risks.

The Task Force identified eight key risks emerging from digitalization of finance:

  1. Data security and privacy risks are amplified
  2. New fraud and money laundering, for example on digital marketplaces, cryptocurrency exchanges, crowdfunding platforms
  3. Irresponsible digital financial products with opaque or misleading terms and conditions and insufficient recourse measures
  4. Data monopolization or exploitative use of data can stifle future digital financing innovation and undermine consumer trust
  5. Unfair treatment can arise from discriminatory algorithms based on biased data or hyper-personalization of financial services
  6. Short-termism, volatility trading and herd behaviour has grown with digitalization and algorithmic trading
  7. Market concentration and rent-taking derives from ever increasing returns to scale and growing complexity and opacity
  8. Lack of, incomplete or over-regulation stifles market innovation


UNDP’s Human Development Report 2019 points to convergence of ‘basic’ capabilities, whereas ‘enhanced’ capabilities underpin a ‘new generation of inequalities’, focused on two seismic changes – technology and climate change


Digitalization offers growing potential benefits to citizens who can access and make valuable use of improved, customized, cheaper financial services. Individual saving and investments should become easier and more rewarding, with more choice, portability and transparency. Growing numbers of people working as independent traders and contractors or running small businesses will have cheaper and faster access to borrowing. Such benefits will however come with risks.

Digitalization puts people at risk of privacy violations and data security breaches, fraud, irresponsible lending, and discrimination based on profiling. This might be through, for example, cryptocurrency exchanges, fake transactions on ecommerce sites or peer-to-peer marketplaces or online gaming, and fraudulent crowdfunding campaigns.Quate

Traditional consumer protection risks such as lack of transparency, unfair or discriminatory treatment, disproportionate, improper or unauthorized use of data by financial service providers, deceptive sales and marketing techniques can also be amplified through digital channels. New types of financial service providers, such as mobile operators and digital platforms, may be operating outside of traditional financial regulations leading to lack of consumer or investor protection.

Data gaps, biases and ownership limit finance’s alignment to the SDGs. To be useful economic, social, environmental and governance data must be able to be aggregated, analysed and used across multiple platforms. Many factors mobilize against this. Data from the informal sector is harder to gather, let alone aggregate, all the more so if individuals and companies lack the capabilities and tools to produce such data, or are anxious not be observed by their respective governments. Lack of disaggregation by critical factors, such as sex, makes useful analysis more difficult. When such data is available, fragmented, non-interoperable systems restrict useful data aggregation and analysis. Too often data quality and integrity remain a challenge.

Digitalization of finance creates a possibility that product design, artificial intelligence and algorithmic decision will replicate gender and other biases and discrimination. Small developing economies which have not yet harvested large pools of data are particularly vulnerable to biases since lending algorithms will be trained on foreign data, in particular when virtual banks are established by global banking groups or BigTech firms. Automation and machine learning based on incomplete or bias-saturated data may also further marginalize sections of the population already facing disadvantages.

Privacy and security of personal data has become a critical issue, especially with digital platforms and mobile operators gathering so much data about users. Encouraging access and use of data that supports innovations aligned with citizens’ needs may take precedence in the short-term in countries looking to establish the bases for digital financing ecosystems. However, securing adequate protection of citizenspersonal data and privacy is increasingly viewed to be paramount for lasting, sustainable citizen benefit. Different countries are adopting different approaches to use, ownership, and protection of data, European Union has introduced General Data Protection Regulation (GDPR) to secure people’s rights over their data, but the impact of this legislation is too early to judge despite moves by several jurisdictions to emulate it. In the main, consumer consent remains a challenging construct.

Data localization requirements continue to impact the shift to digital. Data issues also have an important cross-border dimension, requiring regional if not global alignment of data privacy, protection, access, and trade frameworks. The G20 Summit in Japan highlighted the importance of “data free flow” for productivity, innovation and sustainable development but reaching concrete agreements has proved difficult, in part due to sovereign interests and concerns around national security matters. The United States, Mexico and Canada Agreement (USMCA) Digital Trade chapter prevents restriction of cross-border information transfers. Yet exceptional circumstances remind us of the urgency of reaching such global convergence, especially when cross-border data proves so vital for pinpointing infectious diseases outbreaks, predicting progression and saving human lives.


“Data access and protection pathways reflect tensions between competing visions – openness, paternal control, bourgeois civility, or commercial and state interest”

 World Economic Forum

Cybersecurity is becoming the most important systemic risk in digital financial services. Just as citizens become more vulnerable, so do businesses, governments and the financial system as a whole. Cyberattacks affected over 4 billion records, in the first half of 2019 alone, representing a 54 percent increase from the same period in 2018. Over the past two years, cyber insurance premiums have tripled as the costs associated with cybercrime continue to grow. Financial institutions increasingly rely on a handful of cloud infrastructure providers, with similar IT features and systems. Such data concentration increases the risk of it being targeted and compromised and creates the potential for cascading effects from breached entities. Global standards such as Financial Action Task Force (FATF), CPMI-IOSCO guidance on cyber resilience  and CMPI strategy against wholesale payment fraud related to endpoint security provide a first barrier against these risks.

Digitalization can improve market efficiency but may drive an over focus on volatility trading and rent-taking. Digitalization increases the volume of short-term transactions focused on profiting from market volatility. The UK’s Financial Conduct Authority (FCA) has highlighted the costs of high-frequency trading, or ‘latency-arbitrage’ races where market actors front run traditional equity traders such as pension funds and their intermediaries. The FCA estimates that such arbitrage can cost traditional equity traders using UK markets as much as US$5 billion a year in lost, profitable trades. To curb the negative effects of this practice IEX, a US-based stock exchange, has for example introduced a 350-microsecond delay designed to prevent high-speed traders with faster data feeds from trading with disadvantaged individual investors at potentially stale prices. The Bank of International Settlements has established an Innovation Hub to explore critical trends in financial technology relevant to central banks such as digital currencies, stablecoins, and the use of technology in financial regulation.


“Digitalization supports steeply increasing returns to scale, with near-zero marginal costs of service, and dramatic synergies in the application and value of data”


Digital disruption drives innovation but is likely to be followed by growing market concentration. New entrants offer financial services through product and enterprise innovation, operating on the edges or outside of existing financial regulatory regimes. Digitalization supports steeply increasing returns to scale, with near-zero marginal costs of service, and dramatic synergies in the application and value of data. As enterprises grow, they can further enhance service offerings in broader areas. Grab and Uber are leveraging payments data to offer credit lines and insurance products to drivers, and M-KOPA is using M-Pesa payments data to supply ‘pay-as-you-go’ access to clean energy and consumer debt.

Digital platforms succeed when they can harness network effects and associated increasing returns to scale. The associated benefits may also have costs resulting from increasing market concentration and the use and privacy of data. Macroeconomic impacts and systemic risks also need to be considered, arising from this increased market concentration, and associated risks such as algorithmic pro-cyclicality and contagion, and potential dilution of full control over monetary outcomes.

Rent taking by financial intermediaries remains a major risk of digitalization to the extent that it contributes to increasing levels of complexity and opaqueness in well-developed financial and capital markets and poses a regulatory challenge of tracking rapid evolution of digital finance. A landmark study highlighted that the margin taken by the financial sector for intermediation of investment in the US has remained constant at about 2 percent for more than a century despite increased volumes and technological developments, suggesting that intermediaries have absorbed the financial benefits from the associated cost reduction effects.

The recent promulgation by the European Union of a revised Payment Systems Directive (PSD2) illustrates a context specific regulatory approach to securing a level playing field for new players, which could support partial disintermediation. For incumbent financial institutions, cost reduction opportunities from digital represent both an opportunity and threat to their bottom line as their market is opened up to radically cheaper competition. Many incumbents are racing to invest in emerging technologies to improve service to customers and enhance operations. Some, however, may resist increased transparency of their activities and rewards.

For public financing, similarly, realizing the digital dividend is largely dependent on both sound investment in functional digitalization, and the willingness of governments to underpin the ‘trust ecosystem’ with enhanced transparency, targeting and assessment of public spending.

Digitalization depends on energy access and supply. While digitalization supports the rapid transformation of our economic systems, it could equally drive emissions higher. The energy intensity of the ICT sector itself is increasing by 4 percent per year, in contrast to the 1.8 percent annual decrease in global GDP’s energy intensity. In telecommunications mobile networks are more energy intensive than fixed networks and connectivity drives demand for data and content. Much of the energy use is by centralized network and data centre infrastructure rather than consumer devices. For example, Cambridge Bitcoin Electricity Index estimates that bitcoin alone uses 84.23 TWh of energy a year which is comparable to the power consumption of Austria. As a response, the ICT industry has recently launched a first sector-wide pathway to net zero.



“Inherent uncertainties, barriers and risks combine to make the future a place to be shaped rather than predicted.”