Financial inclusion and COVID-19: Can this crisis be an opportunity for digital finance? (Part I)

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The current COVID-19 health crisis is unprecedented in its scope. Three-quarters of the world's population was in confinement, while no one really knows what comes after. It seems clear we are in for a reshaping of the world economy, large scale changes in social norms, and dramatic political shifts.

Today almost all countries are affected by the virus. This crisis is testing each country's vital infrastructures at multiple levels. First, in fighting the spread of the disease itself through its health system, then in buffering the economic effects through the quality of their telecommunications or financial services infrastructures. The state of the banking and finance system of a country helps determine whether it will weather the economic crisis coming in the aftermath of the health crisis or not. Digital finance can be an instrumental tool to buffer the impact of the crisis in many ways.

First, digital finance has played a role in fighting the spread of the epidemic directly by supporting social distancing efforts. Some countries have decreased the amounts with which you can pay digitally to avoid cash, and many stores across Europe have requested or requiring digital payments instead of cash. Digitizing money has become a tool to ensure economic life does not become a risk factor of virus transmission.

Digital financial services can also help buffer the economic effects of the crisis. During confinement, mobile financial services have allowed people to continue receiving money from their employer, send emergency transfers to family, and pay their rent or bills all in digital form potentially without even leaving their homes and risking being infected. As Melinda Gates exposes in her recent Foreign Affairs article, they also allow for government cash transfer programs to support the population (G2P) and arrive directly in the wallets of vulnerable people and thus fulfill their mission of helping people without having to set up costly cash distribution centers. For instance, wealthier OECD countries are designing economic support measures to target the backbone of most economies – the tens of thousands to millions of small businesses. These efforts intend to provide a lifeline to help businesses survive, and importantly, to continue paying their employees as normal economic life slows down at a disastrous pace.

These measures will help cushion the impact of COVID-19 on employment in wealthier areas. But what about lower-income countries? Some lower-income countries, as reported by the NextBillion in this blog series, have set up G2P programs to respond to the crisis: Togo has set up a cash grant designed to support informal workers during the three months of state-mandated social distancing – an unconditional cash transfer grant that gives each worker 30% of the minimum wage. Citizens sign up via mobile phone, and the transfer is delivered by mobile money. Similarly, in Pakistan low income citizens can use their mobile phone to enroll in an emergency support program run by the Ministry of Social Protection and Poverty Alleviation, with payments transferred digitally and linked to biometric identity.

The financial inclusion of the most vulnerable has never been more necessary than it is today. Many are still left behind as inclusive services, like mobile money, are not pervasive enough and government cash disbursements are complicated by COVID distancing imperatives. In fact, nearly 1.7 billion people are still unbanked, primarily in Africa and Asia. For them, this crisis is proving to be more severe than for others. A recent Oxfam report shows that half a billion people could be pushed into poverty by COVID-19. For most countries with large unbanked populations, the challenges associated with this virus could be magnified, from increased risk of transmission to significant problems distributing benefits.

COVID represents a deep humanitarian tragedy but may also provide incentives for overdue reforms. Through quick action some countries are using this opportunity to make long-needed regulatory and policy reforms and propel themselves, under duress, to the rank of the most advanced countries in terms of financial inclusion. Could this crisis push millions towards formality, enabling effective government response and increasing resilience?