FINANCIAL SERVICES
“New technologies are reshaping how households, firms and governments engage with the financial sector”
Why this matters Financial innovation has become one of the most dynamic drivers of economic development in LMICs. New digital technologies – mobile money, agent banking, instant payments, open finance, alternative data credit models, digital ID systems, insurtech and capital market innovations – are reshaping how households, firms and governments engage with the financial sector. These innovations are not merely technological upgrades. They represent structural shifts that reduce transaction frictions (costs and barriers), expand access, mobilize savings for much- needed investment, deepen credit markets, mitigate risk and improve the efficiency of public sector delivery – basically, the financial deepening mentioned above. In markets where informality is high, documentation is scarce and financial infrastructure is thin, financial innovation effectively substitutes for underdeveloped physical or institutional systems. As we saw in the early 2000s, when mobile phone technology leapfrogged fixed line inefficiencies in many LMICs, financial innovations are
now helping to overcome some of the “bricks and mortar” barriers embedded within the financial sector that hold back development. How it drives development Financial innovation is already driving development in several ways as well as differentiating development between regions; there is no “one-size-fits-all”. • Inclusion and access: Mobile enabled platforms and simplified electronic Know Your Customer (eKYC) processes allow millions of unbanked people to join the formal financial system. • Cost reduction and efficiency: Real-time payments and digital wallets lower transaction costs while increasing speed and reliability. • Resilience and risk management: Parametric insurance (paying a fixed amount for a predefined event, without loss assessment), digital remittances and digital G2P transfers (goods-to- person, or government-to-person financial services) help households withstand shocks.
• MSME growth and formalization: E-invoicing, digital tax systems and supplychain finance facilitate credit access and bring informal firms into the formal ecosystem. • Climate and capital mobilization: Green bonds, blended finance vehicles and digitally enabled securitizations crowd in long-term finance. These benefits, however, are regionally differentiated as highlighted below. The conditions that have enabled mobile money services to flourish in Sub-Saharan Africa (such as M-PESA, which allows for payments and transfers without a bank account) are distinct from those enabling open finance ecosystems in Latin America or digital public infrastructure breakthroughs in South Asia. Understanding these differences is essential for designing effective financial inclusion strategies.
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