FINANCIAL SERVICES
Cross-cutting innovation opportunities and challenges
There is a wide range of innovation opportunities, but many difficulties remain in rolling out and applying these tools.
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Digital Financial Services (DFS): Opportunities revolve around reduced transaction costs, quickly scalable solutions and enabling G2P delivery. However, there are also challenges, notably in SSA where market dominance (for example by M-PESA) reduces competition, while in LAC there is limited impact because bank penetration is already high. Real-time payments and interoperability: Prospects are good in Asia and LAC where merchant density is high. However, strong governance and capacity is limited in many LICs, which opens up possibilities for fraud. Alternative data credit: This is effective in Asia and LAC due to large e-commerce ecosystems, but at the same time over-indebtness risks, especially in SSA where protection systems are weaker, highlight difficulties in scaling up this offering. PAYGo asset finance: This is highly effective in SSA where, according to the World Bank, roughly 600 million people still lack electricity. Nonetheless, this has limited relevance in more electrified MICs. Moreover, there is FX risk for providers.
Parametric and microinsurance: Opportunities revolve around the high value in SSA and parts of Asia with large smallholder populations. Despite these benefits there exist the base risks of multiple catastrophes occurring simultaneously or ongoing disasters, which can raise insurance losses to the point of failure, across all regions. Given climate change has been driving an increasing number of natural disasters across developing (and developed) economies, the risks are significantly larger and more dispersed compared to the risks related to the other innovations above. Capital market innovations : These are strongest in LAC and emerging Asia where the investor bases are deeper and capital markets broader. However, limited institutional depth in LICs constrains scaling, notably in Sub-Saharan Africa.
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PAYGo asset finance is highly effective in Sub-Saharan Africa where roughly 600 million people still lack electricity.
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