Digital finance: A new focus for ADB?

MANILA — The Asian Development Bank is aiming to be “more strategic” in the integration of financial technologies in its projects and programs, according to the bank’s finance sector group chief. The bank has been supporting its member countries in modernizing their payment systems to expand citizens’ and small and medium enterprises’ access to finance, often difficult for those living in remote rural areas where financial institutions are hard-pressed to maintain services due to high costs and inaccessibility. But it has not often been the main focus, and the way the bank had done this had not been very systematic. “It was in the design stage, but it was not so strategic because the whole fintech is so new. You know a project is approved, then it runs for three to five years. So the few years you go, fintech is not really on the radar,” Lotte Schou-Zibell, who is also technical advisor for finance in ADB’s sustainable development and climate change department, told Devex following the conclusion of the 2nd Asia Finance Forum: FinTech and Sustainable Development that took place at the ADB headquarters in Manila. But the bank — or Schou-Zibell’s team, to be exact — is now developing a work plan for the next two years that will allow them to look at ADB’s project pipeline, often published a few years in advance, and identify which projects in which countries are supporting or aimed at financial inclusion. From there, they aim to identify which of those projects the bank can integrate digital financial technologies, such as mobile money and cloud computing. She expects the work plan to be ready by the end of year, but it will still require multiple approvals, including ultimately from ADB President Takehiko Nakao. “We’re really focusing in ADB on three areas, in general: one is high-level technology, [the second] is green finance, and the third is disaster risk insurance. So in high-level technologies, we have the digital finance,” she said. Devex asked the finance sector group chief about ADB’s potential focus areas in the sector, how much expertise and capacity the bank currently has to provide assistance on the topic, and how they foresee working with partners in this growing area of work. Our conversation here has been edited for length and clarity. You were saying earlier about ADB thinking of a business line for financial technology. Is ADB going to have a dedicated budget and department for that? No, nothing like that. I think it’s more correct to say having more strategic focus in our projects rather than a business line perhaps. It’s the same when we’re looking at green finance. We have a credit line, for example, to MSEs, and we will look at how can we integrate green finance into this. Can we ensure that some of the loans are to support the purchase of LED lamps for rural households or for clean toilets, or solar panels if you want to charge your phone? Things like that. A number of your current pilots are with the private sector. Will you be dealing with them more on digital finance? It all depends. The projects we’re looking at now [with FINCA and Cantilan] happen to be both with financial institutions. The project we’re looking at in Mongolia is also looking at nonbank financial institutions. They’re also private in that sense, but we’re looking at a shared cloud platform. But we always work with the government. So before we do anything in the Philippines or Georgia, we make sure that the government is OK with it, so that we have no objection from the government. When we have a technical assistance project, we go to them to say: this is what we’re planning to do, and if you have no objections to this we will look at the feasibility of doing this pilot project. What were some of the things that you picked up from the forum? At a roundtable session, we put countries into groups and had them discuss some of the preconditions. And there’s a lot of cohesiveness, actually. A lot of them talked about connectivity, so the ICT infrastructure, the network coverage, having access to electricity; the interoperability, having an interoperable payment system. They talked about national literacy, digital literacy, training and capacity building. They talked about how we should talk about safety and trust, rather than using the term cybersecurity, as it sends a more positive message. “The important thing with fintech is that it’s moving so fast. The change is so fast. And I think that’s the challenge the banks and regulators are having: the speed of change. We have to keep on our toes.” --— Lotte Schou-Zibell, technical advisor for finance in ADB's sustainable development and climate change department They also talked about the importance of the legal and regulatory framework, or the RegTech. And the regulatory sandboxes, whereas you have here in the Philippines, you have a test and learn environment. Everyone also mentioned the digital biometric ID. I also mentioned the other day that financial products need to be affordable, accessible, and appropriate — and appropriate means they meet the needs of the clients. And of course they talked about looking at technologies: blockchain, artificial intelligence, machine learning. And this is really important for speeding up the process. And with that you can also lower the cost substantially. I know these are all important, and you’re in the early stages, but where do you see ADB focusing? It really depends on each country. We have 47 developing member countries and all are in various stages of development and technological development, and political will and willingness to really embark on new areas. You heard from the Central Bank of Papua New Guinea how they’re looking broadly at how they can implement blockchain to overhaul their whole financial system, and not just the financial system but the whole economic environment. So that’s very progressive. And then we have Georgia, which is quite tech savvy. It’s the most tech savvy country in the Central West Asia. And then you’ll have other countries that are much more weary, a bit more conservative. But India is moving quickly, and China is moving very fast. So it really varies. It all really depends on the needs of each individual country. One area I could say we would like to have more focus is digital ID or biometric ID, or you can say national identification — whatever manner each country would like to develop it. That’s one thing we see is important for finance, but also for health and education. So that’s something that’s much broader than just finance. Does ADB have the capacity to assist countries in terms of expertise on the subject? On capacity, fintech is quite new, and we don’t have a lot of expertise internally. We’re a very narrow, slim organization, and so we do engage consultants. And fintech is rather broad, so if you want RegTech, you need an expert on RegTech. If you want cybersecurity, or safety and trust, you need an expert in that. It’s not the same person. If you’re doing biometric ID, that’s another person. And because we don’t have a big portfolio, we can’t motivate to have experts in all these different areas. So it’s much more efficient for us to engage consultants with these specific expertise. I think it’s the most efficient way to go right now, because we don’t have that critical mass to engage experts internally at the moment. And you don’t want just a general fintech expert to go in and look at all these different areas. You’re not going to go anywhere. Where will the budget come from for fintech? If they’re loans, the regional departments have their allocation and that funding is coming from our ADF resources. So we have our lending money, so to speak. And that’s within each regional department. And the technical assistance comes either from our financial sector trust fund, or we have other sources of funds where we can get technical assistance from. How do you see ADB working with partners on fintech? The important thing with fintech is that it’s moving so fast. The change is so fast. And I think that’s the challenge the banks and regulators are having: the speed of change. We have to keep on our toes. In collaboration with the other multilateral development banks, what we do every time we have a project in a country, we do a donor mapping. And we have a rather detailed outline and it’s in our project documentation, which is also public. We identify exactly if it’s a financial inclusion project, and then we’ll map exactly what other donors are doing, the name of the project, the amount, when it was approved, when it was closing. So that’s always mapped to make sure we’re not duplicating efforts. If there’s opportunity to collaborate, we collaborate or at least share information. So we do make sure that we are well coordinated. How do you see ADB’s focus in the area of digital finance, when there are often two elements: digital finance that helps people transact for convenience and digital finance that is necessary to bank the unbanked? I think we have to focus on both, and reaching the last mile. Another thing, we’re now just developing another technical assistance to look at connectivity, identify the gaps, connectivity to last mile access. And it’s not just finance. It’s health education finance and rural development. And this comes back to network coverage and electricity where you have bandwidth and so on to identify the gaps, because if you don’t have that connectivity, you can’t have access to finance. Is that in any particular country? We haven’t started it yet, but it’s coming up. And the idea is to at least have this mapping done in the next six to eight months, because in October 2018, we’re hosting the global infrastructure forum, which is in the sidelines of the IMF-World Bank meetings. So the heads of the nine MDBs will be there, including the U.N. secretary-general. This will be in Bali. Hosting rotates, so next year it will be my team. So we thought this is a very important topic to address and really to reach that last mile. You have to understand what are the connectivity issues, and it’s an issue in several of our member countries, that there is no network coverage in rural areas and island economies. You heard Papua New Guinea and the Pacific islands. There are few people living in each island, so that’s a real issue in many of those countries. Read more Devex coverage on financial technology.