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Digital public infrastructure (DPI) can accelerate financial inclusion and close existing gaps in digital financial services, but can also introduce risks and exacerbate the existing ones if not designed using good principles and global standards, a G20 partnership for global financial inclusion report prepared by the World Bank said.
The report, titled G20 policy recommendations for advancing financial inclusion and productivity gains through digital public infrastructure, says: “DPI, if managed well, can lower transaction costs, catalyse innovation, foster competition and interoperability, and enhance user experiences and choice.”
According to the report, some of the risks that DPIs could bring include legal and regulatory risks, and insolvency risks which can endanger the ecosystem at large if some of its critical components were to become financially unsustainable. Financial consumer protection risks could also be heightened by its misuse.
The policy recommendations in the report include risk-based regulation, supervision, oversight arrangements for financial sector use of DPIs, promotion of sound internal governance among others.
The report has cited the example of Aadhaar which, along with Jan Dhan bank accounts and mobile phones, has played a critical role in moving ownership of transaction accounts from one-fourth of adults in 2008 to over 80 per cent now.
Other examples of DPIs include Singapore’s Singpass, Philippines’ PhilSys, UAE-Pass and fast-payment systems such as India’s UPI, Brazil’s Pix, and Turkiye’s FAST among others.
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The World Bank report also said that digitalisation of remittances is an opportunity to increase access to and usage of these accounts, which would also reduce associated transaction cost. The report highlighted that DPI can help address challenges such as access to formal credit faced by the micro, small and medium enterprises (MSMEs). Digital payment systems can also help small and medium enterprises to build credit history, which can help in accessing formal sources of finance such as bank loans.
“Data exchange can also facilitate the use of alternative data sources and big data analytics to provide additional information sources to the credit risk-assessment process of MSMEs,” the report said.
It also said that data exchange and digital payments, when used together, can also provide alternate sources of collateral for MSMEs.
