FIT IN Initiative Inaugural Conference

Everyone deserves access to decent financial services, especially the most vulnerable. That’s why in November 2020, the Toulouse School of Economics launched the FIT IN Initiative (Financial Inclusion Through INteroperability). This project developed at the crossroads between TSE’s Digital CenterSustainable Finance Center and Infrastructure & Network Center seeks to catalyze new research that can constructively influence the design and regulation of interoperable digital payment systems in developing countries. The main objective of this four-year research initiative is to better understand the implications of alternative competition and regulatory policies and ultimately inform policies to expand the scope, improve the quality and reduce the cost of digital payment systems for impoverished users.

 

How can policymakers promote financial inclusion?

In December 2021, the inaugural FIT IN Initiative conference featured two lively sessions showcasing some of the latest economic analysis in digital finance. Bringing together 8 experts on the topic, the conference was intended to inform policymakers and facilitate connections between researchers, regulators, commercial providers and practitioners.

Mobile money and financial inclusion

Digital financial services, and mobile money in particular, have generated considerable enthusiasm and hope for a reduction in remittance fees for the rural poor. Jenny Aker (Tufts University) emphasized that this is especially the case in Sub-Saharan Africa, where remittances account for 2.5% of the region’s GDP and transfer costs are among the highest in the world. Analyzing data from Niger, Jenny and her co-authors show that demand for sending and receiving remittances is substantial. Nevertheless, fewer than 3% of households use mobile money despite high rates of mobile phone ownership and the comparable costs of other transfer services. While rural households are willing to pay mobile-money transfer costs, there is significant variation by region, primarily correlated with access to agents. This suggests that one of the primary barriers to mobile-money adoption could be the agent network.
 
What is the economic impact of introducing mobile money in rural areas with limited access to financial services? A study by Catia Batista (Nova School of Business and Economics) and Pedro Vicente is the first to use a randomized controlled trial to answer this question. Following a sample of rural communities in Mozambique, their results show that the availability of mobile money translated into high adoption of these services. Mobile money improved consumption smoothing by treated households, reducing their vulnerability to adverse weather and self-reported shocks. However, mobile money also led to reduced investment, especially in agriculture. The number of migrants in a household and the migrant remittances received by rural households both increased, particularly in presence of adverse shocks, while there are no clear effects on savings. These results suggest that, by drastically reducing transaction costs for remittances and improving insurance possibilities, mobile money can accelerate migration to urban areas.
 
To examine how best to inform and encourage use of mobile banking services, Emma Riley (University of Washington) and Abu Shonchoy also conducted a randomized controlled trial. They offered training on mobile banking to 400 female microfinance clients in rural Ghana, along with small incentives to encourage adoption of mobile banking services. Individual incentives increased the use of mobile banking by 16 percentage points, double the control mean of 15%. However, incentives to encourage others in the same microfinance group resulted in significantly higher use of 36 percentage points, along with increases in the value and number of mobile banking transactions. Incentives to encourage others resulted in large increases in knowledge about mobile banking, frequency of knowledge sharing with peers, and confidence in safely conducting digital transactions. Women in microfinance groups where the group leader had already used mobile banking saw significantly larger treatment effects. These findings highlight the importance of thinking about technology adoption within peer networks.

Digital payments and financial services

In the second FIT IN Initiative session, researchers discussed their investigation of the new relationships emerging between banks, Big Tech platforms, fintech payment providers, and consumers. Uday Rajan (University of Michigan) underlined how competition for standalone payments disrupts the historical banking model because payment flows are informative about credit risk. Using a model in which processing payments allows providers to learn about customers’ creditworthiness, he and his coauthors find that competition from fintechs affects a bank’s price for payment services and its loan offers. This competition promotes financial inclusion, may hurt consumers with a strong bank preference, and has an ambiguous effect on the loan market. Both fintech data sales and consumer data portability increase bank lending, but the effects on consumer welfare are ambiguous. Under mild conditions, consumer welfare is higher under data sales than with data portability.
 
Yao Zeng (Wharton) proposed that there is an informational synergy between fintech lending and cashless payments. Theoretically, fintech lenders screen borrowers more efficiently when borrowers use cashless payments that produce transferable and verifiable information. In turn, a strategic consideration to stand out from non-adopting borrowers pushes borrowers to adopt cashless payments. Empirically, he and his coauthors provide evidence that larger use of cashless payments predicts a higher likelihood of loan approval, a lower interest rate, and a higher loan amount, especially for firms of higher credit quality. This synergy provides an economic rationale for open banking, and more broadly for data sharing and a lending model without traditional banking relationships. 
The EU’s General Data Privacy Regulation and California’s Consumer Privacy Act aim to protect vulnerable consumers from exploitation by firms. Research by Michael Sockin (University of Texas) investigates how such policies might affect the welfare of consumers who differ in their ability to resist temptation. Sharing data with a digital platform benefits a consumer through improved matching efficiency with normal consumption goods at the expense of exposing those with self-control issues to temptation goods. Michael’s analysis highlights the limitations of GDPR and CCPA regulations because of nuanced externalities induced by consumers’ active and default choices. He and his coauthors find that CCPA-type policies, where the default choice is to opt-in for data sharing, give the highest social welfare if temptation is low. On the other hand, when temptation is high, no data sharing gives the highest welfare. However, GDPR-type policies where the default choice is opt-out, may still yield the highest social welfare when temptation is in the intermediate range. 

 

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