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UN lays out digitalisation plan for a ‘people’s financial system’

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The pandemic has opened up a historic opportunity to harness digitalisation, reshape finance in alignment with citizens’ needs and finance the Sustainable Development Goals (SDGs), a UN report has argued.

Kristalina Georgieva, managing director at the International Monetary Fund, said that “[there is an urgent need to] return the financial services industry to what it is supposed to be – an industry that serves people”.

Background on Task Force

The UN report by the Task Force on Digital Financing of the SDGs seeks to provide global leadership in helping to place sustainable development at the heart of finance’s disruptive, digital evolution.

The report, titled People’s Money: Harnessing Digitalisation to Finance a Sustainable Future, was published after 18 months of international public-private stakeholder engagement, as well as an extensive review of research and diverse literature.

The Task Force was set up in 2018. It is co-chaired by Achim Steiner, UNDP administrator, and Maria Ramos, previously chief executive of Absa Group, and consists of leaders from across finance, technology, policy, regulation and international development.

The publication is a follow-up on a 2019 progress report, mandated by the UN Secretary General and guided by the work of his High-Level Panel on Digital Cooperation, a public-private stakeholder cooperation co-chaired by Melinda Gates, co-chair of the Bill and Melinda Gates Foundation, and Jack Ma, former executive chairman of Alibaba Group.

It presents the main elements of the Task Force’s analysis on opportunities and barriers and risks, how these can be overcome, as well as an action agenda with recommendations to various stakeholders, including policymakers, regulators, fintechs and civil society organisations.

Digital disruption

Digitalisation is already transforming finance, for example, mobile platforms bring financial services to mass markets and a third of US public equities trades are executed by computer-managed funds, the report said.

Steiner told a press briefing that the digital finance revolution offers opportunities to reconnect people with their money.

“Digital finance’s dramatic potential for transformative impact is being revealed by the Covid-19 pandemic. Digital transfers enable governments to get support to people in need, crowdfunding platforms have mobilised funds for medical supplies and emergency relief, and algorithmic lending means small businesses have quicker access to funds,” he said.

Action Agenda

The report outlines an action agenda, which consists of three recommendations to various market players to:

  • advance catalytic opportunities to deliver financing for specific SDGs;
  • build foundations for sustainable digital financing ecosystems; and
  • strengthen inclusive international governance to develop policies, regulations, standards and corporate governance arrangements at the international level, suited for securing SDG-aligned global digital financing platforms and markets (see graph below).
Source: People’s Money: Harnessing Digitalisation to Finance a Sustainable Future by Task Force on Digital Financing of the Sustainable Development Goals

 

The role of financial institutions

According to the report, the key role of financial institutions is to:

  • identify and advance opportunities in own products and systems;
  • advance interoperable digital ID and data systems;
  • engage with international standard setting; and
  • explore corporate governance options for stewarding the SDGs.

Simon Zadek, head of the Task Force Secretariat, explained to Expert Investor that financial institutions seek to adapt to a sustainable financial system that serves the people as their businesses are dependent on them.

“If you’re a financial institution, then you’re facing the challenges of innovation, competition and regulation,” he noted.

Zadek said that financial institutions can lose business if they don’t step up.

In terms of innovation, new products need to satisfy customer needs. With regard to competition, fintechs are taking market share from financial institutions.

And when it comes to financial regulation, sustainability is rising on the regulatory agenda.

As an example, he pointed to the planned, second sustainable finance strategy by the European Commission. He said that, for the first time, they are deliberating including a strategic piece on fintech and the role of digitalisation in advancing sustainable finance.

“And all of that is being shaped by the changing perception of citizens as to what is possible; that they understand that the financial system has to act in their interest more and [that] they are being offered choices, to allow them to walk away from financial institutions that don’t,” Zadek added.

Opportunities for financial institutions

Meanwhile, the report also outlines the business opportunity for financial institutions.

For example, digitally-enabled SME lending is one of five identified ‘catalytic opportunities’ to accelerate the SDGs, as SMEs are in need of $5.2trn (€4.4trn) per year, according to the report.

While SME loans are typically too small for banks, digital lending can be done more cheaply, Zadek said.

“When you look at algorithmic lending to SMEs, the marginal cost of lending is almost zero, because you’re using big data and AI to do the analytics and the due diligence,” he explained.

Pathfinder initiatives

To advance digitally enabled SDG aligned financing, the Task Force has also developed or supported ‘pathfinder initiatives’.

One example is the International Dialogue on Global Digital Finance (IDGF), which engages with big tech, such as Facebook to increase inclusiveness in its plans to create a digital currency, Zadek said.

Another example is an infrastructure initiative on digital governance led by financial market data provider Refinitiv.

The firm’s Infrastructure 360 App provides information and insight on over 60,000 infrastructure projects. It integrates data on project finance, deals, loans, due diligence, risk profiles and macroeconomic, geopolitical and operational risk with environmental, social and governance metrics to support investment decision making, a UN press release said.

Historic opportunity

Both, opportunities and risks of digitalisation, are heightened by the coronavirus crisis.

The authors believe that digitalisation will make a difference if it helps to overcome barriers to financing the SDGs.

Among the risks that digitalisation opens up are breaches of personal data, embezzlement and fraud. It can also intensify short-termism, undermine long-term value creation, and it may widen inequalities.

The report said that digitalisation “deepens the damaging implications of being excluded from the digital world and strengthens market power of digital infrastructure platforms and digital marketplaces”.

“The historic opportunity to harness digitalisation in reshaping finance must be grasped now, given the urgency to finance the SDGs and the short window of change resulting from a period of digital disruption, and the potential to maintain the digital momentum of the current crisis,” it noted.

Elena Johansson

Senior Reporter

Part of the Bonhill Group.