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April

"Opportunities and Risks in Digital Financial Services – How do we best Protect Consumers and their Privacy?"


Speech by Parliamentary State Secretary Thomas Silberhorn at the Responsible Finance Forum VIII

27 April 2017 in Berlin

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Ladies and gentlemen,

The spread of digital technology is fundamentally altering our way of life. It is transforming the way we work, the way we socialize and communicate, the way we receive and search for information. At this very moment, some of you may be browsing social media or perhaps booking your next business trip. Digital technology has made communicating and doing business incredibly quick and easy.

The rapid development of information and communication technologies impacts all of us: the significance of this transformation will continue to grow. Therefore, it is a given that digital technology - with all its opportunities and implications - is a priority of Germany’s G20 presidency.

Digital technology can amplify and accelerate development potentials, in particular for emerging economies. Rather than laboriously adjusting structures that are already in place or having to invest in heavy infrastructure, we can use state of the art technology to reach our goals efficiently: Drones deliver medical supplies in Rwanda, even where roads or actual addresses do not exist. Apps deliver first-class educational materials to remote villages in Ecuador.

Digital technology is particularly useful when it comes to financial inclusion. A major benefit associated with digital financial services is increased reach. More households in developing countries have access to a mobile phone – a major entry point for many digital financial services – than have access to electricity or improved sanitation.

At the same time, new business models are evolving, with financial technology companies, so-called FinTechs, making use of big data and algorithms to significantly decrease transaction costs. This in turn makes it possible to reach people who have been financially excluded until now.

The statistics show signs of positive developments: between 2011 and 2014 alone, digital financial services helped 700 million adults globally to gain access to financial services – this is a 20 per cent increase. It is fair to say that digital finance is a true game changer!

A recent McKinsey study shows the economic benefits of financial inclusion: It suggests that digital finance could increase the GDPs of all emerging economies by 6 per cent, or a total of 3.7 trillion US dollar, by the year 2025. This would essentially be like adding a whole new economy that is larger than all African economies put together. The study estimates that this additional GDP could create up to 95 million new jobs across all sectors.

However, today we are here to consider both the opportunities and also the risks in digital financial services. They are indeed two sides of the same coin, as the title of this session says.

Big data and algorithms are a major opportunity to promote financial inclusion based on new instruments and business models. At the same time, big data and algorithms also entail possible risks as far as data privacy, consumer protection and cyber security are concerned.

Every time each one of us browses social media, transfers money online or otherwise makes use of digital technology – we each create a trail of data. A recent study conducted by the University of Cambridge and Stanford University provided interesting insights on how such data trails might be used for personality analysis. With an algorithm analyzing a person’s Facebook 'likes', the research team was better able to predict personality traits of study participants than their friends and family. The algorithm needed only ten 'likes' to know a study participant better than a work colleague, it needed 70 to beat a roommate, 150 to beat a parent or a sibling, and 300 to beat a spouse.

If we apply this insight about the power of algorithms to financial services, it offers great potential for better assessing the creditworthiness of an individual. Models like Artificial Intelligence, Predicting Future Preferences, Credit Decision Scoring, and Behavioral Analytics might remove the need for extensive collateral – which is often a burden to provide for individuals and small businesses.

However, an algorithm might determine that certain people based on their skin color or their place of residence are less creditworthy than others. That would raise the costs of loans or insurance premiums for those groups of clients. Or costs might even become prohibitively expensive because a provider may regard business with those groups as too risky or unprofitable. Intentionally or not, algorithms might discriminate. As a result, digital technology would lead to financial exclusion rather than financial inclusion. We have to ask: who will be in charge of the accountability of algorithms?

To address this and other risks, we have looked closely at tapping the potential of digital technology, while ensuring responsible digital finance. Only if we strike a balance between opportunities and risks, will we be able to reap the benefits in terms of positive societal and economic impacts. These insights are reflected in our overarching Digital Agenda of German Development Cooperation as well as in our initiatives such as the strategic partnership for a "Digital Africa" promoting responsible business in the ICT sector through development cooperation measures.

We believe that traditional and digital responsible finance alike require an integrated "three-pillar approach". Let me briefly elaborate on those three pillars:

1. Consumer protection and supervision:

We, as a community, have made great headway in "traditional" responsible finance. The G20 High-Level Principles on Financial Consumer Protection are an important milestone and point of reference for regulators. The G20 High-Level Principles for Digital Financial Inclusion adopted last year in Hangzhou provide further important guidance for concrete action.

The rapidly increasing use of big data by FinTechs and financial institutions requires policymakers to rethink and adapt their policies. Regulatory frameworks to protect consumers need to keep pace with the rapid changes in the industry.

Consumer protection is – as we say in German – "the salt in the soup", because although no one can see it, when eating the soup everyone will taste it. Regulators need to demand that the right quantity of salt is added to the soup while simultaneously making sure that the salt does not spoil the soup altogether.

Governments can facilitate market development: by promoting innovation in products and delivery mechanisms and by building institutional capacity and protecting consumers.

In Uganda, we have helped to establish a dedicated Financial Innovations Sub-Committee at the Bank of Uganda involving representatives from all relevant departments. A key outcome of this joint effort was the issuance of Mobile Money Guidelines by the Bank of Uganda. This includes coverage of issues ranging from agents exploiting the low technological literacy levels of customers to transparent fees.

The targeted cooperation among the various relevant authorities and departments helped to create a comprehensive solution to the complex and intertwined challenges of digital financial services.

2. Self-regulation of the industry

Through codes and standards, the digital financial industry can contribute to increasing financial inclusion in a responsible manner. An important issue that needs to be addressed is the lack of transparency. Providers often fail to provide details about how they gather data, why they need it, and how it will be used and assessed. Individual pricing and product conditions based on "black box” algorithmic techniques might lead to discrimination and the exclusion of vulnerable groups.

Therefore, industry initiatives are important building blocks for responsible digital financial markets. One example is the Code of Conduct for mobile money providers published by GSMA – the GSM association of mobile phone operators worldwide. Complementing the efforts of regulatory and supervisory bodies such industry initiatives support the development of a safe and responsible industry for digital financial services.

3. Financial literacy or financial capability for clients

We have understood that digital services are only useful if people know how to use them.

In Jordan we are supporting information campaigns and training courses on the responsible use of digital financial services. Financial literacy measures are not just about conveying knowledge regarding financial products. Rather, such measures aim to help clients internalize what they have learned and adapt their behavior accordingly. As the digital revolution sweeps through all aspects of our personal, professional and political lives, digital literacy at all levels is becoming more important than ever.

In that vein, I am very happy to share with you that we are using the momentum of the German G20 presidency to raise awareness for the inclusion of women and girls in the digital world.

With our initiative #eSkills4Girls we are highlighting the structural challenges that bar women and girls in particular from engaging with and benefiting from digital technology.

This relates directly to financial inclusion: Globally, women are 7 per cent less likely than men to have basic transactional accounts. Women living in poverty are even 28 per cent less likely than men to have a bank account. So we will need to cater to the needs of women if we wish to achieve our targets of significantly increasing financial inclusion. Therefore, it is encouraging to see that the G20 Digital Economy Ministerial Conference also supported the #eSkills4Girls initiative in its declaration on "Shaping Digitalisation for an Interconnected World" earlier this month.

Through our collective efforts we have already made important progress: The G20 High-Level Principles on Financial Consumer Protection and the High-Level Principles on Digital Financial Inclusion are proof of our commitment to responsible finance. Now it is crucial that we continue to catch up and keep up. We need to move from theory to practice. We need to build capacities to continuously adapt to the realities in a very dynamic environment.

We, as policymakers, have an obligation to improve our collective understanding of data-enabled digital financial services so as to effectively design laws and rules to leverage the upsides of this emerging industry, while managing the potential risks and burdens.

In the spirit of the renewed Global Partnership as outlined in the 2030 Agenda on Sustainable Development: It needs the joint efforts of all of us – of the public and the private sector, of G20 countries and beyond.

In January, the German G20 presidency hosted the conference 'Digitising finance, financial inclusion and financial literacy'. We had the pleasure of welcoming Her Majesty Queen Maxima as patron of the Global Partnership for Financial Inclusion, GPFI – and I would like to reiterate an important point that Her Majesty made: For the two billion individuals and 200 million micro, small, and midsize businesses in emerging economies who still remain financially excluded: We’ve done very well, but not well enough!

And let’s remember, it is not only in emerging economies that financial exclusion is an issue. 58 million people in the EU do not have a basic account and about 16 million adults in the US are unbanked. Financial exclusion is an issue affecting all of us.

So let’s work together, let’s address opportunities and risks by taking pro-active action and realize the enormous potential that digital finance holds for all our economies and for the wellbeing of all.

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