The pandemic is changing consumer behavior and expectations in the Pacific, particularly when it comes to using digital tools for financial transactions.
When a teacher on Vella Lavella Island in the Solomon Islands needs to access the money she’s earned teaching or received as remittances from a relative, she needs to take a day off work and, at considerable expense, travel by boat to Gizo Island. Frequently, bad weather, even cyclones, causes delays, as does poor internet access.
People in the Pacific have long needed more convenient digital solutions for payments, and other financial services. This will not only give more people access to the financial system, it will make life much easier for those already using the system. COVID-19 has intensified the need to address these issues.
This sense of urgency increased in March when the World Health Organisation advised countries “to use contactless payments to reduce the risk of transmission”. Although possibly a low risk, a psychological fear exists that money may pass on infection. Many businesses stopped accepting cash and moved to either online or contactless tap-and-go payments. Cashless payments, when the basic infrastructure is in place and the recipient has a bank account, are faster and easier.
Like many places, Pacific island countries reacted quickly to the viral threat with measures to prevent its arrival and physical distancing rules to limit its spread. What’s more, many countries announced fiscal packages to counter its impact on economic growth and household incomes. These include additional health spending, temporary cash transfers for displaced workers, and credit support to small, liquidity-strapped enterprises and affected sectors.
However, setting up cash transfer programs is constrained by limited infrastructure, databases, registries, identification systems, and the number of people who have bank accounts. This results in authorities and program managers facing challenges in identifying beneficiaries, setting up effective payment mechanisms, and promptly disbursing much-needed money.
Digital payments are convenient but only as effective as their underlying infrastructure. What happens when power shuts down and the credit card reader is out of service? What if you lose your card and have to travel long distances to find a cash machine or have to wait days or longer for a replacement?
Going cashless also risks excluding some of the most vulnerable members of society, like the aged. Many people remain unbanked—66% of the population in Indonesia, 75% in the Solomon Islands, and 85% in Papua New Guinea.
Data connectivity, mobile technology, digital banking and financial technologies can help overcome these challenges.
The Pacific Islands are already undergoing fundamental changes as the result of new technologies. The many benefits include greater financial inclusion, lower transaction costs, less cash to physically manage and secure, real-time payments, and enhanced budgeting. Pacific island businesses—particularly small enterprises—can also enjoy the technologically driven economic growth experienced in advanced markets as e-commerce regulations are established and online payments are embraced.
The Pacific Islands are already undergoing fundamental changes as the result of new technologies.
The payments industry has a track record of innovation that can help solve the development challenges in the finance sector of emerging economies. This includes everything from “chip and pin”, digital wallets, virtual card issuance, and tokenization, which enhances the security of “card-not-present” transactions. It can also include payments made using mobile devices, wearable tech, or internet-of-things devices.
Distributed ledger technology, cloud computing, and artificial intelligence have the potential to support these innovative services. That is why we have seen big technology companies also entering the payment space utilizing their technical capabilities and customers’ data to provide payment services aiming to solve the financial inclusion challenge.
Innovation is taking place that allows people to transact between themselves, with businesses and government, often using mobile smart devices that can work both online and offline. Not only are incumbent banks seeking new business opportunities in fintech, but start-ups are disrupting markets seeking to expand financial inclusion by using technology to cut operational costs. A recent trial of a digital access tool in Papua New Guinea, for example, will allow citizens without ID to participate in the banking sector with savings accounts and loans.
Digital payments are cost effective and convenient. Indeed, with innovations such as digital wallets the user may not even have to enrol at a physical bank branch, thus enabling rural or otherwise remote citizens to participate. In the Solomon Islands for example, a mobile wallet product called EziPei, was launched in February this year. While still at an early stage, it holds promise for citizens to send money, receive money, top up airtime, pay for electricity and water from anywhere using any smartphone or feature phone, and on any network.
However, there are challenges that come with innovative products and services and entering new markets. Consumer and investor protection, compliance costs associated with anti-money laundering and combating the financing of terrorism laws, enforcement of tax laws and international sanctions, as well as circumvention of capital controls and securities laws, to name a few are areas of concern for industry stakeholders. Building consumer trust and confidence in new financial technologies is also an area of utmost importance in order to achieve scale and success.
If managed, the coronavirus pandemic can serve as an important catalyst to further accelerate the adoption of non-cash payments. But for this to happen, central banks will need to consider their own innovation as well as enabling that FinTechs and TechFins (technology firms such as Google, Amazon and Alibaba) deliver innovative financial services. This may include digital currencies and application program interfaces (API) for open banking.
Efforts will need to:
- Rationalize cash and promote and design digitization programs for commerce and the economy.
- Ensure universal access where merchants and consumers, irrespective of finances and education, will have access to the tools of the future.
- Support omnichannel payments. The rapid build-out of omnichannel capabilities will become an essential requirement for all payment companies in most geographies.
- Make payments contactless. The fear of contact with contaminated surfaces has given a real boost to the use of card and wallet-based contactless payments.
- Explore the use of data and technology to protect against fraud and cybercrime. Consumer education is also key as individuals are often the target in online crime.
- Provide financial and technical literacy to ensure consumers know how to use digital products wisely, safely and securely. They need to have the skills and confidence to manage their money soundly, and to understand the risks.
- Redesign the regulatory model. In today’s technology-driven financial sector, we need to enable innovation to expand access to finance while ensuring stability, consumer protection, and competition.
COVID-19 is changing consumer behaviour and expectations. It will be imperative to balance short-term crisis management today with thinking ahead to restarting economies. Innovative products provide opportunities to support the un-banked and under-banked at a time when traditional banks have been forced to adjust business models and strategies. Policy makers should seize the opportunities this pandemic has created.