European Business Organization Law Review (2020) 21:7–35

https://doi.org/10.1007/s40804-020-00183-y

ARTICLE

Sustainability, FinTech and Financial Inclusion

Douglas W. Arner1,2 · Ross P. Buckley3 · Dirk A. Zetzsche4,5 · Robin Veidt6

Published online: 23 March 2020

© T.M.C. Asser Press 2020

Abstract
We argue financial technology (FinTech) is the key driver for financial inclusion,
which in turn underlies sustainable balanced development, as embodied in the UN
Sustainable Development Goals (SDGs). The full potential of FinTech to support the
SDGs may be realized with a progressive approach to the development of underly-
ing infrastructure to support digital financial transformation. Our research suggests
that the best way to think about such a strategy is to focus on four primary pillars.
The first pillar requires the building of digital identity, simplified account opening
and e-KYC systems, supported by the second pillar of open interoperable electronic
payments systems. The third pillar involves using the infrastructure of the first and
second pillars to underpin electronic provision of government services and pay-
ments. The fourth pillar—design of digital financial markets and systems—supports
broader access to finance and investment. Implementing the four pillars is a major
journey for any economy, but one which has tremendous potential to transform not
only finance but economies and societies, through FinTech, financial inclusion and
sustainable balanced development.

Keywords  Sustainable investment · Sustainable development goals · FinTech ·

Financial inclusion · RegTech · Sustainability · e-KYC · Electronic payment
infrastructure

1 Introduction

Sustainable development is one of the most important shared objectives globally. In

looking at this issue, the focus today increasingly centres on the United Nations Sus-
tainable Development Goals (UN SDGs), with the UN SDGs providing a framework
of detailed objectives and criteria in pursuing sustainable development.
Central banks and financial regulators around the world are likewise considering
how they can enhance sustainable development and the UN SDGs in the context of

* Douglas W. Arner
douglas.arner@hku.hk
Extended author information available on the last page of the article

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 8 D. W. Arner et al.

their wider mandates for financial and economic development. Central banks and
financial regulators however have to also balance their other objectives, including
monetary stability, financial stability, financial integrity and consumer protection
with these developmental objectives.
Today, there are three major approaches emerging among financial regulatory
policymakers to sustainability and the UN SDGs.
The first approach views climate change and the other UN SDGs from the stand-
point of the traditional financial services focus on risk and related disclosure: as an
example, the Financial Stability Board has led the development of a new set of cli-
mate change related disclosures. Similar frameworks are being adopted by others,
particularly around environmental, social and corporate governance (ESG). Going
forward, using the UN SDGs as the core framework for defining, monitoring and
evaluating ESG investment has great potential to redirect existing resources towards
achieving the SDGs.
The second approach views the UN SDGs (particularly climate change but also
biodiversity and poverty reduction) as relating to new sources of potential risk
which must be addressed: for example, climate change is now identified by the
global insurance industry, its major regulators and related international regula-
tory organizations (such as the International Association of Insurance Supervisors)
as perhaps the greatest risk facing the industry going forward. This is resulting in
policy and regulatory changes and significant research into risk modelling, manage-
ment and mitigation, all resulting in substantial redirection of resources to support
the SDGs. InsurTech is a particular focus of R&D efforts. Likewise, the core focus
of the Financial Stability Board is identifying new risks, thus providing a potentially
significant opportunity for policy and regulatory focus.
The third approach—which is in its very early stages—involves thinking about
how to restructure or even redesign the financial system to support the UN SDGs.
This is the focus of this article: How can we support the transformation of finance
to support the UN SDGs? In answering this question we turn to two other lead-
ing foci for central banks and financial regulators: financial inclusion and financial
technology.
As the increasing focus on sustainability and the UN SDGs has emerged, so has a
related focus on financial inclusion, bringing finance to all parts of societies in order
to maximise benefits. Financial inclusion focuses on sustainable balanced develop-
ment: making sure that the benefits extend to all.
In addition, over the past decade, central banks and financial regulators have had
to face yet another challenge: the digital transformation of finance and financial sys-
tems around the world. Financial technology or FinTech is a new term for the inter-
linkage of finance and technology.1 The interlinkage of finance and technology has
a long history, but the most recent waves of its development pose new regulatory
challenges because of an unprecedented speed of technological development includ-
ing BigData, Artificial Intelligence, enhanced connectivity and storage technologies

1
  See on the evolution of the FinTech sector and FinTech in general Arner et al. (2016), p 1275, Arner
et al. (2017), pp 377–378.

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Sustainability, FinTech and Financial Inclusion 9

such as Blockchain and cloudservices.2 FinTech brings with it not only major oppor-
tunities to transform finance positively but also major new risks which potentially
impact regulatory objectives.
Sustainable Finance and FinTech are now major policy focuses of most national
governments and regulators, as demonstrated by (1) a range of initiatives promoted
by the European Commission3 and some of the EU Member States,4 and (2) an
abundant stream of research on both sustainability5 and FinTech.6 Yet few have
linked the two fields. In particular, the European Commission’s Sustainable Finance
Action Plan is silent on FinTech.
This article undertakes to link the two topics, using a third as catalyst: Financial
Inclusion. Similar to sustainable finance and FinTech, financial inclusion is at the
centre of current global policy attention, driven e.g. by the G20,7 the World Bank8
and major development organizations.9
Thus, in seeking to redesign finance to support sustainability through the UN
SDGs, we focus on one significant avenue: digital financial transformation in sup-
port of financial inclusion and financial development. Strategies focusing on digital
financial transformation support financial inclusion, the generation of new financial
resources and the direct achievement of the SDGs, for instance through a combina-
tion of digital identification systems, simplified account opening processes, inter-
operable electronic payment systems, and government-to-citizen services delivered
through this core financial infrastructure. The new Central Banks and Bank Super-
visors Network for Greening of the Financial System and the new Sustainability

2
  See Zetzsche et al. (2018b); Arner et al. (2017), p 373.
3
 See on FinTech European Commission (2018a). On sustainable finance see European Commission
(2018b).
4
 Regarding sustainable finance, most notably, the Grand Duchy of Luxembourg has launched a Green
Finance initiative, inspired by the ambition to claim market leadership in Green Finance financial prod-
ucts. Other prominent EU examples include the sustainability agendas of France, the Netherlands and
Germany, which seek to steer capital flows into sustainable financial products.
5
  See e.g. Delimatsis (2016) (arguing that a ‘discomfort with the functioning, working methods and cer-
tain rigidities of the global standardizing bodies such as the ISO led to a mushrooming of a new gen-
eration of private standard-setters at the transnational level’). In return, the European Commission has
started work on an own taxonomy, see European Commission (2018b), work programme in Annex II
and III; see also Schanzenbach and Sitkoff (2019) (arguing that ESG investing is only possible for trusts
if the trustee reasonably concludes and solely acts because of the fact that the ESG investment will be
directly beneficial for the beneficiary by improving risk-adjusted return); Sjafjell and Bruner (2019) (the
contributions in the edited volume discuss the mismatch between global markets and territorially rooted
national sustainability regulation).
6
  Rather than referring to the large volume of legal work in this field (including our own), we instead
refer to some key economic research, including Biais et al. (2019) (analysing economics of Blockchain
technology); Hornuf and Schwienbacher (2017a); Buchak et  al. (2018) (measuring the impact of tech-
nologies); Bacache et al. (2015) (as example for related topics such as taxation of the digital economy).
7
  See Global Partnership for Financial Inclusion (GPFI) (2016).
8
  See The World Bank’s financial inclusion policy work at https​://www.world​bank.org/en/topic​/finan​ciali​
nclus​ion.
9
 Including the International Monetary Fund, the OECD, and others, NGOs such as the Alliance for
Financial Inclusion, The Toronto Centre, and Microfinance Centre, as well as the state-sponsored devel-
opment banks (EIB, ADB, IDB, FDIC, etc.).

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 10 D. W. Arner et al.

Committee of the International Organization of Securities Commissions are exam-

ples of initiatives which seek to combine various policy approaches to support digi-
tal financing of the SDGs, while the Alliance for Financial Inclusion’s FinTech for
Financial Inclusion (FinTech4FI) initiative shows the potential for strategies for dig-
ital financial transformation.
Why focus on financial inclusion? We have good reasons to do so: As of 2017,
1.7 billion adults lacked access to a financial or mobile money account, some 31
percent of the world’s population.10 Significantly, though, between 2010 and 2017,
1.2 billion people gained a financial or mobile money account for the first time, with
most located in developing countries.11 Much of this progress came from the impact
of technology in finance. For example, mobile money has played a major role in
increasing financial inclusion in Kenya and East Africa.12 China has moved in a very
short period of time from an inefficient traditional financial system to perhaps the
world’s most digitized financial system.13 India has dramatically increased finan-
cial access by building the infrastructure for a new digital economy (‘India Stack’),
thereby leading to hundreds of millions people gaining accounts.14 Along with simi-
lar developments in Russia, these four places account for the vast majority of the
gains in financial inclusion since 2010.
From the legal perspective, linking sustainability, FinTech and financial inclusion
is far from obvious. In fact, most research has focused on the three fields as separate,
unrelated silos of knowledge. Financial inclusion has become an economic research
topic15—with a focus in microfinance16—but, with few exceptions,17 much less a
legal one. Where legal scholars focus on financial inclusion, they have studied (1)
bank access for underprivileged people in developed societies,18 (2) the regulatory
set-up of mobile money service providers,19 (3) regulatory preconditions for micro-
finance institutions,20 and (4)—most recently—the Central Bank’s role in financial
inclusion.21 We also note a scarcity of legal work relating to sustainable finance:
While a plethora of studies discuss sustainable finance in general, and some research
has been devoted to the steering effect of the UN SDGs,22 with the exception of

10
  Demirguc-Kunt et al. (2018).
11
  See World Bank (2017).
12
  GSMA (2017); Ashenafi et al. (2016).
13
  Chien and Randall (2018); see also Zhou et al. (2015), p 25.
14
  See on the India Stack https​://india​stack​.org/. For a detailed discussion, see Arner et al. (2019b), pp
55, 64 et seq.
15
  See e.g. Lal and Sachdev (2015).
16
  See e.g. with regard to technology Ashta (2010).
17
  See e.g. Barr (2004a, b, 2012); Lee (2017), as well as the contributions in Barr et al. (2007).
18
  See in particular Barr (2012) and the contributions in Barr et al. (2007), as well as Blank and Barr
(2009).
19
  See e.g. Buckley et al. (2015); de Koker et al. (2017); Lal and Sachdev (2015); Winn (2016); Zhou
et al. (2015).
20
  See BCBS (2010); Trujillo et al. (2014, 2015); Rosengard (2011).
21
  See Harris and Barr (2019).
22
  See Biermann (2019), pp 52–53; Kanie and Biermann (2017) (with contributions on the governance
function and implementation of the UN SDGs).

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Sustainability, FinTech and Financial Inclusion 11

the impact of climate change on financial institutions23 few academics have stud-
ied the link between law and sustainable finance. A lot of attention (including our
own24) has been devoted to the legal environment governing (and the impact of) cer-
tain financial technologies (such as initial coin offerings,25 artificial intelligence,26
crowdfunding,27 blockchain28 and new payment methods29). However, besides fur-
thering competition and innovation, and balancing the former with traditional objec-
tives of financial regulation,30 little attention has so far been focused on how to
ensure financial inclusion as a wider objective of the promotion of FinTech. This is a
gap this article seeks to fill.
While, as demonstrated above, our cross-disciplinary analysis is a radical step
away from traditional disciplinary boundaries of legal scholarship,31 we follow the
practical approach undertaken by development bodies. Their interdisciplinary ten-
dency is demonstrated by widely recognized reports issued e.g. by the G20 and the
United Nations.32
In line with this approach, this article examines why FinTech is important for
sustainable development and how regulators and governments can design a compre-
hensive strategy to support digital financial transformation, underpinning financial
inclusion and sustainable balanced development at the same time. Neither FinTech
nor financial inclusion are objectives in themselves. Rather, both are tools to build a
sustainable future.

2 Financial Inclusion and Sustainability: The Long‑Term Perspective

While financial inclusion is not included specifically in the UN SDGs, we suggest

that it plays a central role in underpinning the SDGs as well as supporting finance
in support of their achievement. This section examines FinTech, its relationship with

23
  See the groundbreaking report by Alexander (2014) (assessing the link between systemic environmen-
tal risks and financial stability, and offering insights into how some members of the Basel Committee are
already acting on these links).
24
  See Zetzsche et al. (2019b); Arner et al. (2019a, b); Buckley et al. (2019); Zetzsche et al. (2018a, b).
25
  See e.g. Chiu (2018).
26
  Cf. Vermeulen et al. (2018).
27
  Cf. Hornuf and Schwienbacher (2017b).
28
  See Paech (2017); Vermeulen and Fenwick (2019); Avgouleas and Kiayias (2019); Finck (2018).
29
  Cf. Chiu (2017).
30
 See Allen (2019); Avgouleas (2018); Brummer (2015); Brummer and Yadav (2019); Chiu (2016);
Haddad and Hornuf (2019); Omarova (2019); Magnuson (2018); Ringe and Ruof (2018).
31
  To our knowledge, two exceptions apply. A recent volume edited by representatives of the European
Bank for Reconstruction and Development, to which we have contributed, links to our knowledge for the
first time sustainable finance to financial technologies and inclusion, Zetzsche et al. (2019a). Further, an
article by Chiu and Greene proposes using ICO-style fund-raising in order to achieve greater marketiza-
tion of sustainable and social finance products, see Chiu and Greene (2019).
32
  See e.g. GPFI (2018a), a follow-up to GPFI (2016), as well as GPFI (2018b), endorsed in August
2018. See also UNCDF (2019); World Bank (2019).

123
 12 D. W. Arner et al.

financial inclusion, and how FinTech for financial inclusion relates to sustainability,
the central objective of the UN SDGs.

2.1 Financial Inclusion: Why It Matters

Financial inclusion involves delivering financial services at affordable cost to all

parts of society.33 It enables people to manage their financial obligations efficiently,
reduces poverty and supports wider economic growth.34 First, it reduces individu-
als’ vulnerability. For instance, facilitating saving allows people to weather shocks
and invest in their education, health and micro-businesses. Second, it increases the
efficiency of daily life: bills can be paid electronically without time off work. Third,
financial inclusion allows the socialization and diversification of peoples’ financial
risks through the financial system. For instance, breadwinner insurance can pre-
vent people falling back into poverty. Fourth, financial inclusion supports economic
growth through increasing financial resources to support real economic activity, par-
ticularly for individuals and small and medium enterprises (SMEs).

2.2 Two Sides of the Same Coin

Financial inclusion is crucial to address today’s global challenges as outlined in the

UN SDGs. Financial access (particularly through FinTech, as will be discussed in
more detail below) is one way to reduce the burden of life’s challenges, including
sickness, crime, poverty, unemployment, age, etc.35 Financially excluded individu-
als lack tools to prepare for and manage such risks. For instance, farmers without
access to electronic payment systems worry about theft; and may consume more
immediately rather than take the risk. Health insurance can secure one’s long-term
working capacity. Savings can fund children’s educations and provide for old age.
These are long-term goals. Financial exclusion takes from people the opportunity to
think, plan and act long-term. Where risks that could be avoided, hedged, or social-
ized through the financial system materialize we force the excluded to think and
act short-term, often unsustainably. Financial inclusion and sustainability are two
sides of the same coin, aimed at the UN SDG’s core objective: promoting prosperity
while balancing risks.
The connection between financial inclusion and the UN SDGs, may lead one to
expect to find financial inclusion as a UN SDG. While it is not, analysis suggests
that financial inclusion underlies success in all the SDGs and therefore should be
seen as a key underlying objective in seeking balanced sustainable development (see
Table 1).
Financial inclusion can thus be seen to support the broader achievement of the
UN SDGs.

33
  FATF (2013), p 12.
34
  CFI (2019).
35
  These are listed as key challenges in the United Nations Sustainable Development Goals, https​://www.
un.org/susta​inabl​edeve​lopme​nt.

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 Table 1  Financial inclusion and the UN SDGs
No. Goals Impact How financial inclusion can further goal
Direct = D
Indirect = I

1 No poverty I Access to finance supports poverty reduction

2 Zero hunger I Enhance financial stability; stabilize cash-flows through saving and lending
3 Good health and well-being I Provide health insurance and financial stability
4 Quality education I Enable financial planning and saving for school fees
5 Gender equality D Strengthening female entrepreneurship and financial control
Sustainability, FinTech and Financial Inclusion

6–7 Clean water and sanitation; affordable I Financing development and maintenance of infrastructure
and clean energy
8 Decent work and economic growth D Availability of finance supports entrepreneurship, SMEs and innovation
9 Industry, Innovation and Infrastructure D Provide financing for development and maintenance of infrastructure
10 Reduced inequalities D Enable funding of education and savings which provide the best opportunity for greater participation
11 Sustainable cities and communities I Finance is key to achieving all the targets; increases the domestic and international resources available to
focus on infrastructure development
12 Responsible consumption and production I Key to achievement is financing of research and development as well as infrastructure and education;
increases resources—domestic and international—available
13 Climate action D Identifying and managing both new forms of existing risk as well as new risks and creating systems
which expand financial resources available
14 Life below water I Providing alternatives to unsustainable production

123
15 Life on land I Providing alternatives to unsustainable production
16 Peace, justice and strong institutions I Economic development strengthens peace and civil institutions
17 Partnerships D Allows for engagement of private actors, multiplying assistance of public or state-supported actors
13
 14 D. W. Arner et al.

2.3 Financial Inclusion: A Developing Country Topic?

It is undebated that financial exclusion, in the formal sense, is less widely spread in
developed countries. However, this does not mean that the population in developed
countries know how to use their bank access well: As of 2014, the World Bank esti-
mates that only 33% of all adults globally (and only 38% of account-owning adults)
are financially literate (among them 57% of account owners in major advanced
economies, and 30% in major emerging economies).36 In this context, financial lit-
eracy means the ability to manage one’s finances independently, without a finan-
cial advisor.37 Assuming that approximately 1/3 of the world’s population are chil-
dren and subtracting the 1.7 billion formally excluded from the financial illiterate
approximately 1.7 billion adults globally remain that cannot put their financial ser-
vices access to good use despite access. The EU numbers are equally discouraging.
Based on World Bank figures (2014), 53% of the EU’s adult population is financially
illiterate.
FinTech, if rightly designed and applied (e.g. through robo advisors making
recommendations based on clients’ interests), could come to the account holders’
assistance. However, according to Eurostat, 37% of EU individuals over age 65 have
never used the internet.38 The UK Financial Conduct Authority (as an example of
an advanced economy) estimates that 1 in 5 consumers lack the digital skills to use
digital financial services.39 At a time where 1 in 4 bank branches will be closed by
2020,40 and more bank branches are about to close in poor quarters than in rich41—
technological exclusion translates into financial exclusion.42
Despite many national and EU initiatives,43 the transposition of findings in spe-
cific regulatory and legislative steps aimed at financial inclusion is lagging behind;
analysis of how legislation, with the assistance of technology, could respond
to financial illiteracy is sorely needed.44 Multiple regulators seek to draw les-
sons from (and implement) the UN’s digital literacy framework45—with Kenya’s

36
  See Klapper et al. (2015), p 16.
37
  See Klapper et al. (2015), p 16.
38
  UKFCA (2016), p 13.
39
  UKFCA (2016), p 13.
40
  See report by consultancy firm McKinsey cited in Wallace (2015).
41
  See Brignall (2019).
42
  See Nguyen (2014) (stating that closings have prolonged negative impact on credit supply to local
small businesses of − 13% for several years, even after the entry of new banks), as well as Nguyen (2019)
(stating that bank branch closings in the USA during the 2000s lead to a persistent decline in local small
business lending (fall by 453,000 USD after a closure off a baseline of 4,700,000 USD) for 6 years, while
being very localized, dissipating within six miles).
43
  See the overview of the initiatives and discussions on the European Commission’s online platform for
adult learning, https​://epale​.ec.europ​a.eu/en/theme​s/finan​cial-liter​acy.
44
  See the recent proposal by Safeguarding Ireland, Scoping of a Regulatory Framework for Adult Safe-
guarding Welcomed—Call for Establishment of a National Advocacy Service, taken from the European
Commission’s platform for adult learning, https​://epale​.ec.europ​a.eu/en/conte​nt/scopi​ng-regul​atory​-frame​
work-adult​-safeg​uardi​ng-welco​med-call-estab​lishm​ent-natio​nal.
45
  UNESCO (2018).

123
Sustainability, FinTech and Financial Inclusion 15

Three-Step-System of (1) familiarizing, (2) using, and (3) creating and programming
software providing a particularly active example.46 But despite all these efforts, due
to the enormous dimensions of the problem both digital and financial illiteracy is
here to stay—financial law has to accept wide-spread illiteracy as a given regula-
tory precondition. In light of this, ensuring FinTech for Financial Inclusion is a cru-
cial intermediate goal on the road towards a long-term, sustainable, yet prosperous
world.

3 FinTech, Financial Inclusion and Sustainability

Increasing financial inclusion is being seen—correctly in our view—not as an end in

itself but as one fundamental support for achieving broader sustainable development
objectives, including the UN SDGs.
If financial inclusion is beneficial for sustainability in terms of underpinning the
achievement of the UN SDGs, what is the role of FinTech?

3.1 FinTech and Financial Inclusion

The 2008 financial crisis prompted sweeping regulatory responses coordinated by

the G20 aimed at building a resilient global financial system. This led to the estab-
lishment of the Financial Inclusion Experts Group (‘FIEG’),47 Global Partnership
for Financial Inclusion (‘GPFI’) and the endorsement of the first Financial Inclusion
Action Plan (‘FIAP’) by G20 leaders in 2010, which has been revised in 2014 and
2017.48
The GPFI formally recognized digital financial solutions as critical to facilitate
global financial inclusion in 201649 and introduced the G20 High Level Princi-
ples for Digital Financial Inclusion (HLPs).50 Alongside the Recommendations for
Responsible Finance51 and the ID4D,52 the HLPs aim to encourage and guide gov-
ernments to embrace digital approaches to financial inclusion. In 2017, the FIAP
was updated to reflect the pivotal role of digitization.53
The Alliance for Financial Inclusion (AFI) was established in 2008 by the cen-
tral banks of developing countries, with an exclusive focus on financial inclusion.
In 2012, its members signed the historic Maya Declaration on Financial Inclusion,

46
  See Kenyan Digital Literacy Programme by the Ministry of Information, Communications and Tech-
nology (ICT): http://icta.go.ke/updat​e-on-the-digit​al-liter​acy-progr​amme-being​-imple​mente​d-by-the-ict-
autho​rity/.
47
  G20 Financial Inclusion Experts Group (2010); GPFI (2010).
48
  For the latest version see GPFI (2017); Buckley (2014), p 63.
49
  GPFI (2013).
50
  GPFI (2016).
51
  See Responsible Finance Forum (2011).
52
  See World Bank, Identification for Development: http://www.world​bank.org/en/progr​ams/id4d.
53
  Timmermann and Gmehling (2017).

123
 16 D. W. Arner et al.

by which developing countries committed to financial inclusion targets and national

policy changes and other agreements have followed.54
The UN also established the Task Force on Digital Financing in November 2018
in an effort to develop strategies that promote financial technology to advance the
SDGs. Recognizing that FinTech for financial inclusion requires nothing less than
an overhaul of the entire financial system, the UN’s Task Force is committed to
‘put people at the centre’, i.e. it supports the view expressed herein that FinTech is
an important, possibly the most important, single accelerator for attainment of the
SDGs.55
There is thus strong support for the idea that FinTech does play an important role
in financial inclusion. What role can FinTech play in sustainability more broadly?

3.2 FinTech and Sustainability

Digital finance and FinTech play three core roles in relation to achieving the SDGs.
The first is enhancing the allocation of existing financial resources to support sus-
tainable development. This takes place through business models, incentives, policies
and regulations to redirect financial resources globally and in individual countries
to provide SDG-related finance. Examples include ESG (environmental, social and
governance) and Green investment strategies, and the rapid growth in the EU, China
and Japan in particular in ESG-related financing.
The second involves the expansion of resources in the financial system generally
which can in turn support the SDGs. This takes place through financial inclusion
and financial sector development, which together can increase the amount of finan-
cial resources available globally and particularly in developing countries and by
which savings, investment and inclusion increases result in potentially large amounts
of new money available. China’s digital financial transformation is perhaps the best
example of this.
The third involves the use of digital finance and FinTech to directly achieve the
SDGs themselves. This occurs through the use of new technologies and of regu-
latory technology (RegTech) to design better financial and regulatory systems to
achieve policy objectives, with the India Stack strategy showing the dramatic poten-
tial on offer.
Table  256 presents how FinTech contributes directly or indirectly to the UN
SDGs.
If financial markets are sufficiently mature, providing payment services, long-
term financing, insurance services and savings/investment products, supporting
financial inclusion—particularly through FinTech—contribute to all 17 UN SDGs.

54
  AFI (2017a, b).
55
  UNSG (2018).
56
  The Table draws on the authors’ own research and experience. That digital financial services support
the UN SDGs is very broadly accepted: see United Nations, Digital Finance and the SDGs, http://www.
uncdf​.org/mm4p/dfs-and-the-sdgs.

123
 Table 2  How FT4FI could further the UN SDGs
No. Goals Impact How FT4FI can further goal
Direct = D
Indirect = I

1 No poverty I Allow for online financing, including credit and crowdfunding; create new income opportunities through
online markets and payments; reduce impact of disasters with local impact
2 Zero hunger I Enhance financial stability; stabilize cash-flows through saving and lending
3 Good health and well-being I Provide health insurance and financial stability
4 Quality education I Provide financial planning and savings for school fees
5 Gender equality D Strengthening female entrepreneurship and financial controls
Sustainability, FinTech and Financial Inclusion

6 Clean water and sanitation I Provide financing for development and maintenance of infrastructure; further education for local sustain-
ability expertise
7 Affordable and clean energy I Provide financing for development and maintenance of infrastructure; further education for local sustain-
ability expertise
8 Decent work and economic growth D Allow for online financing, including credit and crowdfunding; create new (online) income opportunities;
ensure funding and use symmetry (long-term for long-term projects, short-term for short-term projects)
9 Industry, Innovation and Infrastructure D Provide financing for development and maintenance of infrastructure
10 Reduced inequalities D See on gender at UN SDG 5. Re regional, economic and educational equality, education and savings
provide the best opportunity for greater participation for most societies; both are furthered by FT4FI
11 Sustainable cities and communities I FT4FI assists the development of and investment in sustainable technology and transformation
12 Responsible production and consumption I FT4FI assists the development of and investment in sustainable technology and transformation
13 Climate action I FT4FI assists the development of and investment in sustainable technology and transformation

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14 Life below water I FT4FI assists the development of and investment in sustainable technology and transformation
15 Life on land I FT4FI assists the development of and investment in sustainable technology and transformation
16 Peace, justice and strong institutions I Robust economic development strengthens peace and civil institutions
17 Partnerships D FT4FI allows for engagement of private actors, multiplying assistance by public or state supported actors
17
 18 D. W. Arner et al.

Table  2 makes evident that financial inclusion through FinTech is perhaps the
most important intermediate step economies must take on their journey to the UN
SDGs. Economies should develop strategies for digital financial transformation,
focusing on FinTech’s role in financial inclusion, as a response to the most important
and difficult question: How should economies approach achieving the UN SDGs?

4 Sustainability through FinTech and Financial Inclusion: Four Pillars

of Digital Financial Transformation

For these reasons, an ever-increasing range of international development organiza-

tions are focusing on the role of FinTech and digital financial transformation in sup-
porting broader developmental objectives today, including the United Nations Sec-
retary-General’s Task Force on Digital Financing of the Sustainable Development
Goals,57 the Alliance for Financial Inclusion,58 the World Bank and Consultative
Group to Assist the Poor (CGAP),59 and many regional development banks.60
Given the many partly competing, partly complementary initiatives it is crucial
to avoid the mistakes of the past. This section addresses two questions: what lessons
have we learned; and what types of FinTech are most likely to advance balanced sus-
tainable growth and financial inclusion?61
FinTech today encompasses technologies such as the application of artificial
intelligence to big data.62 Which among these innovations are most likely to facili-
tate financial inclusion and the UN SDGs?
The immediate answer is mobile money—the provision of e-money on mobile
phones—of which the paradigmatic example is M-Pesa in Kenya. The longer-term
answer is more complex. The real opportunity FinTech affords is developing an
entire infrastructure for a digital financial ecosystem underpinning the SDGs and
financial development, inclusion, stability and integrity.
Lessons can be taken from India’s FinTech strategy, India Stack, implemented
over the last decade. India Stack is a set of APIs which form a digital infrastruc-
ture used by the government, businesses and other entities to provide paperless and
cashless services.63 India Stack involves four main levels.64 First is a national biom-
etric identification system. Second is the establishment of bank accounts to deliver
national services. Third is a common payment API. Fourth is a series of electronic

57
  See UN Secretary-General’s Task Force on Digital Financing of the Sustainable Development Goals,
https​://digit​alfin​ancin​gtask​force​.org/.
58
  See the AFI special report by lead authors Arner et al. (2018).
59
 World Bank, Fintech and Financial Inclusion, http://pubdo​cs.world​bank.org/en/87772​14781​11918​
039/break​out-DigiF​inanc​e-McCon​aghy-Finte​ch.pdf.
60
  We know of FinTech initiatives by the Asian Development Bank, the Islamic Development Bank, the
European Investment Bank, and the Financial Development Corporation.
61
  GPFI (2018a).
62
  See on data-driven financial services Zetzsche et al. (2018b).
63
  What Is IndiaStack?, https​://india​stack​.org/about​/.
64
  Bose (2016). To learn more about India Stack, see https​://india​stack​.org/about​/.

123
Sustainability, FinTech and Financial Inclusion 19

KYC initiatives allowing individuals to provide their financial details to financial

services and other providers. These eKYC utility platforms show how RegTech—
regulatory technology—can improve the integrity of financial markets and reduce
risks.
Based on India’s experience and other successful examples including Kenya,
China and Russia, we argued in our major study for AFI that economies must focus
on four pillars of digital financial infrastructure to support digital financial transfor-
mation.65 These four pillars are:

• Pillar I: Digital ID and eKYC for identification and simplified account opening
• Pillar II: Open electronic payment systems, infrastructure and an enabling regu-
latory and policy environment that facilitates the digital flow of funds from tradi-
tional financial intermediaries and new market entrants
• Pillar III: Account opening initiatives and electronic provision of government
services, providing vital tools to access services and save
• Pillar IV: Design of digital financial market infrastructure and systems that sup-
port value-added financial services and deepen access, usage and stability.

These four pillars are examined below.

4.1 Pillar I: Digital ID and eKYC—Establishing the Foundation

Experience indicates that digital identity is central to the transformation process.

This is particular challenging in developing countries where substantial numbers of
people often lack formal identification documents.66
India’s Aadhaar system is the first level of India Stack and involves issuing a
12-digit randomized number to all residents for access to government and other
services.67 Difficulties in implementation should not detract from the potential of
a national biometrically-based identification system to underpin a digital financial
ecosystem. Digital ID is necessary for subsequent parts of the digital financial eco-
system to rest upon a solid foundation.
The experiences of the UN and Jordan with developing a digital identity solution
for refugees illustrates good system design and synergistic development.68 IrisGuard
is iris recognition technology that converts an iris image into a unique code which
is then used to identify the individual.69 Since 2016, IrisGuard’s EyePay platform
has been used by the UN to deliver financial aid. The technology provides sufficient
digital identity for beneficiaries to receive food vouchers, withdraw cash and trans-
fer funds without a bank account. EyePay, in conjunction with the Ethereum block-
chain, is now used to promote financial inclusion of Syrian refugees in Jordan by

65
  Arner et al. (2018).
66
  See for an extensive analysis of ID techniques and respective regulation Arner et al. (2019b).
67
  About Aadhaar, Unique Identification Authority of India, http://bit.ly/2Hsyz​Jd.
68
 See https​://www.irisg​uard.com/node/39.
69
 Ibid.

123
 20 D. W. Arner et al.

processing supermarket and ATM transactions in real-time. More than 2.3 million
Syrian refugees in the region are registered in the system so far.70
In the European Union, the 2014 eIDAS Regulation was adopted to provide
mutually recognized digital identity for cross-border interactions between European
citizens, companies and government institutions. Once member states notify the
European Commission of their eID, other member states must recognize it and indi-
viduals can use their eID in other member states.71
Base digital ID needs to extend as broadly as possible to maximize efficiencies.
While base identity can be developed from multiple sources, including business-
specific e-identities,72 base identity provides the fundamental element of the KYC
process. Particularly when linked electronically with other golden source data (such
as tax information), it provides the basis of a simple eKYC system. The core objec-
tive is to make opening accounts for most people and entities simple and cheap,
thereby allowing resources to be focused on higher risk customers and protection of
market integrity.
Technology enables the reconsideration of existing systems so as to balance mar-
ket integrity, financial inclusion and economic growth while meeting international
financial standards.
For instance, as part of its Aadhaar system, India has developed a paperless
eKYC service, to instantly establish the identity of prospective customers.73 The
digitization of identity authentication streamlines account opening and allows easy
access to both digital and traditional financial services. Axis Bank was the first
Indian bank to offer an eKYC facility in 2013, reducing the turnaround time for
opening bank accounts from 7 to 10  days to just 1  day.74 Today, many traditional
banks and licensed payments banks in India offer accounts which can be opened and
used instantly with eKYC.75
The European eIDAS system is intended to be the starting point for a similar sys-
tem, making it ‘possible to open a bank account on-line while meeting the strong
requirements for customer identity’.76 This includes accepting electronic identifica-
tion for meeting customer due diligence (CDD) requirements.
Such systems—while technically feasible—may not be politically feasible every-
where.77 Systems of optional digital identity, separate from sovereign identification
systems, may hold the greatest transformative potential.78

70
 Ibid.
71
  Arner et al. (2019b), section 4.3.
72
  Ibid., at section 4.4.2.
73
  Desai and Jasuja (2016).
74
  India Infoline News Service (2014).
75
  For example, AXIS Bank (https​://www.axisb​ank.com/accou​nts/savin​gs-accou​nt/axis-asap/axis_ASAP.
html) and RBL Bank (https​://abacu​s.rblba​nk.com/).
76
  European Commission (2017), pp 13–14.
77
  See Arner et al. (2019b), p 58.
78
  Arner et al. (2019b), section 4.4.2.

123
Sustainability, FinTech and Financial Inclusion 21

4.2 Pillar II: Open, Interoperable Electronic Payment Systems—Building

Connectivity

Payments systems provide the fundamental infrastructure for money to flow through
any economy. They are foundational to financial inclusion, financial development
and the functioning of the real economy. A mobile money ecosystem is one way
FinTech can help. Technology enables developing countries to leapfrog bricks-and-
mortar bank branches with a seamless digital financial system. Even poorer mem-
bers of society and SMEs can then have accounts and access the services they need
to flourish.

4.2.1 Mobile Money

Mobile money enables mobile phones to be used to pay bills, remit funds, deposit
cash, make withdrawals and save, using e-money, sometimes issued by banks but
mostly issued by telecommunication companies (‘telcos’). The service currently
exists in over 89 developing countries and is growing rapidly.79 E-money is typically
defined as a stored value instrument or product that: (1) is issued on receipt of funds;
(2) consists of electronically recorded value stored on a device such as a mobile
phone; (3) may be accepted as a means of payment by parties other than the issuer;
and (4) is convertible back into cash.80
M-Pesa is a major success in providing financial services to a sizable proportion
of the Kenyan population.81 However, mobile money success has not been consistent
across countries. This is due to the differing needs of consumers in different coun-
tries, the inability of service providers to adapt to different markets,82 a tendency of
central banks to over-regulate these services,83 a lack of trained payments profes-
sionals in many markets,84 and cultural and anthropological reasons.
Mobile money services, especially those offered by telcos, are key to defeating
financial exclusion in poorer countries, but pose real regulatory challenges. Such
services often do not initially pose systemic stability concerns and at least initially
do not in many cases require, traditional levels of banking regulation.85 At the same
time, such services have the potential to grow rapidly, particularly when intro-
duced by a dominant mobile telecoms provider, meaning that risks and the conse-
quent need for regulation can develop very quickly in some cases. Service providers

79
  Scharwatt et al. (2015).
80
  AFI Mobile Financial Services Working Group (2014).
81
  In 2016, through embracing M-Pesa and other digital payment networks, over 75% of adults in Kenya
had access to formal financial services, a 26.7% increase from a decade earlier, Ndung’u (2017).
82
  Buckley and Webster (2016), p 151.
83
  For example, the Central Bank of Kenya applied a ‘light-touch’ approach from the outset, which many
believe assisted the provision of these services.
84
  Buckley and Mas (2016), p 71.
85
  Arner et al. (2018), p 12. For the impact on financial stability also see the in-depth analysis by GSMA
(2019), pp 20 et seq.

123
 22 D. W. Arner et al.

benefit from a central bank that encourages innovation and understands local cus-
tomer needs: a major shift from the traditional role of central banks.

4.2.2 Designing Regulatory Infrastructure for an Open Electronic Payments System

In China, Alipay and WeChat Pay show the power of facilitating new entrants and
the digitization of the traditional payments system among banks.
Alibaba established Alipay in 2004 as a payment method for its ecommerce busi-
ness. It is now the second largest mobile wallet provider in the world, behind Pay-
Pal.86 The Yu’e Bao money market fund was established with Alipay in 2013, pro-
viding the opportunity to make small investments, and is now the world’s largest
money market fund.87
WeChat was established as a messaging platform by Tencent in 2011. In 2013,
the WeChat Wallet was introduced, allowing users to make mobile payments in
WeChat games. Cash transfers and in-store cashless payments became possible in
2014,88 and by 2017, 92 percent of survey respondents were using mobile payment
systems like this for retail payments.89
The People’s Bank of China (‘PBoC’) has since 2017 subjected mobile wallet
services to increasing regulation.90 Mobile payment institutions are now required to
channel payments through a new centralized clearing house, the China Nets Union
Clearing Corporation.91 The PBoC has also raised payment platforms’ reserve funds
ratio to 50 percent from 20 percent, gradually increasing to 100 percent over time,
to further protect consumers.92 Payment institutions must now also obtain permits to
offer barcode payments.93
These Chinese experiences highlight how payments providers should be subject
to appropriate proportional regulation to address risks and provide a level playing
field.
Increasingly, interoperability to bring together traditional and new forms of
payments are central to making such systems attractive. As such, governments
are increasingly mandating interoperability as a licensing condition for payments
providers; in many cases, governments are even involved in the development of
switches to provide the supporting infrastructure for such interoperability across dif-
ferent systems.
The combination of digital ID/eKYC with open electronic payments provides the
fundamental infrastructure. The greatest digital transformation can be achieved by
combining these with Pillar III.

86
  Bushell-Embling (2018).
87
  Mu (2014).
88
  Millward (2018).
89
  China Tech Insights (2017).
90
  See for an overview of China’s financial sector regulation Zhou et al. (2015), pp 28 et seq. (‘discuss-
ing China’s last mover advantage’).
91
  Hong (2017).
92
  Wang (2018).
93
  Xinhua (2017).

123
Sustainability, FinTech and Financial Inclusion 23

4.3 Pillar III: Electronic Government Provision of Services—Expanding Usage

While various governments have experimented with electronic provision of services

and mandatory account approaches, their effect is often limited unless built upon
Pillar I and II infrastructure. This combination has underpinned the third element
of India Stack, namely providing government salaries and services electronically
through bank accounts.
Such systems support financial inclusion, empowerment and savings and may
also dramatically reduce leakage, facilitating and supporting all aspects of achieving
the UN SDGs. Such systems have the potential to improve tax collection, as SMEs
grow within the formal financial system instead of outside. The Pillar I-II-III infra-
structure can also support national pension systems, which enhance the financial
safety net and provide additional financial resources to support growth.

4.3.1 Electronic Payment: Government Salaries and Transfers

For the poor, state support payments are often important. Digital financial transfor-
mation polices focused on government payments—particularly to the poor—achieve
three beneficial outcomes. First, digital payments enable governments to shift from
in-kind assistance (food, water supply) to inexpensive cash transfers.94 Second,
accounts established for support payments can be used for non-government pay-
ments. Third, the need to use the technology to receive government payments can
break down cultural attachment to cash.
There are many notable examples of Government-to-Person (‘G2P’) payment
programmes aiming at financially including the unbanked as well as enhancing the
efficiency and effectiveness of government services, transfers and payments. At least
19 G2P programmes operate in developing countries.95 However, most of these
projects are at best half-digital. In the case of Bolsa Familia in Brazil, Familias in
Colombia, and Benazir in Pakistan, a debit card is provided to recipients who may
withdraw cash. However, further digitalizing these projects faces real challenges.
According to CGAP, ‘31 percent of accounts in low-income countries […] [are]
used for only one or two withdrawals per month’.96 CGAP has identified potential
reasons for this, including use limitations of accounts and insufficient recipient and
agent training.97
The Center for Financial Inclusion highlights the need for payment processes
to ‘align with customer life patterns’.98 For instance, in a Pakistani G2P women’s
programme, only 53% of transactions were initiated by women; the rest were by
male representatives.99 Consequently, the Pakistan government adopted biometric

94
 CGAP, Govt. to Person Payments, http://www.cgap.org/topic​s/gov-perso​n-payme​nts; Stewart (2016).
95
  Stewart (2016), p 29 (citing policy reports from PFIP, CGAP, Gates Foundation and others).
96
 CGAP, Govt. to Person Payments, http://www.cgap.org/topic​s/gov-perso​n-payme​nts.
97
 Ibid.
98
  Stewart (2016), p 2.
99
  Ibid., p 19.

123
 24 D. W. Arner et al.

technology, ensuring women received cash transfers directly, thereby hopefully

empowering them to decide how to use the money.100
G2P payments can further financial inclusion and the UN SDGs, if properly
designed. However, G2P payments frequently have not successfully underpinned
a flourishing digital financial ecosystem. In particular, the three following features
must be addressed:

1. Government-designed account procedures should facilitate later unrestricted pay-

ments.
2. The digital-to-real gap must be bridged well. When digital transaction partners
are few, individuals will prefer cash. If merchants cannot do business without
accepting e-money, they will provide devices to accept e-money efficiently, with
or without incentives. Hence, it all starts with e-liquidity on the customers’ side.
3. Functionality must be simple. The learning required to receive government sup-
port must enable one to make and receive other transfers. A customized set-up
could assist, for instance by providing customers with the account information
of their most important recipients.

4.3.2 Electronic Payment and Provision: Other Core Services

The combination of Pillars I, II and III supports many service payments, particularly
for utilities and telecommunications, that improve the lives of individuals. The infra-
structure for Pillars I, II and III also supports ecommerce, with significant benefits
for SMEs.
Governments can support digital transformation by highlighting the advantages
of e-money, setting limits for cash transactions in the real economy, and requiring
merchants to accept digital payments at low or no cost to customers.
More transformational, integrated strategies integrating Pillars I, II and III have
the potential to transform government revenue, delivery of services, and trust and
confidence. This combination is very powerful from the standpoint of supporting the
achievement of the UN SDGs.
From the mutually reinforcing foundations of Pillars I-III, Pillar IV focuses on
other forms of infrastructure to support access to finance more broadly.

4.4 Pillar IV: Design of Financial Market Infrastructure and Systems—Enabling

New Activities, Business and Wider Development

Additional forms of digital financial infrastructure, combined with the foundations

of Pillars I-III can support access to finance, financial stability and market integrity.
Digitized systems for securities trading, clearing and settlement can also provide
greater access to investment products and support financial sector development more

100
  Government of Pakistan and BISP (2017), p 12.

123
Sustainability, FinTech and Financial Inclusion 25

broadly, as evidenced through the experiences of China, Kenya and India, among
others.

4.4.1 Transforming Credit Provision: From Collateral and Microfinance to Cash‑flow

Historically, credit risk analysis was conducted only by specialized banks, making it
uncommercial for many individuals and SMEs. The traditional solution was to rely
on collateral, which is difficult in developing countries where property rights may be
weak or nonexistent.
Digitalization has changed this. Providers with accurate customer data are well
placed to price credit through datafication, i.e. the process of analyzing and using
data. Superior data may derive from social media services, search engines, e-com-
merce platforms, and telcos.101
The big data approach applied by these firms (referred to as ‘TechFins’) should
improve business decisions by helping form a better picture of a customer’s financial
position using these superior data sets.
TechFins can thus ‘re-personalize’ the financial relationship with clients by
adjusting credit rates based on individuals’ real risk profiles. This enables financial
inclusion by providing ‘personalized’ services at a much lower cost per client.
The potential benefits are huge but the emergence of such platforms also brings
new challenges and risks, some existential from the standpoint of the UN SDGs,
meaning approaches to the interaction between data regulation and financial regula-
tion must be considered carefully.

4.4.2 Adding Insurance and Investments to Savings and Credit

While online payments and lending are the core of most financial inclusion strate-
gies, extensions into the investment sector are necessary. Digitalization can increase
access and reduce transaction costs. It also may reduce biases in investments and
strengthen capital markets through enhanced savings rates. Importantly, it also has
the potential to bring new financial resources into the financial system which can
in turn support innovation, business development, human capital and infrastructure,
as savings rates increase and are redirected through the financial system, thereby
underpinning attainment of the UN SDGs.
However, digitalization also brings risks. The main challenge is the uncertainty
and complexity which are inherent in investments. Bridging the trust divide—as
investors must trust intermediaries to control risk—is at the heart of developing liq-
uid financial markets.

4.4.3 Building Better Financial Infrastructure

Today, cloud, Internet of Things (IoT), blockchain and other technologies are
being used to redesign markets and infrastructure, particularly in payment systems,

101
  Zetzsche et al. (2018b), pp 406 et seq.

123
 26 D. W. Arner et al.

securities clearing and settlement systems, early stage financing, and trade and agri-
cultural finance. Maximizing this potential requires the foundation of Pillars I-III.

5 Developing a Comprehensive Strategy

5.1 Strategic Approach

The starting point is that the power of these pillars is greatest when all are pursued
and become mutually reinforcing. This is the core lesson from India Stack and can
be seen in an increasing range of countries which are pursuing integrated strategies
to support financial inclusion and digital financial transformation.

5.2 The Challenge of Technology

Any FinTech-based approach must accept that technology is not perfect. Three con-
sequences follow.
First, technology may operate beyond its developers’ intentions. Self-learning
algorithms may enhance biases existing in the data.102 Perfect technologies to con-
trol this tendency do not yet exist. Hence, providers must constantly test the out-
comes of algorithmic data interpretation.
Second, technology may do exactly what the developers intend, and the problem
is the developers. Financial history is replete with fraud. Every new technology will
be abused by some. A recent example is the use of initial coin offerings for defraud-
ing investors/participants.103
Third, ever-accelerating technology facilitates ever more new entrants, mak-
ing regulators’ roles ever more challenging. This will likely require regulators to
respond with technology. RegTech includes automation and data-driven analysis of
internal control systems and internal and external reporting.

5.3 Building Innovation Ecosystems: Regulatory Sandboxes, Piloting

and Test‑and‑Learn Approaches, and RegTech

Probably most important is the need for policymakers and regulators to develop
methods to understand new technologies and the related risks and opportunities
combined with the increasing necessity for regulators to consider how they can bet-
ter use technology in redesigning their systems for the regulation of digital finance
and FinTech.
One recent development to potentially assist digital financial transformation is
regulatory sandboxes.104 The sandbox creates an environment for businesses to test

102
  See e.g. Uber’s use of machine learning, Reese (2016).
103
  Zetzsche et al. (2019b).
104
  Zetzsche et al. (2017).

123
Sustainability, FinTech and Financial Inclusion 27

products without having to meet the full panoply of regulation. In return, regulators
require appropriate safeguards. The main advantages of sandboxes extend beyond
the regulator’s exemption. A sandbox sends a market message that the regulator
is open to innovation and provides learning opportunities for regulators. The main
risks of sandboxes are the potential to jeopardise regulatory priorities and supervi-
sory ‘over-friendliness’ due to capture or corruption.
We note, however, that ‘no two regulatory sandboxes are alike’: most regula-
tors practice, under the sandbox label, something we find more akin to an innova-
tion hub, i.e. a structured way of communication with innovative firms that results
in guidance to the firm and mutual learning, but no regulatory privilege is auto-
matically granted to the innovative firms; further, while innovation hubs require
resources and the involvement of seasoned supervisors, they often function without
substantial changes to legislation.105
Other ways to respond to innovation include more structured approaches to waiv-
ers, no-action letters, piloting and testing, and small business exemptions.
Another way resulting in increased regulatory technology expertise is to actu-
ally use technology: Regulators could require supervised firms to report digitally
to supervisors, and supervisors to receive and process reported information by digi-
tal means, resulting in a RegTech cycle that will propel both supervised firms and
supervisors into the digital age. Successful examples in this regard can be drawn
from the European Union.106 This use of technology by regulators is the truly
transformative potential of RegTech and integrated systems design of the sort we
advocate.

5.4 Balancing Inclusion with Client Protection

Client protection is key for not only digital financial inclusion but digital financial
transformation more broadly. One promising option is regulation-by-design: regula-
tory restrictions embedded technologically in the product. These restrictions would
reflect client exposure and ability to bear risks and would substitute for today’s
restrictions on access to financial services.
A reasonable approach will never aim at full access for all of society to all finan-
cial services. To protect clients, any policy must be partially exclusive: restricting
access to products too risky for people with low financial literacy. The result will be
an asymmetric paternalistic system in which people with greater financial sophis-
tication have access to wider ranges of financial products. We envisage that clients
will be assessed by income, education, experience and wealth and categorized in
classes. Depending on the class, access to risky products will be controlled. This
approach also allows preferred ethical restrictions. For instance, clients who wish to
avoid leverage for religious reasons (e.g. Islamic finance) will be able to do so.

105
  For a detailed analysis for regulatory sandboxes around the globe, see Buckley et al. (2020).
106
  See Buckley et al. (2019), pp 1–11.

123
 28 D. W. Arner et al.

The FinTech aspect of this new legal, rather than de facto, segregation, is that
criteria can be set, reviewed and adjusted day-to-day, as its application follows data-
driven rules, and its outcome can be supervised using RegTech.
Going forward, such principles-based, rather than rules-based, approaches are
key to successful regulatory development.

6 Towards Inclusive and Balanced Sustainable Growth

Digital financial transformation is one important answer to how regulators and gov-
ernment can support achievement of the UN SDGs, and thus result in a balanced,
sustainable development. Digital financial transformation supports achievement of
the UN SDGs in three key ways: first, by potentially generating additional finan-
cial resources; second, by more efficiently using existing (as well as new) financial
resources; and third in some cases by directly supporting achievement.
What sorts of approaches work? A comprehensive digital financial transforma-
tion strategy based on four pillars, including digital ID, open interoperable payment
systems, FinTech for G2P programmes, and long-term development of sophisticated
financial market infrastructure, is key.
From the standpoint of transforming all aspects of society and development, the
most powerful technology which has emerged is the mobile phone, particularly the
smartphone when combined with internet access. Research shows the transforma-
tive potential in terms of all of the SDGs as well as for financial sector development,
inclusion and deepening. The development of inexpensive smartphones combined
with new business models which rely less on network charges or handset sales and
more on generating data which in turn support commercial applications means that
smartphones are ever more available in many countries. Policies supporting smart-
phone and internet development are among the most important that can be pursued
and form the basis of many aspects of digital finance to support the SDGs. Major
barriers remain though, particularly in the context of the last mile but also in the
context of much of Africa where feature phones still prevail and internet access is
mixed. Because of their foundational effect, this is a core area for focus in seeking
rapid transformation going forward.
Another transformational technology not only in digital finance but in empower-
ment more generally is digital identification. Formal identification is an element of
the SDGs and because of its significance, is the subject of a major World Bank led
initiative: ID4D. The experience of India’s Aadhaar system, through which over a
billion people have received digital biometric identification has been transformative:
it has shown the power of such systems for achieving the SDGs directly as well as
increasing financial resources available but, at the same time, has highlighted the
potential dangers in data protection and other abuses. Once again, digital identifica-
tion projects if designed and implemented effectively have the potential to support
foundational transformations in directly achieving the SDGs as well as in supporting
financial development supporting wider societal transformation.
These foundational technologies offer the potential for other interventions, of
which mobile payments have been among the most important from the standpoint

123
Sustainability, FinTech and Financial Inclusion 29

of achieving the SDGs, with the example of M-Pesa in Kenya being the best known.
Central to their impact is interoperability, with an increasing range of governments
mandating this in order to maximize developmental benefits.
Combining these allows governments, businesses and others to provide better
services to people, with important successes in the context of displaced persons
through the UNHCR’s use of digital delivery of aid. Going forward, these sorts of
systems are likely to be increasingly important as migration and other forms of dis-
placement increase. Other examples of mitigation and development include forms of
digital crop insurance, pooled digital insurance for catastrophes.
As digital financial transformation proceeds, digital finance increasingly enables
individuals to invest small amounts of money, with customer acquisition costs made
viable through foundational technologies of the sorts described here. This bring new
money to achieve the SDGs, potentially as billions of people join the financial sys-
tem and are empowered to make investments which support wider social objectives.
Looking forward, the power of digital finance is greatest in those countries which
are furthest behind but through policy choices to support foundational technologies
are able to leapfrog to higher levels of development. This strategy of digital financial
infrastructure development rests fundamentally on availability of communications’
infrastructure. It offers the greatest potential in countries with high smart phone
penetration rates and inefficient old-fashioned financial systems. While financial
inclusion remains a challenge in many countries, the cost of smart phones is fall-
ing rapidly, while construction of related infrastructure is proceeding apace in most
markets. While this strategy will not solve all challenges—for instance, we may face
a new digital divide between the technologically able and others—it does provide
the core elements of an enabling framework to support the achievement of the UN
SDGs.

Acknowledgements  We are grateful for the financial support for this research provided by the Alliance
for Financial Inclusion (AFI); the Australian Research Council; the Hong Kong Research Grants Council
Research Impact Fund; and the Qatar National Research Fund National Priorities Fund. All responsibility
is the authors’. This article draws upon our earlier, extended report for AFI: ‘FinTech for Financial Inclu-
sion: A Framework for Digital Financial Transformation’, September 2018; available at https​://www.afi-
globa​l.org/publi​catio​ns/2844/FinTe​ch-for-Finan​cial-Inclu​sion-A-Frame​work-for-Digit​al-Finan​cial-Trans​
forma​tion.

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maps and institutional affiliations.

Affiliations

Douglas W. Arner1,2 · Ross P. Buckley3 · Dirk A. Zetzsche4,5 · Robin Veidt6

Ross P. Buckley
ross.buckley@unsw.edu.au
Dirk A. Zetzsche
dirk.zetzsche@uni.lu
Robin Veidt
robin.veidt@uni.lu
1
Kerry Holdings Professor in Law and Director, Asian Institute of International Financial Law,
Faculty of Law, University of Hong Kong, Hong Kong, China
2
Board Member, Centre for Finance, Technology and Entrepreneurship (CFTE), London, UK
3
KPMG Law‑King and Wood Mallesons Professor of Disruptive Innovation, and Scientia
Professor, UNSW Sydney, Sydney, Australia
4
Professor of Law, ADA Chair in Financial Law (Inclusive Finance), Faculty of Law, Economics
and Finance, University of Luxembourg, Luxembourg, Luxembourg

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5
Director, Centre for Business and Corporate Law, Heinrich-Heine-University, Düsseldorf,
Germany
6
Research Associate, ADA Chair in Financial Law (Inclusive Finance), Faculty of Law,
Economics and Finance, University of Luxembourg, Luxembourg, Luxembourg

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