The Old and the New Economics of Financial Inclusion

The past decade has witnessed dramatic technological advances that have changed the economics of financial inclusion. This paper contrasts the old and the new economics of financial inclusion and draws policy implications. The old model of financial inclusion was not able to defy the logic of financial markets, relying on subsidies and nudges from state authorities to make financial institutions include underserved segments of the economy. The new economics of financial inclusion derive from digital automation. It has dramatically lowered transaction costs and increased returns to scale, allowing services at lower margins and lower volumes than ever before to be commercially sustainable. Rather than banks, digital newcomers such as mobile network operators or BigTech firms are protagonists of digital financial inclusion. They are willing to make significant investments that foster financial inclusion even when it is not profitable in the short-run, because it allows them to leverage a feedback loop of data analytics and network externalities that also harbours the danger of creating new monopolies and oligopolies. Regulators may thus face a Faustian Bargain: trade private sector led financial infrastructure investment now for anticompetitive behaviour later. To avoid the short end of the Faustian Bargain, regulators can consider a two-step policy: laissez-faire first, rectification later.