Caribbean Digital Transformation Program Workshop

5 th Growth and Resilience Dialogue April 14, 2021

Digital Transformation for All Esperanza Lasagabaster Lead Economist World Bank

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The Digital Economy is transforming the world

The “digital economy […] is the single most important driver of innovation, competitiveness and growth, and it holds huge potential for […] entrepreneurs. ” (EC, 2015)

In 2016, the global Digital Economy was worth $11.5 trillion, 15.5% of the world’s GDP.

It is expected to reach 25% of the world’s GDP in a few years.

The pace of technological change is incredible.

Mobile is a relatively recent technology, and it has progressed from being an expensive cordless landline, to the most affordable source of broadband connectivity, and with 5G it may soon be as fast as Fiber.

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1. Digital Financial Services

2. Digital Transformation of Businesses

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Financial Services are critical to growth

• At the macro level, the empirical literature shows that countries with deeper, more developed financial systems can allocate capital more efficiently and enjoy higher income.

• At the micro level, access to finance improves income opportunities and reduces poverty. It allows new business investments, helps entrepreneurs manage risks, and allows households to invest in education, housing and smooth consumption when affected by adverse shocks.

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Evolution of financial services as a result of digital technologies

Digital Financial Services

Digital Platforms

Note: L (low), M (medium), H (high) reflect a judgement on the benefit level of the technology for the corresponding Fintech solution. Source: IMF and World Bank Group (2019)

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New digital business models are emerging in many areas of finance

E -commerce platforms or telecom operators offer digital payments & saving instruments using mobile phones and agent networks (Safaricom / Alibaba)

Payments

Fintechs are supporting cross-border payments (Transwire).

Remittances

Alternative data (payments, social media, mobile phone activity) used to provide credit to MSMEs & households in minutes (Ant Financial’s 310 loans)

Credit

V ehicle, travel, and health insurance offered through apps and marketplaces. Alternative data helps with risk classification and product pricing.

Insurance

Investment/financial planning

Kenya’s M-Akiba government bond issued to small savers.

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Covid-19: The big push forward

Mexico. Operations conducted through CoDI (October 2019-February 2021)

• Covid-19 has pushed the digitalization of financial services across the globe

CoDI’s Case (Mexico)

• Launched in late 2019, Cobro Digital (CoDi) has provided a viable electronic payments platform for small businesses and individuals. • It can be easily operated from any smartphone and relies on QR codes overcoming key constraints to digital payments. • 4.2 million accounts validated by the end of 2020 benefitting from its ease of access and the push of Covid-19.

Source: Banco de Mexico

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NOT WITHOUT RISKS ….

Cybersecurity and Operational Risks

Data Governance and Privacy

Exclusion

Financial Integrity

Unfair Consumer Practices

Regulatory Arbitrage

Macro-financial Risks

Unfair Competition

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How can governments foster digital financial services?

Digital Infrastructure

Enabling New Players & Products

Consumer Protection

Credit Infrastructure

Competition

Diverse approaches • Partner with

Key considerations • Credit information sharing reduces information asymmetries between lenders / borrowers • Alternative data from digital sources and analytical tools (AI/ML) can lower cost of lending. • Digitalizing Secured Transaction Registries

Entry is not enough • Allow level

Core Infrastructure • Support broadband connectivity • High penetration of smartphones Other government services • Digitalize G2P (social benefit transfers) • Digitalize government platforms (e.g., land & tax records)

Transparency is key • Rules to foster clear and timely

bank or licensed entity (bKash and Brac Bank)

playing field and prevent regul. arbitrage

disclosure by standardizing

• Specialized license as

• Economies of scale / scope could lead to a

total-cost metrics for mobile money products and remittances (e.g., Kenya Competition Authority) protect data (e.g., EU Data Protect. Regulation)

financial service provider (common). existing non- financial entity (uncommon, e.g., Kenya).

few cornering the market

• License an

• Banks could

restrict access to financial infrastructure

• Regulations to

• Techn. firms could restrict access to

data/tech. tools While some countries have used specialized regimes to test new products, regulatory sandboxes are increasingly used to foster innovations in a controlled environment and with limited risk.

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1. Digital Financial Services

2. Digital Transformation of Businesses

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The Digitalization of firms is key to productivity

• Productivity is at the center of sustained economic progress and the digitization of firms can substantially increase productivity (World Development Report 2016, World Bank)

• Digitalization process advanced during the past decade but…

• Progress was uneven across industries • Much higher in knowledge-based industries (e.g., nearly 90% of employees in OECD countries connected to digital devices in 2019). • Low in food and accommodation (barely 31% of employees connected). • Differences between knowledge-based and more traditional sectors are even wider in middle-income countries. • Progress lagged among SMEs • SME digitalization is most advanced on marketing, electronic invoicing, and interactions with government (e.g., paying taxes) but still small in many countries (e.g., in 2018, only 6% of SMEs used e-commerce in Chile). • Gaps are much larger for enterprise resource planning (ERP), supply chain management and more complex technologies (e.g., in Chile, 26% and 6% of large and SMEs, respectively, used ERP prior to Covid-19).

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Covid-19 has accelerated the digitization of businesses

• Business Pulse Surveys conducted in 60 countries and covering more than 100,000 firms indicate that digitization has been a very important firm response to the crisis. • Large firms have increased digitization the most. Does this mean that the digital divide could widen?

• Digitization has been partial— mostly focused on marketing and sales.

• Many public support programs have not reached the firms that needed them the most.

Source: World Bank Business Pulse Survey (2021) https://www.worldbank.org/en/data/interactive/2021/01/19/covid-19-business-pulse- survey-dashboard

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Obstacles to broad-based digital adoption by businesses ….

Lack of Awareness

Digital Skills

Access to Affordable and Fast Broadband

Access to Finance

Data Governance and Privacy

Cybersecurity

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How can governments foster digital adoption by firms?

Protecting Intellectual Property

Participation in online platforms

Digital Security

Upgrading Skills

Technology Support

• Diverse set of packages with financial and non-financial support • Direct support or tax incentives to enhance digital uptake by SMEs. • Chile: Package of digital tools for SMEs to expand sales, reduce operating costs, and strengthen relationships with clients/suppliers.

• Government

• Public platforms to guide SMEs in the digitalization process (e.g., New Zealand support for small firms on e-commerce; U.K. support to SMEs on exporting

• Strengthening management skills , e.g., Acelera PYME program (Spain) helps SMEs reconsider business model and enhances managerial/digita l skills. • Ta x incentives or vouchers for investing in workers’ training.

• High public

support for IP rights through regulatory changes, information, technical assistance and financial support (e.g., Spain’s matching grant support on patents).

awareness on SME risks but targeted interventions more limited and still evolving. • Platforms for information sharing on security. • Tax incentives for investing on digital security (e.g., Korea) • Certification programs on digital security

through e- commerce; Australia broader guidance).

• Platforms expanded

following Covid-19

Many initiatives expanded or intensified following the Covid-19 pandemic.

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Opportunities going forward

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Opportunities for the OECS

• Challenge: Limited availability of digital financial services. Uptake of digital payments is currently low and the costs of opening and maintaining bank accounts are high

• Opportunity: Digital technologies present enormous opportunities to transform financial services in the OECS • Upgrading the regulatory framework governing payment systems and non-traditional financial service providers • Fostering interoperability • Leveraging public services to encourage greater use of digital financial services as modes of payment • Other innovations in digital financial instruments could follow—digital lending platforms and insurance products

• Challenge: Few businesses have embedded digital technologies within their business models

• Opportunity: • Accelerate the digitalization of traditional industries (including tourism) • Encourage managerial training programs on digital skills • Support regional business accelerators

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THANK YOU

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