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International Journal of Business Forecasting and
Marketing Intelligence
ISSN online: 1744-6643 - ISSN print: 1744-6635
https://www.inderscience.com/ijbfmi
Digital finance research and developments around the world: a
literature review
Peterson K. Ozili
DOI: 10.1504/IJBFMI.2022.10049390
Article History:
Received: 27 June 2022
Accepted: 28 June 2022
Published online: 14 December 2022
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Copyright © 2023 Inderscience Enterprises Ltd.
I
nt. J. Business Forecasting and Marketing Intelligence, Vol. 8, No. 1, 2023 35
Copyright © 2023 Inderscience Enterprises Ltd.
Digital finance research and developments around
the world: a literature review
Peterson K. Ozili
Economic Policy Office,
Central Bank of Nigeria,
Abuja, Nigeria
Email: petersonkitakogelu@yahoo.com
Abstract: This paper presents a concise review of digital finance research and
developments around the world. It showed that the determinants of digital
finance include the need for efficiency in financial services delivery, the need
to achieve the United Nations sustainable development goals using existing
digital technologies, the need to increase financial inclusion, and the need for
efficient payments. The review shows that the Fintech and mobile money
industries are the largest beneficiary of investments in digital finance. It
showed that the future of digital finance is to create a digital environment that
permits the offering of all kinds of financial product and services that can be
customised and personalised to meet the unique needs of all users on a single
digital platform and without requiring any form of human assistance or
intermediary. Several areas for future research are suggested.
Keywords: digital finance; artificial intelligence; machine learning; financial
inclusion; fintech; access to finance; financial stability; economic growth;
blockchain; central bank digital currency; CBDC; robotics; cryptocurrency.
JEL codes: E44, F65, G18, G21, G28.
Reference to this paper should be made as follows: Ozili, P.K. (2023)
‘Digital finance research and developments around the world: a literature
review’, Int. J. Business Forecasting and Marketing Intelligence, Vol. 8, No. 1,
pp.35–51.
Biographical notes: Peterson K. Ozili is an Economist at the Central Bank of
Nigeria. He works extensively in academia and policy making. He has
experience in economic policy, financial inclusion, financial stability, financial
innovation, banking regulation and supervision. His areas of specialisation are
financial economics, international development, accounting, development
finance, the economics of financial markets, banking and financial reporting.
He has published extensively in many accounting and finance journals such as
the British Accounting Review, Journal of Applied Accounting Research,
Journal of Accounting in Emerging Economies, International Journal of
Managerial Finance, European Journal of Finance, Research in International
Business and Finance, etc.
36 P.K. Ozili
1 Introduction
Digital finance is the process of using digital devices and digital technology to acquire,
use and distribute financial resources to economic agents such as individuals, households,
firms and government (Siddik and Kabiraj, 2020; Ozili, 2018). The use of digital
technology in finance began in the early 2000s during the dot.com bubble. Digital finance
innovations became prominent after the 2007 to 2009 global financial crisis as financial
institutions began to use digital technology to process cross border payments, to manage
customers’ account, to save cost and to maximise profits.
Generally, digital technology in finance has aided the rapid development of the
financial sector of many developed countries by increasing the speed of the transmission
of financial market information to investors, shareholders and other market participants,
and by increasing the speed of financial transactions and payments (Bech et al., 2017;
Shabsigh et al., 2020). In developing countries, the use of digital technology in finance
has helped to increase the size of remittance inflows and has contributed to high levels of
financial inclusion (Podolski, 2020; Emara and Zhang, 2021).
Digital finance, while being important, has also become the subject of enormous
debate. The debate is centred on five main themes: debate about the net welfare benefits
of digital finance (Ozili, 2018), debate about the structure and size of transaction cost
when using digital finance applications (Nagle et al., 2020; Gille, 2005), debate about
which aspects of finance should be digitised and which should not be digitised (Ozili,
2021a), debate about the voluntary or involuntary use of digital financial services (Ozili,
2021a), and debate about how to handle and secure the large data or ‘big data’ that arises
from digital financial transactions (Beaumont, 2019; Schiff and McCaffrey, 2017). These
debates have led to calls for more regulation, that is, to regulate the digital finance
ecosystem and enact legislation to protect users’ digital data. While these developments
are important from a safety point of view, they show that digital finance comes with some
issues. Consequently, providers and users of digital financial products and services need
to understand these issues, so that providers of digital financial products and services can
conveniently provide access to finance to users, and users can use digital financial
services safely and in an environment of trust.
Another important area, which is central to this paper, is the global developments in
digital finance in several parts of the world. Understanding these developments can help
us understand the determinants of digital finance and whether digital finance enhances
globalisation. Such knowledge can also help us gain some insight into whether digital
finance is evolving too fast and can help us make predictions about the future of digital
finance. Such knowledge can also provide insights about the risks of international digital
finance. To explore this important area of digital finance, this paper survey the existing
research on digital finance and it draws insight from real-world experience in digital
finance developments. This paper is one of the first papers to review the most recent
global developments in digital finance.
This review paper contributes to the literature in the following ways. Firstly, the
paper contributes to the literature that examines the role of the internet and digital
technology in finance. It contributes to this literature by exploring the potential to
increase access to finance for all economic agents through digital technology enabled by
the internet. Secondly, this paper contributes to the financial innovation literature. Studies
in this literature include Tufano (2003), Laeven et al. (2015), Bernier and Plouffe (2019),
etc. This paper contributes to this literature by showing that many financial innovations
Digital finance research and developments around the world 37
are built using digital technology and rely on digital technology to function. Thirdly, this
paper contributes to the digital finance literature. Studies in this literature include
Gomber et al. (2017), Ozili (2018), etc. This paper contributes to the digital finance
literature by providing a much needed review of the state of digital finance research and
development, and it makes predictions about the future of digital finance in 10 to
20 years’ time from now.
To begin, Section 2 highlights the importance of digital finance. Section 3 highlights
the modern application of digital finance. Section 4 presents the international determinant
of digital finance. Section 5 presents a concise review of post-2010 digital finance
research in the literature. Section 6 identifies some of the developments in digital finance
around the world. Section 7 offers a prediction about the future of digital finance.
Section 8 suggests some directions for future research. Section 9 concludes.
2 Importance of digital finance
Why is digital finance important? Digital finance is important to modern finance for
many reasons. One, digital finance is important because almost all forms of financial
instruments in global financial markets are traded using digital financial platforms,
technologies or infrastructure (Moșteanu, 2019; Feyen et al., 2021). Two, digital finance
is important is because most of the disruptive innovations in finance today such as private
digital currency, cryptocurrency, embedded finance, internet finance, blockchain finance,
decentralised finance, artificial intelligence (AI) finance and central bank digital currency
(CBDC) are all the outcome of advancement in digital finance (An et al., 2021;
Wullweber, 2020; Zetzsche et al., 2020a; Ozili, 2019). Three, digital finance is important
because digital finance offers convenience to users by saving the time and transportation
cost that users would incur to visit a financial institution to perform basic financial
transactions (Nagle et al., 2020; Ozili, 2018). Four, digital finance is important because it
allows financial institutions to focus on improving the efficiency of their financial service
offering rather than spending too much time in resolving soft issues, e.g., human-side
issues (Wang et al., 2020). Five, digital finance is important because it can increase
financial inclusion by bringing unbanked adults into the formal financial sector through
digital devices so that they can have access to basic financial services (Ozili, 2018; Durai
and Stella, 2019; Ozili, 2021b). Finally, digital finance is important because it increases
consumption spending and investment thereby contributing to economic growth (Li et al.,
2020; Guo et al., 2021; Sadigov et al., 2020).
3 Modern developments in digital finance
Over the years, digital finance has evolved in remarkable ways. Today, digital finance
manifests through internet finance, Fintech finance, embedded finance, AI finance,
blockchain finance, decentralised finance, etc. Internet finance is a financial services that
is offered over the internet using a network which may be an analogue network or a
digital network. Internet finance facilitates financing, payment, investment, and
information intermediary services by the internet (Hou et al., 2016). Fintech finance is
financial services that is offered by financial technology companies. Fintech companies
use technology to enhance or automate financial services and processes which are then
38 P.K. Ozili
delivered to customers in a frontend user interface commonly referred to as user
applications (Lai et al., 2017; Guild, 2017). Open banking is a type of digital technology
application in banking and finance. Open banking is the use of open APIs that enable
third-party developers to build applications and services around a bank or financial
institution (Mansfield-Devine, 2016). Embedded finance is simply the integration of
financial services into the service or product of a non-financial institution. Embedded
finance is about enabling non-financial services companies to provide financial services
to customers. Embedded finance involves embedding financial services as an add-on
service into the business processes of non-financial institutions. It allows customers to
access financial services in a non-financial service shop such as in a grocery store, a
car dealership, a hospital or within a non-financial app. In banking, embedded
finance enables non-financial services companies to provide banking services. This is
possible by using banking-as-a-service (BaaS) and API-driven banking and payments
services to integrate banking services within a non-financial environment and ecosystem.
Decentralised finance is a type of blockchain-based digital finance. Decentralised finance
transforms traditional financial products into products that operate without an
intermediary through smart contracts on a blockchain (Avgouleas and Kiayias, 2020).
Decentralised finance is financial services offered on a public blockchain over the
internet. It does not rely on centralised financial intermediaries such as brokerages,
exchanges, or banks. It uses smart contracts on blockchains, mostly Ethereum. It is
mostly built on top of peer-to-peer and trustless networks. Decentralised finance is also
viewed as the democratisation of finance. Blockchain finance is financial services that are
delivered over the blockchain. It involves delivering financial services on a digitally
distributed, decentralised, public ledger that exists across a network (Ozili, 2019). AI
finance is the use of advanced robotic systems to enhance financial decision making and
to streamline and optimise specific financial activities (Veloso et al., 2021; Mancher et
al., 2018). AI finance improves the predictive power of financial models and leads to
better management of risk and better financial decision making (Hilpisch, 2020).
Electronic money, or eMoney, is an area of digital finance that focuses on the conversion
of traditional paper money into a digital medium of exchange to improve the efficiency of
payments. Electronic money is best defined as money in digital form or the virtual
equivalent of paper money (Wulandari et al., 2016). Electronic money that is issued by
private or non-state actors are referred to as private digital currencies or cryptocurrencies
such as Bitcoin, Ethereum, Litecoin, Dogecoin, etc., while electronic money that is issued
by state actors or a central bank is known as fiat digital currency or CBDC.
4 International determinants of digital finance
The section explores the factors that explain the increasing demand for digital technology
in financial services. The first determinant is the need to increase efficiency in financial
services delivery. Efficiency in financial services delivery is achieved by reducing the
cost of financial services. Financial institutions use digital technology to automate
repetitive human tasks in the financial sector in order to reduce labour costs. The
resulting cost savings from automating repetitive human tasks leads to a reduction in the
cost-to-income ratio of financial institutions and increases their profit margins in the long
run.
Digital finance research and developments around the world 39
The second determinant is the need to achieve the United Nations sustainable
development goals (SDGs). The expectation is that adopting digital technology in finance
can help to achieve some, if not all, of the 17 United Nations SDGs. Digital finance
offers greater access to finance for poor people, small businesses and large firms. For
instance, digital financial services such as online quick loan and instant stock purchase
allows poor people and small businesses to use available loan and investment products to
increase consumption and investment, thereby reducing extreme poverty, extreme hunger
and income inequality. It also provides an opportunity to use credit to fund and acquire
quality education and to support productive economic activities that lead to economic
growth.
The third determinant is the need to increase financial inclusion through digital
financial inclusion. Financial inclusion is aimed at increasing the number of banked
adults in society. Governments around the world want higher levels of financial inclusion
because greater financial inclusion increases tax revenue and reduces the size of the
informal economy. Digital financial inclusion ensures that individuals have a formal
digital identification credential that enables them to remotely access a wide range of
digital financial services in the formal financial sector. The digital credential offers
convenience to users as it allows users to access formal financial services without
needing to visit the physical location of a financial institution. The benefit to users is the
convenience and cost savings it offers while the benefit to governments is the increase in
digital financial transactions which can be easily taxed to generate substantial revenue for
the government.
The fourth determinant is the need for efficient payments and payment settlement
finality. Provided that there is a reliable payments system, using digital technology to
facilitate payment can improve the efficiency of payments by facilitating the transfer of
value from a sender to the receiver, providing real-time confirmation of the value
transferred on the receiver’s digital device, and notifying the sender of any failure in
transferring value from the sender to the receiver so that the sender can either re-initiate
the value transfer or take some other action. Digital technology in the payments system
can also improve payment settlement finality especially for within-border and cross-
border transactions. Settlement finality, also known as final settlement, is the irrevocable
and unconditional transfer of an asset or financial instrument, or the discharge of an
obligation by the securities settlement facility or its participants in accordance with the
terms of the underlying contract (RBA, 2012). Digital technology in the payment system
can assist parties in the discharge of contractual settlement obligations after they have
received an irrevocable and unconditional request to transfer an asset or financial
instrument from one party to another. Digital technology in the payment system can be
used to remind parties of the need to fulfil their contractual settlement obligations and can
also be used to notify parties of the consequences of a breach in fulfilling their
contractual settlement obligations.
5 Review of post-2010 digital finance research – a concise summary
This section presents a summarised report of the findings of post-2010 digital finance
research. The studies reviewed in this section were obtained after conducting a search on
Google scholar search engine. There are six broad research themes in the post-2010
digital finance literature.
40 P.K. Ozili
The first theme relates to studies that highlight the benefits of digital financial
services or the benefits of digital finance. The literature show that digital finance can
increase financial inclusion and expand financial services to non-financial sectors (see
Ozili, 2018; Siddik and Kabiraj, 2020); digital finance can increase the gross domestic
product of several economies (see Zhang and Chen, 2019; Ozili, 2018); digital finance
can improve bank performance in the long run (see Phan et al., 2020; Ozili, 2021c);
digital finance can increase aggregate expenditure and generate higher tax revenue (see
Ozili, 2018); digital finance via digital payments can reduce the circulation of counterfeit
paper money and can reduce the use of counterfeit money to make payments (see Ozili,
2018); digital finance gives users greater control of their personal finance (see French
et al., 2021; Ozili, 2018); digital finance applications have tools that aid quick financial
decision making (see Guo et al., 2021; Ozili, 2018); digital finance helps to reduce
money laundering which is commonly associated with cash transactions (see Oxford
Analytica, 2021).
The second theme relates to studies that examine the impact of digital finance on
specific areas of the economy or the wider economy. These studies show that digital
finance has a positive effect on financial stability through greater financial inclusion (see
Ozili, 2018; Siddik and Kabiraj, 2020). Other studies show that digital finance improves
access to finance (see Bollaert et al., 2021; Creehan, 2019), enhances the efficiency of the
financial sector (see Wang et al., 2020), and enhances the functioning of capital markets
(see Wales, 2015). There is evidence that digital finance can help the economy recover
quickly from a recession caused by a financial crisis, economic crisis or a health
pandemic (see Arner et al., 2020; Curran, 2020), and digital finance can support climate
change mitigation efforts (see Puschmann et al., 2020; Tao et al., 2022). There is also
evidence that digital finance has helped to grow several sectors of the economy such as
the equity crowdfunding industry (see Butticè and Vismara, 2021), the energy sector (see
Winiecki and Kumar, 2014), the agricultural sector (see Babcock, 2015), the
manufacturing sector (see Chen and Zhang, 2021), the banking sector (see Jünger and
Mietzner, 2020), the circular economy (see Bressanelli et al., 2018), the tourism sector
(see Adeola and Evans, 2019), the external trade sector (see Abendin and Duan, 2021),
amongst others.
The third theme relates to studies that examine the impact of digital finance on one or
more aspects of human development and welfare. Existing studies show that digital
finance enhances human development and improves welfare by improving household
consumption (Li et al., 2020), promoting gender equality (Kusimba, 2018), increasing
women participation in the economy (Kofman and Payne, 2021), reducing transaction
cost for households (Ozili, 2018), reducing gender inequality (Sorgner et al., 2017),
reducing extreme poverty (Chen and Zhao, 2021), and reducing income inequality (Das
and Chatterjee, 2021).
The fourth theme relates to studies that examine country-specific use case of digital
finance innovations such as the M-Pesa in Kenya (see Kingiri and Fu, 2019; Ndung’u,
2018), the Pradhan Mantri Jan-Dhan Yojana (PMJDY) scheme in India (see Markose
et al., 2020; Tiwari et al., 2019), the large-scale use of point-of-sale (POS) devices and
unstructured supplementary service data (USSD) technology to facilitate digital financial
transactions in countries like Bangladesh, Nigeria and South Africa (see David-West,
2016; Peter et al., 2018), among others.
The fifth theme relates to studies that identify the challenges of digital finance. Some
of the challenges identified in this literature include: the potential risks to national
Digital finance research and developments around the world 41
security (Reshetnikova et al., 2021), the lack of appropriate and timely regulation as well
as poor quality and unaffordable digital connectivity (Ketterer, 2017), the difficulty in
getting merchants to accept digital payments for small purchases (Ozili, 2018), high
transactions cost that could erode the small income of poor and low-income households
coupled with the low level of financial literacy among the poor and rural population
(Ozili, 2020), etc.
The sixth theme relates to studies that examine the regulation of the digital finance
ecosystem. There is the argument that the emerging risk of digital finance is a
justification to regulate it (Michaels and Homer, 2018). There is also the argument that
digital finance regulation can create an enabling environment to nurture innovation and
create a level playing ground for incumbent players in the digital finance ecosystem
while at the same time providing regulatory sandboxes to protect new digital finance
players that are in their early stages of development (see Shulist, 2018; Alam et al.,
2019). The aim of digital finance regulation is to meaningfully regulate digital finance
without stifling innovation (Pavlidis, 2021). And when a digital finance regulatory has
been developed, there should be continuous improvement in the regulatory framework
from time to time (Zetzsche et al., 2020b). Overall, the review shows that digital finance
research is growing fast, and many studies have investigated contemporary issues in
digital finance which are relevant for policy and practice.
6 Regional developments in digital finance: real world experience
6.1 Global development
There are over 2 billion unbanked adults in the world. Digital financial services have the
potential to increase the GDP of developing and emerging countries by US$3.7 trillion
and has the potential to create 95 million jobs across all sectors (Manyika et al., 2016).
Fintech has dominated much of the global digital finance space with global Fintech
revenues rising from €92 billion in 2018 to over €188 billion in 2024. Also, global
mobile money services increased by 20% in transaction value in 2020 as shown in
Table 1. The largest increase was recorded in the East Asia and Pacific region, the Latin
America and the Caribbean region and the Europe and Central Asia region respectively.
The sub-Saharan African region and the Middle East and North Africa region recorded a
relatively slow growth in global mobile money services.
6.2 Asia
A McKinsey Report showed that over 700 million consumers use digital banking
regularly in Asia (Barquin and Hv, 2015). India, Indonesia, Mongolia, Myanmar,
Pakistan, and the Philippines are using digital financial services to increase access to
finance for poor people and for women. Presently, there are over 775 million potential
female users of mobile money in East Asia and Pacific. Regarding Fintech adoption, two
Asian countries, China and India, have the highest Fintech adoption rate in the world at
87% and 77% respectively followed by Singapore according to a Ernest and Young
global Fintech adoption index 2019 report.1 A 2017 Asian Development Bank report
shows that digital financial services could increase the gross domestic product (GDP) of
Asian economies by 14%, and has the potential to boost GDP to as high as 32% in
42 P.K. Ozili
Cambodia which is a much smaller market.2 Factors aiding the development of the digital
finance ecosystem in Asia include an enabling framework for the provision of payments,
the widespread use of e-money, and regulation that allows the use of agents by both
banks and non-bank entities (World Bank, 2019). Some of the challenges facing the
Asian digital finance ecosystem include regulatory arbitrage, regulatory uncertainty,
incomplete schemes for the protection of customers, low financial literacy, and low
technological literacy (World Bank, 2019).
Table 1 2020 global mobile money statistics
Mobile money
deployment
live services
Number of
registered
accounts
Number of
active
accounts
Transaction
volume
Transaction
value (US$)
Global 310 1.2 billion
(+13% from
2019)
300 million
(+17% from
2019)
41.4 billion
(+15% from
2019)
767 billion
(+22% from
2019)
East Asia and
Pacific
49 243 million
(+24% from
2019)
52 million
(+20% from
2019)
5.4 billion
(+26% from
2019)
111 billion
(+34% from
2019)
Europe and
Central Asia
9 21 million
(+6% from
2019)
4 million
(+11% from
2019)
234 million
(+15% from
2019)
4.0 billion
(+13% from
2019)
Latin America
and the
Caribbean
30 39 million
(+38% from
2019)
16 million
(+67% from
2019)
701 million
(+35% from
2019)
19.8 billion
(+30% from
2019)
Middle East
and North
Africa
29 56 million
(+9% from
2019)
3 million
(+35% from
2019)
146 million
(–63% from
2019)
10.5 billion
(+26% from
2019)
South Asia 36 305 million
(+5% from
2019)
66 million
(+5% from
2019)
7.5 billion
(+8% from
2019)
131 billion
(+10% from
2019)
Sub-Saharan
Africa
157 548 million
(+12% from
2019)
159 million
(+18% from
2019)
27.4 billion
(+15% from
2019)
490 billion
(+23% from
2019)
Source: GSMA 2021 report
6.3 Europe
Most of the investment in digital finance in Europe is currently invested in Fintech.3 In
2020, the European Fintech ecosystem was made up of 3,482 European ventures with
44% in the UK, 8% in Germany, 6% in Spain, 6% in France, 5% in Switzerland, 5% in
Netherlands and the remaining 27% were spread across other European countries
(Deloitte-IIF, 2020)4. Also, 5% of European Fintech deals accounted for around 65% of
the total funding in the global Fintech sector according to a Finch Capital Report.5
European Fintech companies raised a total of €3.52 billion in 2018. This number
increased by 150% to €8.81 billion in 2019 and to approximately €10 billion in 2020.6
Also, the amount of funding invested in AI exceeded €750 million in 2019 and dropped
to approximately €400 million in 2020 due to the COVID pandemic while the total
amount of funding invested in open banking systems amounted to over €400 million in
2019 and approximately €500 million in 2020 as shown in Figure 1.
Digital finance research and developments around the world 43
Figure 1 Digital finance developments in Europe (see online version for colours)
Table 2 Africa Mobile Money 2020 statistics
Mobile money
deployment
live services
Number of
registered
accounts
Number of
active
accounts
Transaction
volume
Transaction
value (US$)
Africa 171 562 million
(+12% from
2019)
161 million
(+18% from
2019)
27.5 billion
(+15% from
2019)
495 billion
(+23% from
2019)
West Africa 70 198 million
(+19% from
2019)
47 million
(+23% from
2019)
6.4 billion
(+29% from
2019)
178 billion
(+46% from
2019)
Southern
Africa
14 11 million
(+24% from
2019)
3 million
(+28% from
2019)
284 million
(+43% from
2019)
3.0 billion
(+24% from
2019)
North Africa 14 14 million
(+16% from
2019)
1 million
(+22% from
2019)
77 million
(+29% from
2019)
5.4 billion
(+37% from
2019)
Central
Africa
16 46 million
(+2% from
2019)
16 million
(+10% from
2019)
2.2billion
(+30% from
2019)
35.7 billion
(+23% from
2019)
East Africa 57 293 million
(+9% from
2019)
94 million
(+16% from
2019)
18.6 billion
(+10% from
2019)
273 billion
(+11% from
2019)
Source: GSMA 2021 report
6.4 Africa
Digital finance began to gain inroads into Africa in early 2005 (AFR, 2021). As of 2021,
there were more than 514 Fintech companies offering digital financial services across the
African continent (GDI, 2021)7. 98 of these companies have received over US$100,000
and only 50 companies have received funding exceeding US$1 million (GDI, 2021). Of
the total investments made across the continent, 70% (US$823m) of the investments are
44 P.K. Ozili
concentrated in payment solutions especially in mobile money payment solutions (AFR,
2021). In 2020 alone, Africa had 171 mobile money services, 562 million registered
users, 161 million active accounts, 27.4 billion in transaction volume and US$490 billion
in transaction value (GSMA, 2021). West Africa and East Africa recorded the highest
progress in mobile money adoption in the African continent according to data obtained
from GSMA as shown in Table 2. Some of the challenges faced by players in the
African digital finance ecosystem are low fundraising, regulatory challenges, lack of
understanding of the local digital finance market and the difficulty in finding talent.
7 The future of digital finance
Having identified several advances in digital finance such as internet finance, fintech
finance, open banking, embedded finance, decentralised finance and AI finance in
Section 3, a question that arises is where exactly is digital finance heading to? What is the
future of digital finance? The future of digital finance is to create a digital environment
that permits the offering of all kinds of financial products and services that can be
customised and personalised to meet the unique needs of all users on a single digital
platform and without requiring any form of human assistance or intermediary. In such an
environment, a wide range of financial products and services such as insurance, banking,
credit, investment and savings products will be offered on a single digital platform. Users
will no longer need to have a different app for different financial services. Users will
have the option to customise financial services to meet their specific needs without
requiring the assistance of a human agent. This will be made possible using digital
identities, robotics, data analytics, machine learning and AI solutions. Also, the future of
financial risk management will change as AI and machine learning will change risk
management in unprecedented ways. In risk management, AI and machine learning can
be used to immediately identify any anomalies, patterns or unusual risks in financial
transactions that are worthy of more human-centric investigation, and can also be used to
make forecasts to aid decision making in financial risk management.
8 Areas for future research in digital finance
8.1 More research on how regulators can keep pace with emerging digital
finance transformation
Regulators are generally not proactive in responding to rapid digital technology
transformation in finance. This is largely due to the bureaucratic structure and processes
in regulatory organisations. Regulators often take a long time to develop a new regulation
for specific digital finance innovations and they take a longer time to implement the
regulation. By the time the regulation is ready to be implemented, the digital finance
landscape has evolved to another emerging digital finance innovation and the already
formulated regulation becomes outdated or obsolete. In a sense, regulators tend to lag
behind in keeping up with emerging innovations in the digital finance ecosystem. Future
research should suggest ways in which digital finance regulation can be more agile,
dynamic and proactive. One idea is to adopt a principles-based digital finance regulatory
framework rather than a rules-based regulatory framework. Another idea is that digital
Digital finance research and developments around the world 45
finance regulation should be designed to be technology-neutral so that digital finance
regulations do not need to change as digital technology changes or when a new digital
finance innovation emerges. It is also possible that greater collaboration between
financial institutions and regulators is needed. Such collaboration can make it easier for
financial institutions to inform regulators of new digital finance innovations as soon as
they become aware of it. This will help regulators to keep pace with new innovations in
the digital finance space so that they can issue regulations in a timely manner. Future
research should explore additional ideas or suggestions on how regulators can keep pace
with emerging digital finance transformation.
8.2 More research on user information security and compliance
It is possible that future digital finance innovations will collect additional user data that is
sensitive and very confidential to users such as users’ digital identification number.
Existing digital finance innovations, such as internet banking applications, mobile money
applications, CBDC tokens or wallets, also collect sensitive and confidential data of
users. As a result, there will be issues about the security of users’ sensitive information,
and compliance with existing data privacy rules. The dilemma that arises in data security
and privacy has to do with the need to collect as much information as possible to properly
identify a legitimate user of a digital finance application, and the need to protect the
sensitive information of users stored on digital databases or stored in the cloud. Future
research studies should investigate ways to increase user data security and strengthen
compliance policies.
8.3 More research on how to deal with bias caused by bad data
Machine learning and AI solutions will undoubtedly play an important role in the future
of digital finance. The outcome of machine learning and AI solutions will depend on the
data that is fed into the system. However, the nature and structure of data (both financial
and non-financial) that is fed into AI-based digital finance services (DFS) systems may
reinforce social, gender and racial biases rather than eliminate them especially when bad
data is unintentionally fed into AI-based DFS systems. Bad data, in this context, refers to
any data whose structure reinforces a social bias, gender bias or racial bias. There is a
need to find ways to re-invent AI-based data collection and processing systems in ways
that enable such systems to detect bad financial and non-financial data before processing
it so that such systems can reject bad data altogether until a human agent restructures or
change the data to ensure it has no bias. This will ensure that any financial or
non-financial data whose structure reinforces existing social and gender bias are rejected
by AI-based data collection and processing systems. Future research can suggest
innovative ways to re-invent AI-based data collection and data processing systems so that
they can identity biases in data structure and escalate data anomalies to a human agent for
correction.
8.4 More research on how to deal with algorithmic bias
This is related to the previous point. Algorithmic bias or AI bias occurs when an
algorithm produces results that are systemically prejudiced due to erroneous assumptions
in the machine learning process (Lin, 2019). Erroneous assumptions in the machine
46 P.K. Ozili
learning process could lead to decisions that are systematically unfair to a large group of
people. The implication for digital financial services is that it can lead financial
institutions to charge relatively low interest rates to Caucasian borrowers while charging
relatively high interest rates to borrowers from an ethnic minority group. Also,
algorithmic bias could restrict access to financial services to certain group of customers
while favouring more access to finance to specific group of customers. There is a need to
find ways to eliminate or reduce erroneous assumptions that lead to algorithmic bias.
Future research studies can identify ways to eliminate or reduce algorithmic bias.
8.5 More research is needed on combining a risk-conscious culture with a
higher risk appetite for digital finance transformation
More research is needed on how risk-conscious financial institutions can take on high
risk in digital transformation without breaching existing risk limits. Most financial
institutions have a risk-conscious culture that limits their ability to take high risk in
digital transformation (Deloitte-IIF, 2020). Since most financial institutions’ processes
and operating model are designed to protect against a number of risks (Deloitte-IIF,
2020), the risk management system of financial institutions may flag investment in digital
transformation as a high risk activity because digital transformation requires some degree
of uncertainty and experimentation. Therefore, proceeding to undertake such
transformation will be at the discretion of the board of directors. Also, there might be a
need to modify the risk management system of financial institutions in a way that ensures
that the risk consciousness of financial institutions do not hinder financial institutions
from making critical digital transformation when the need arises.
9 Summary and conclusions
This paper presented a concise review of the existing digital finance research in the
literature, and highlighted some of the developments in digital finance around the world.
The paper reached several conclusions. Firstly, it showed that digital finance has become
an important part of modern finance and the major application of digital finance can be
found in Fintech, embedded finance, open banking and decentralised finance, central
bank digital currencies, among others. Secondly, it identified some international
determinants of digital finance which includes the need for efficiency in financial service
delivery, the need to achieve the United Nations SDGs through existing digital
technologies, the need to increase financial inclusion through digital financial inclusion
and the need for efficient payments. The paper also found that digital finance research is
growing fast, and many studies have investigated contemporary issues in digital finance
that are relevant for policy and practice. Regarding the digital finance developments
around the world, the paper showed that the Fintech has industry has been the largest
beneficiary of investments in digital finance with the total number of users of mobile
money services surpassing 1 billion globally. Also, the author predicted that the future of
digital finance is to create a digital environment that permits the offering of all kinds of
financial products and services that can be customised and personalised to meet the
unique needs of all users on a single digital platform and without requiring any form of
human assistance or intermediary. The paper then suggested some areas for future
research which include the need for more research on how regulators can keep pace with
Digital finance research and developments around the world 47
emerging digital finance transformation, the need for more research on user information
security and compliance, the need for more research on how to deal with bias caused by
bad data, the need for more research on how to deal with algorithmic bias, and the need
for more research on how to combine a risk-conscious culture with a higher risk appetite
for digital finance transformation.
In conclusion, digital finance transformation is likely to take different forms in
different parts of the world due to differences in technological advancement, differences
in the willingness to embrace change, differences in policy and regulatory support for
digital finance transformation, and differences in understanding the risks associated with
new digital finance innovation. In some countries, financial institutions and Fintech
players will take a conservative approach towards digital finance transformation. In other
countries, financial institutions and Fintech players may take a bold approach to keep
pace with new digital finance transformations in order to gain some first-mover
advantages – a move that could make regulators lag behind. Such decisions, however,
need to be made with an in-depth understanding of the risks associated with new digital
finance innovations and after obtaining the necessary regulatory approvals. While the role
of banks in the future of digital finance is still uncertain, it is certain that banks will face
increasing pressure to re-invent themselves to remain relevant, as such, they will have to
choose to innovate or perish.
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Notes
1 file:///C:/Users/xls/Downloads/ey-global-fintech-adoption-index-2019.pdf.
2 https://www.adb.org/sites/default/files/publication/222061/financial-inclusion-se-asia.pdf.
3 https://tech.eu/features/35066/european-fintech-report-2021/.
4 https://www2.deloitte.com/content/dam/Deloitte/nl/Documents/financial-services/deloitte-nl-
fsi-fintech-report-1.pdf.
5 https://www.siliconrepublic.com/start-ups/europe-fintech-growth-report-finch-2022.
6 https://tech.eu/features/35066/european-fintech-report-2021/.
7 2021 Good Data Initiative Report.
