Pre-recorded speech of Queen Máxima at the conference ‘Digital Disruption and Inclusion: Challenges and Opportunities’ hosted by the Asia School of Business and the Bank for International Settlements (BIS)

Speech | 27-01-2022

Ladies and gentlemen,

Today’s discussion on digital disruption and inclusion — and how it affects people’s financial resilience and health — is incredibly timely.

The COVID-19 crisis has accelerated innovation and uptake of digital financial services. This acceleration builds upon a lot of gains in financial inclusion that we have made over the previous decade. Since 2011 1.2 billion people have obtained an account. And this only measures until 2017. I anticipate even greater gains when the new World Bank Global Findex is released later this year.

Efforts to advance digital financial inclusion — such as expanding agent banking networks and enabling e-KYC systems — have resulted in the build-up of necessary infrastructure. This has been critical, especially during the pandemic.

Digital financial services have become an integral part of response and recovery efforts in many countries, serving as an effective channel to distribute relief payments to the public. E-commerce and digital payments platforms have also been lifelines for many micro- and small entrepreneurs to conduct business during lockdowns.

While there are many reasons to celebrate, there is still a lot more to be done. Moreover, the pandemic has highlighted the need to look more holistically at the relationship between the use of financial services and outcomes for individuals.

We should ask: Does access necessarily equal better financial health? In other words, does it help a person, or a family, successfully manage their current financial obligations and have confidence in their financial future? If the answer is no, then we are not where we want to be.

The issue of financial health is a universal one. People everywhere lack resilience. The 2020 OECD financial literacy survey found that almost half of respondents had no money left at the end of the month. In the developing world, only half of adults can access a lump sum of funds (1/20^th of GNI) in the face of an economic shock or emergency.

So, how is financial health relevant for financial sector policymakers and regulators? And what are their roles in addressing the issues?

A financial health lens can provide a much better view of macro and micro trends by assessing the financial wellbeing of individuals, households, and small businesses.

It can also help identify inequalities, especially as it affects vulnerable populations like women or rural communities; Increased financial health can relieve pressure on government safety nets;  Deeper financial resilience can result in quicker recovery during economic downturns; While a build-up of financially unhealthy populations can signal potential financial sector instabilities.

A focus on financial health can also enhance other key policy agendas:

• First, financial inclusion. Access to financial services can drive improved financial health, but the linkage is not automatic. For example, in Kenya during a period of increased financial inclusion between 2016 and 2018, financial health declined. When we adopt a financial health perspective, it broadens our attention from access and usage metrics, shifting it to outcomes for individuals.
• Second is financial stability. A build-up of financially unhealthy customers can signal potential financial sector instabilities. Financial health can help assess or offer an early warning on rising debt burdens even before portfolios deteriorate. About five years ago in the Netherlands, we started the Debt Lab to help people reduce over-indebtedness. One key lesson we learned was to be on the lookout for those early warning signs. Here, the first red flag is often when a person stops paying health insurance premiums.
• Third, we need consumer protection. A financial health lens can support how oversight bodies assess consumer risk and better understand how products in the market contribute to positive – or negative – customer outcomes. It can also help evaluate product suitability or detect emerging poor practices, such as predatory lending.
• Fourth is financial education and capability. Good financial health is the desired outcome of efforts to enhance people’s financial planning and savings habits. However, financial literacy alone does not guarantee positive outcomes. Knowing does not always lead to doing.
  For example, South Koreans score higher than the OECD’s average score in overall financial literacy. But less than half indicated that they track their finances or have long-term financial plans. There is a need for more effective interventions.
• Finally, there are important linkages to other social and economic policies that are key factors for financial health, including social protection, employment, and health care. We need to broaden the policy dialogue and coordination beyond just financial sector actors.  

Ladies and Gentlemen,

To properly address financial health, start with measuring it:

• Measurement is key to understanding the scope of the issue and can better inform policy actions.
• Today, however, what typically gets measured are macroeconomic indicators like GDP, consumer price index, and so on. Yet many of these metrics fail to reveal the state of financial health at an individual level. We need more nuance so that we can genuinely measure the current situation, as well as future progress.
• Measurement should take into consideration the local context. But it could also benefit from methods that would allow for benchmarking across countries.
• My working group on financial health produced a report that outlines measurement approaches. These can be further adapted into local contexts. The working group also holds ongoing discussions around global measurement standards with leaders such as OECD and the World Bank. I do encourage you to reach out to my office to access our resources and join our efforts.

While the connections between financial health and policies have been explored extensively in some high-income countries, more work is needed. This is especially true for emerging economies.

It is important to look at financial health distinctly at the micro and macro levels, and even more crucial to understand the important linkages between the two.  

We need to better understand: What are the main drivers of financial health in a given country?

• In the United States, medical debt is the most common kind of debt in collections and the most common cause of bankruptcy. About 8 million people were pushed into poverty in 2018 due to out-of-pocket medical expenses.

We also need to understand, how different financial services contribute to financial health – both negatively and positively.

• We are seeing signs of over-indebtedness through digital credit in some markets such as Kenya, Tanzania and, more recently, India. The scale of consumer risks from digital finance is growing faster than the adoption rate. These risks could create financial shocks for consumers that will reduce their resilience and affect their financial health.

And we need much more research to explore the empirical linkages between financial health and financial stability.

A better comprehension of financial health in a country can help policymakers and regulators craft more precise interventions.

For policymakers:

• That means make financial health a core purpose of financial sector policy. For instance, the Central Bank of the Philippines has worked on a national strategy refresh with a vision towards inclusive growth and financial resilience. It identifies improved financial health as one of the of its main desired outcomes.
• Policymakers also need to be sure that there is sufficient focus on vulnerable groups. For example, again in the U.S., the financial health gap between men and women has widened during the pandemic. Therefore, the government could tailor policies to women’s financial health needs.
• Additionally, it is key to design social protection programs with resilience in mind and ensure that default options for government programs encourage financial health. For example, automatic enrollment in pension savings.

And for regulators:

• Use financial health as a lens for financial sector oversight, especially consumer protection. By limiting loan products that feature repetitive short-term borrowing, we can protect consumers from credit products that encourage over-indebtedness. Financial authorities can also create incentives and enabling environments, such as market data or a regulatory sandbox, for providers to offer innovative products and solutions conducive to good financial health.
• Regulators can also drive private sector involvement and accountability. Build standards and incentives for companies to measure and compare the financial health of their employees, customers, and clients.

In conclusion, financial health is a critical matter for individuals, households, and small businesses everywhere. Elevating financial health as a priority policy and regulatory agenda can significantly contribute to improving their wellbeing, as well as strengthen resilience at micro and macro levels.

Ladies and gentleman, I really wish you fruitful dialog. I look forward to collaborating with you throughout this important journey. Thank you.