Conclusion

competition as well as consumer protection.109 Digital technology and new entrants in the credit market can foster competition, increase innovation and efficiency, and challenge incumbents.110 On the other hand, economies of scale and scope in data and network effects can compound the existing scale advantages of incumbents’ capital and customer bases. Crossover big tech platforms may provide additional competition in financial services, bringing their own scale advantages, but market abuses by some big tech companies are already a concern in their core product areas. Financial regulators must work with competition authorities as well as consumer protection entities to monitor and prevent anticompetitive or abusive practices as the sector evolves in each market.

Open access to customer data and financial infrastructure could reduce the tendency toward market concentration, particularly as data and credit infrastructure become critical factors for lending in the COVID-19 crisis recovery. By leveling the playing field, open data frameworks can empower smaller players and increase contestability and competition. However, open access to personal and financial data is technically difficult to implement securely. A proliferation of entities involved in providing a single service could reduce accountability for service quality and data use and leave consumers wondering who is responsible when a transaction fails or fraud occurs. Although data portability can increase bank lending, the effects on consumer welfare can be nuanced.111 Efforts to spur competition through open banking112 need to move in tandem with cybersecurity, privacy protections, consumer financial education, and an analysis of market dynamics.

The ability of credit markets to reach and serve businesses and households—including micro- and small businesses and low-income households—will be central to an equitable recovery. To effectively support the recovery, lenders will have to adjust their credit models and product portfolios to improve visibility and recourse in a way that manages heightened risks and counters the impacts of the pandemic. Digitalization of economic activities and adoption of financial technology can enable development of the solutions and product innovations needed.

Governments and regulators should support sound innovations in financing, particularly those for MSMEs and vulnerable segments; facilitate upgrades in data-driven underwriting; encourage product diversification; and enable the entry of innovative lenders such as fintechs into the market. Maximizing the benefits of innovation in the financial sector will require modernizing regulatory and supervisory approaches, along with financial infrastructure. Collaboration among regulators will become increasingly important as financial activities cut across sectors and the powerful advantages of scale and scope in networks, data, and capital lead to greater provider concentration.

Although credit markets can effectively support MSMEs and households in the recovery, governments may need to continue to help balance the risks and returns for lenders serving the most affected segments and sectors of the economy. In addition to enabling markets through the measures outlined above, some credit markets may benefit from well-targeted guarantee schemes.

The solutions and policy recommendations discussed in this chapter are aimed primarily at countering a reluctance to lend in the context of the heightened risk and uncertainty of the pandemic and ensuring adequate access to finance to allow even the more affected households and entrepreneurs to take part in the recovery. These measures can also serve as the foundation for more efficient and resilient credit markets that can address structural constraints, progressively reduce long-standing gaps in access to finance, and foster responsible financial inclusion.