Global fintech and funding innovation ecosystem

COVID-19: Making the case for robust digital financial infrastructure

McKinsey & Co | Olivia White, Anu Madgavkar, Tawanda Sibanda, Zac Townsend, and María Jesús Ramírez | Jan 26, 2021

Digital infrastructure - COVID-19: Making the case for robust digital financial infrastructureGovernments worldwide reacted to the COVID-19 crisis with an outpouring of financial aid to businesses and individuals that was exceptional for both its size and the speed with which the disbursements were made.

According to the IMF, fiscal measures announced globally amounted to $11.7 trillion, or close to 12 percent of global GDP, as of September 2020. As a result, the pandemic has served as a high-stakes, real-life stress test for the financial infrastructure in many countries, bringing into sharp relief critical gaps and opportunities as well as providing valuable lessons about how to improve efficiency and resilience for the future.

What determines how effectively the money is disbursed, for achieving the design ambitions of the program and delivering the funds rapidly to the intended recipients? This question has been drawing the attention of economic researchers, policy makers, fintech innovators and civil society watchdogs alike. Building on our pre-pandemic research on the economic impact of digital identification and digital financial inclusion, we studied a sample of 12 government economic disbursement programs for both individuals and small and medium-size enterprises (SMEs) in seven countries—Brazil, India, Nigeria, Singapore, Togo, the United Kingdom, and the United States.

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Several findings stand out. First, we find that effective programs have three critical structural features of financial infrastructure: digital payment channels, the presence of a basic digital identification system with broad population coverage, and simple data on individuals and businesses that are tethered to the ID.

When these features were present in country-level financial infrastructure, these programs could be optimally designed and delivered quickly. When one or more of these infrastructure features was not present, countries had to make trade-offs between the design ambition (the scope, scale, and specificity of beneficiaries targeted) of their programs and their delivery success (the speed, coverage, and fraud levels in rolling them out).

Second, we estimate that the potential economic gain from building robust digital financial infrastructure is about 20 percent greater now than it was before the pandemic. Before the COVID-19 crisis, we estimated the potential economic gain by 2030 from applying basic and advanced digital ID to a wide range of interactions between individuals and government and nongovernmental institutions to be in the range of 3 to 13 percent of GDP. Finally, the crisis has underscored the resilience and flexibility that a robust financial infrastructure for SMEs and individuals provides, and thus its importance as a critical tool for responding to unexpected and potentially catastrophic events.

Digital financial infrastructure can improve country-level resilience in crises and on an ongoing basis

Beyond the potential economic impact, investing in digital financial infrastructure can help governments protect their populations in other important ways with long-term benefits. Effective government support in times of need helps prevent extreme poverty, hunger, and inequality, among others.

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This cannot all be measured in GDP growth. Financial infrastructure is relevant for the effectiveness of broader national government programs in more normal times, as well as interactions between individuals and non-government institutions (Exhibit 4).


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