Fintech in times of conflict and crisis
Since the start of the coronavirus pandemic, the world has been in a perpetual state of turmoil. Apart from existing conflicts and crises, a new one emerged with Russia's invasion of Ukraine, which saw millions of Russians and Ukrainians lose access to financial services.
Now facing the same fate as more than 1.2% of the global population, many Ukrainians have been displaced and forced to leave their country. As refugees often have to depart with little or no preparation, on many occasions, they abandon their passports and other identity documents.
The lack of proper identification can pose a significant challenge for refugees trying to access financial services. This is where fintech services can help. As explained by Kateryna Danylchenko, chief executive of the International Bureau of Credit Histories, fintech services have the potential to help people displaced by conflicts and crises access funds.
Refugees and migrants frequently face obstacles when trying to secure employment, accommodation, or make payments in their host country due to a lack of documentation and limited access to banking services.
Improved connectivity within and between regions through fintech solutions has led to increased accessibility of financial services for individuals. Recent developments in fintech have facilitated access to essential financial services such as opening accounts at digital banks, sending money to relatives, booking temporary housing, and verifying their identity to landlords.
However, service providers, central banks, and governments still have some issues to address. The war in Ukraine has highlighted the insufficient level of financial connectivity across borders.
In cases where a country is excluded from the global payment infrastructure, or where cross-border sharing of know-your-customer (KYC) and credit history data is not possible, refugees fleeing from conflict often encounter difficulties in accessing financial services during resettlement.
Many features already widely used by fintech services, such as biometric technology, including facial recognition and fingerprint scanning, and mobile banking solutions, can help these people access funds in their host countries.
However, if those features are rendered unusable, fintech companies can use alternative data sources, such as social media activity or mobile phone use, to assess creditworthiness and offer loans to asylum seekers who would otherwise be excluded from financial systems, providing access to credit for those who may be unable to provide credit histories or collateral.
The challenges faced by payment providers may take time to become apparent. It's not just a matter of having the technical capacity to respond quickly when national governments impose sanctions, but there is also the issue of rigid KYC and know-your-business (KYB) monitoring tools that some providers need to improve.
In addition, with the expansion of Western sanctions, regulatory oversight will become more stringent, with a focus on Russian ultimate beneficiaries. These developments are expected to drive the adoption of digital due diligence tools, which many payment providers have not yet prioritized for investment.
In the short term, payment providers with multinational operations are expected to hasten the implementation of more robust digital due diligence tools to improve their compliance with sanctions and monitor ultimate beneficiaries. Furthermore, despite the existing difficulties in the cryptocurrency market, these providers are expected to increasingly consider adding cryptocurrency acceptance in response to the growing consumer demand.
Relations, Sanctions and Impacts
Ukraine recognizes the importance of using the full potential of the domestic debt market to achieve the crucial strategic goal of financing this year's state budget, which requires at least $38 billion from external sources.
In December last year, the International Monetary Fund approved Ukraine's request for program monitoring with board involvement, which is the first arrangement of its kind. The National Bank of Ukraine and the Finance Ministry agreed that next year's deficit financing will not be handled by the central bank, as this would pose additional risks and challenges to macroeconomic stability.
On the other side of the conflict, the UK has imposed a total of 1,123 tech sanctions on Russia, in addition to the 215 that were already in place since the start of the war. According to GlobalData, these sanctions will require Western technology companies to decrease their presence in the Russian market. The conflict has also caused market uncertainties, with surging interest rates observed in the US and UK partly attributed to the conflict. This has created a funding squeeze in the tech sector this year, leading to widespread layoffs across the industry.
Visa and MasterCard last year announced that they would stop operations in Russia. While in reality, Visa and MasterCard cards continue to function in the country, both companies stopped the global support for cards issued by Russian banks, preventing Russians from using them abroad.
Many Russian banks have also been cut off from the SWIFT system, with Sberbank being the latest to be removed. The move came just as Apple and Google also began to stop support for contactless payment in the country.
As a result, Russians are being limited to their country's very own fintech solutions, the Faster Payments System (SBP), which saw massive improvements after the sanctions started to bite. Developed by the Bank of Russia and the National Payment Card System, which connects Russians with over 200 banks, allowing them to receive payments and make purchases.
However, the system is not perfect, especially for cross-border and international transactions. As of December last year, half of the Russian cross-border payments were made in currencies from friendly nations.
Since then, multiple sources have reported that Russians have begun turning to another form of fintech solution, namely cryptocurrencies, especially with the rouble losing its value. Crypto activity in both Russia and Ukraine has been on the rise since February 24 last year, which marks the start of the conflict.
A report by blockchain analysis company Chainalysis showed a 35% increase in rouble-denominated crypto trade volume just a month after the start of the conflict. Similarly, there was a 121% increase in the trade volume of Ukrainian hryvnia-denominated cryptocurrency. Chainalysis suggested that while some of the growth could be attributed to businesses adopting cryptocurrency for international transactions, ordinary Russian citizens are likely also trading for stablecoins to safeguard their assets.
With Russia's near-total exclusion from the global payment system, many central banks and governments will assess their dependence on global financial networks, particularly those that can be influenced by the US, and reconsider associated risks.
Domestic payment data sovereignty has already emerged as a significant topic of discussion, and many national authorities are likely to promote the use of local card schemes and interbank networks, mandate connectivity to domestic switches, and raise data sovereignty requirements. Consequently, international payment providers will face greater complexity demands on their product development roadmaps.