Digital Financial Inclusion – Why is it important?
The world is a growing and dynamic place. Despite the obvious challenges, it is generally becoming a richer and more prosperous place to live in with more people being lifted out of poverty than ever before. For people in low- and middle-income countries, digital financial services (DFS) can be a pathway to move and remain out of poverty. The commercial benefits are increasingly documented with studies showing that the costs of payment transactions can be reduced up to 90% if they are performed through digital channels. Digital technology can address one of the main obstacles that have been keeping these services out of reach for so many, the fact that they are too expensive for people whose transactions are worth a fraction of a dollar.
However, despite the growing penetration of mobile devices (including smartphones) and continuous technological innovation, an estimated 2 billion people worldwide still remain unbanked. While everyone has a frequent need to transact to buy products and services, the ability to access or utilize formal financial services, particularly in developing countries, is undermined by numerous legal, cultural, commercial and financial issues, not to mention in many cases the lack of reliable national ID schemes which makes it extremely difficult for poor people to even open a basic account. There is therefore much more that both the public and the private sectors can do together to exploit the potential DFS can offer to bring the most vulnerable segments of the world’s population into formal financial services.
ITU facilitating the discussion
At the macro level there is an urgent need to develop mechanisms to operationalize best practices and policy recommendations to allow regulators, operators and providers in the telecom and financial services sectors supporting the DFS industry to grow organically and reach a larger number of low-income people in a sustainable way. The ITU, through its Focus Group on DFS and the Global Dialogue, is facilitating a discussion between the telecoms and financial services regulators and operators. There is a strong need for framed collaboration between the two in addition to a clear understanding of the laws and responsibilities.
On the regulatory side, having the right rules in place is key to attract medium and long-term investments, provide legal certainty, avoid arbitrage and allow service providers to scale their business without compromising the security, stability and integrity of the financial system. The telecommunications industry has not been slow to act. However, in many countries new players find it difficult to navigate an environment which is heavily regulated and where for many years only traditional financial players could operate. Commercially, there needs to be fair competition to guarantee an open, level playing field for the different stakeholders involved in the process.
A better understanding of how the telecommunications and financial services regulators can work better together in a fast evolving market place is important if any system is to be successful. Examples of effective inter-authority cooperation comes, for instance, from East Africa (i.e. Tanzania, Kenya and Uganda) where regulators have been working hand-in-hand to address issues such as consumer protection, interoperability, security of the network where competences are somehow shared or overlapping. With mobile numbers suddenly becoming bank accounts, customers are increasingly confused about roles and responsibilities if services are disrupted or where to direct their complaints in case of litigation.
Samples of success
There are numerous examples of success stories we can draw upon. In 2013, the Mexican government managed, for instance, to save an estimated USD 1.27 billion per year, or 3.3 per cent of its total expenditure, on wages, pensions and social transfers. How? By digitizing and centralizing its payments to all government workers.
Another example is represented by M-KOPA which has provided solar electricity to more than 330 000 homes in three African countries. Each solar home system can be repaid in small daily instalments on their cell phones. Innovations like these that elegantly solve urgent problems will make financial services attractive enough that people are willing to assume the risk of leaving the cash-based economy they know and trust.
Digital credit— small loans that can be accessed instantly over mobile devices—are increasingly offered in low-income countries, particularly in sub-Saharan Africa. One of the first to reach scale in a short period of time is M-Shwari, a savings and loan product launched in Kenya in 2012, and now exported into neighbouring countries. The product is being used by millions of people, a large percentage of whom are below the poverty line, and thus unserved by credit providers, also because of a lack of credit history. By using alternative data – airtime, credit top up, number of P2P transfers etc. it is now possible to develop alternative scoring systems that have showed a high level of predictability.
The above examples show how technology is stimulating new applications and innovating business models even though scalability and profitability remain major challenges.
No one size suits all. Countries can learn from each other and adapt measures to a national context, but the measures can’t be duplicated without being adapted to local needs. The Focus Group is providing a toolkit that can be tailored accordingly. From now to the beginning of January 2017, when our remit will conclude, we will be publishing a series of deliverables which will include a set of recommendations that a broad range of stakeholders can utilize. Our objective is to help accelerate the work being done around the world by local policy and decision makers, influencers and providers of technical assistance on digital financial inclusion.
Sacha Polverini (@sacha279) joined the Bill & Melinda Gates Foundation’s Financial Services for the Poor (FSP) team in December 2012 as Senior Program Officer – Regulation and Policy. A graduate of University L.U.I.S.S Guido Carli in Rome, Sacha holds a Master’s degree in European Political Studies from the Universite’ Libre de Bruxelles. In addition he has completed the post-graduate management program at Solvay Business School, Ecole de Commerce de Solvay, Brussels.