Globally, financial sector policymakers recognize the “game-changing” potential of digital financial inclusion. At an October 2014 conference, Jamie Caruana, General Manager of the Bank for International Settlements, emphasized this point by noting that institutions including the G20 and global financial regulators ‘“have the opportunity - and indeed the responsibility - to prepare the standard-setting world for both the risks and the rewards of the digitization of financial services.”
What, exactly, did Mr. Caruana mean by “digital financial inclusion” and why does it matter, both to this audience of global policy leaders and to the estimated 2.5 billion mostly poor and low-income adults who today transact mostly or entirely in cash? To which risks and which rewards is he referring – and who stands to gain or lose? A new CGAP Brief distills answers to these and related questions.
Defining the key components of “digital financial inclusion”
“Digital financial inclusion” can be defined broadly as digital access to and use of formal financial services by excluded and underserved populations. Such services should be suited to customers’ needs, and delivered responsibly, at a cost both affordable to customers and sustainable for providers. There are three key components of any such digital financial services: a digital transactional platform, retail agents, and the use by customers and agents of a device – most commonly a mobile phone – to transact via the platform.
- A digital transactional platform enables a customer to use a device to make or receive payments and transfers and to store value electronically with a bank or nonbank permitted to store electronic value.
- Retail agents armed with a digital device connected to communications infrastructure to transmit and receive transaction details enable customers to convert cash into electronically stored value and to transform stored value back into cash. Depending on applicable regulation and the arrangement with the principal financial institution, agents may also perform other functions.
- The customer device can be digital (e.g., mobile phone) that is a means of transmitting data and information or an instrument (e.g., payment card) that connects to a digital device (e.g., POS terminal).
What is happening?
New digital transactional platforms – such as bKash in Bangladesh, which reached nearly a quarter of the country’s adult population of over 160 million in its first two years – offer convenient and vastly less expensive ways to make payments and transfer funds. In addition, these platforms can offer a safe place to store value for hundreds of millions of households that rely on the proverbial mattress. These platforms accommodate the very small and unpredictable cash flows of the poor, allowing them to transact affordably in tiny amounts whenever they wish, subject to the vagaries of sometimes unpredictable or unreliable connections and other risks.
Digital transactional platforms yield further benefits for financial inclusion by providing both a means to access additional financial services, such as interest-bearing savings, credit, insurance, and even investment products. They also generate data that financial providers can use to design financial products tailored to the repayment capacity and financial needs of the specific poor and low-income customer segments.
The dramatic rate at which poor consumers are taking up products, such as the one-month M-Shwari consumer loans offered by Commercial Bank of Africa (CBA) to M-Pesa customers in Kenya or the life insurance products marketed to Tigo (Ghana) mobile phone pre-paid customers, speaks volumes about demand. One million M-Shwari loans were issued within 41 days of the product’s launch, catapulting CBA from a modestly sized corporate lender to one the largest retail players in Kenyan banking. Tigo’s Family Care life insurance product doubled the insurance market in Ghana in its first year of operation. With the advent of ever cheaper smartphones, the pace of change will only accelerate.
What is changing with digital financial inclusion and what is on the horizon for policy makers?
Digital financial inclusion introduces new market participants and allocates roles and risks (both new and well-known) in different ways compared to traditional approaches to retail financial service delivery. The three key components of digital financial inclusion models correspond to the three main triggers of new or shifting risks:
- The new parties and arrangements involved in the digital transactional platform, and specifically in the management and storage of account data and the holding of customer funds;
- The technology used by the device and the digital transactional platform; and
- The use of agents as the principal customer interface.
These triggers, as well as the typical profile of the financially excluded or underserved customers in question, introduce operational risks, consumer-related risks, and financial crime risks, among others. Understanding and mitigating these risks will be key to achieving the game-changing potential rewards of digital financial inclusion.
As a consequence of the recent demonetization in India, there emerged an urgent need for promoting Digital Financial Inclusion throughout the country - preferably in a Hand Holding mode. We are a Capacity Building Institution having focus on Self Help Groups. So far, we have promoted more than 3000 SHGs across the different districts of West Bengal, India, as a SHPI and now we are interested to promote Capacity Building support to the SHG members and leaders on Digital Financial Inclusion. Could you suggest us the sources of the required resources for this purpose?
The definition of the key components of digital financial inclusion is incorrect in that "retail agents" are not a necessity in many contexts.... Digital literacy on a household level is much higher than many assume it is.
Other than for purposes of digital usage guidance, to the retailer is where people go to deposits and/or withdraw the funds. His role cannot be overlooked. Indeed there is increasing financial literacy, the customer can do the rest on their own.