How Digital Payments Improve Financial Inclusion

How Digital Payments Improve Financial Inclusion

Headlines may trumpet the digital shift, the return of a booming economy, the tidal wave of eCommerce that has moved to devices, and to a world where one can buy a car with cryptocurrency.

But the pandemic also has spotlighted a rift wherein cash still reigns in poorer countries around the globe, and access to credit and savings, and even reliable means of commerce, are virtually non-existent.

That effort to bring poorer populations into the formal financial system has been part of the mission for the Bill & Melinda Gates Foundation since it was started in 2000. And as Michael Wiegand, director of Financial Services for the Poor for the foundation, told Karen Webster, financial inclusion efforts need the tailwinds of technology, interoperability and trust to enable the roughly 2 billion individuals across the globe living on $2 or less a day — many of them women — to access services and aid from the formal financial system. The efforts mirror Bill Gates’ comments in December that “we believe the ability to save and transact should be universal.”

The impact of improved financial inclusion would be significant. The foundation has noted that widespread adoption and use of digital finance could increase the gross domestic products (GDPs) of all emerging economies by 6 percent, or a total of $3.7 trillion by as early as 2025 and create 95 million new jobs. But along the way — and traveling a long road away from cash-based transactions — incentives must be in place for consumer to get funds delivered to their wireless devices, and to transact electronically, and for merchants to get on board.

Progress Made — And Still To Be Made

“There really has been tremendous progress,” Wiegand said, even measured before the pandemic.

Between 2011 and 2017, more than 1 billion people came into the formal financial system, gaining access to at least some traditional services, he said. There’s no official estimate of just how widespread the impact of the pandemic might have been (last year’s report was delayed as the coronavirus raged across the globe), but evidence points to continued strides in financial inclusion — an acceleration with government programs, and in some cases, mandates that wage payments be made electronically (such as in Bangladesh) acting as tailwinds.

Government-led, national identification efforts are also paving the way to making it easier to interact with traditional banking services, too, he said. Social patterns and interactions themselves are changing as people continue to embrace social distancing or are moving back to their villages, which leads to more emphasis on connecting through mobile devices, which helps set the stage for more digital transactions.

In one effort illustrated by Wiegand, earlier this year, Pakistan announced a government-run instant digital payment system to help with financial inclusion and government revenue. The new system, termed “Raast” and done in collaboration between the State Bank and the foundation, is being rolled out in stages through 2022. It will let stakeholders, such as merchants, consumers and government entities, take advantage of real-time payments (and government payments) done over the internet.

One stated goal is to boost to the inclusion of women in the formal economy. National IDs, he said, reduce fraud risks but also put economic power in the hands of women, reducing at least some firmly entrenched gender inequality.

“What we’ve seen in Pakistan is that when the government’s making payments to women, they know that the women themselves are the ones that are accessing the funds because they can authenticate themselves digitally,” said Wiegand. “We know there’s a lot of evidence that financially including women is a key lever to empowering them. It’s not only about pulling them out of poverty but increasing their agency and standing in society. It’s a cultural change.”

He said the foundation hopes that the Raast system becomes ubiquitous for smaller transactions and gains acceptance for larger payments.

“We think that a whole range of providers, especially some of the more innovative FinTech providers through to the big traditional banks, will see this huge benefit to all of their customers by including more and more Pakistanis in the payment system,” he said.

Elsewhere, in India, the Unified Payments Interface (UPI) platform, which Wiegand said is “more of a middle-class, smartphone-oriented platform,” has seen transactions more than double through the pandemic, off an already high base. Digital, Aadhaar-enabled payments have been growing, too, where users need not have a smartphone in hand, but instead leverage their biometrics to make transactions.

“Those payments are more than doubling as well,” maintained Wiegand. “So, we’ve seen evidence of that shift towards digital payments quite broadly over the past year in India.”

The Guiding Principles

The efforts in India and Pakistan dovetail with a set of principles developed by the foundation, known as the Level One Project Guide, that countries can follow as they bring existing financial services onto new payment rails and platforms. said Wiegand.

Interoperability is key between providers as they work with existing FIs and non-traditional financial services providers, he said. National digital payment efforts should also support immediate “push” payments, too, with appropriate know your customer (KYC) measures in place. Consumers need to trust that their money will be safe if they move away from cash-based activity.

“Trust is critical,” noted Wiegand, who added that “the risks of these new types of financial service providers is a big area of focus for us.”

Along those lines, the foundation has been ramping up its investments geared toward helping central banks and providers identify and manage risk and protect privacy, while reducing costs associated with transactions.

Wiegand recounted that digitizing government payments and wage payments have been the easiest ways to get people into the financial system at scale.

“As you enable them to pay in more digital ways, that could encourage savings, but it’s getting over the hump and creating a digital footprint and a certain comfort with digital products” that are the key, early steps, Wiegand said.

Those early measures and principles, while improving trust on the part of the unbanked, can do much to broaden the acceptance and use of digital wallets in everyday life. Acceptance must also scale on the payer side of the ecosystem to digitize payments. There’s the need to standardize how money is sent, he said, and cited India’s interoperable systems where money can be sent to a recipient’s phone or national ID number (via the Aadhaar system). Interoperability also saves costs.

Moving Away From Cash In, Cash Out

A higher level of acceptance can get economies moving away from the cash in/cash out activities that amount to a “chicken and egg” problem. As Webster noted, in those economies, the only way to do business is to get cash because one needs to pay in cash, and one needs to be paid in cash to have funds to put in the digital wallet and transact.

As a microcosm of those frictions, Wiegand stated that in Kenya, large distributors of Coke started requiring their merchants to pay digitally, but they were receiving cash from their end customers.

“Those merchants were taking a bunch of cash and weren’t able to offload it,” noted Wiegand.

The solution to that pain point has been enabling acceptance at the consumer level through a form factor that takes into account that they use mobile phones, not smartphones (leveraging biometrics can be helpful, as has been seen in India, he said). The increasing availability and affordability of smartphones is an important form of driving financial inclusion, noted Wiegand, although the phones should not be viewed as a magic bullet.

Neither will cryptos be a magic bullet, noted Wiegand. Libra (now Diem) may have been touted as a vehicle for financial inclusion, but the space is in its nascent stages. Central banks are exploring their own issuance of digital fiat, but it could be a while before we see official launches.

As Wiegand told Webster, “digital currencies have many attributes that would have the potential to benefit the poor. Rapid, low-cost transfers, especially cross-border, are beneficial to the poor.”

Looking Ahead

Right now, the pressing challenge is to get local currency into unbanked users’ hands. Bit by bit, he said, fostering basic access to payments has helped moved hundreds of thousands of people out of poverty in Kenya, and has helped women gain entrance into the formal economy. In Bangladesh, digitized, “pushed” wage payments have made it easier for workers — and, often, female workers — make quick payments back to their villages. Those transactions, said Wiegand, “have changed the behavior for how that money is sent and spent in the village in a positive way.”

Looking ahead, the foundation has been working with the West African Economic and Monetary Union to put digital payment systems across their countries. Uganda and Ethiopia are candidates for real-time payment systems, he said. It’s become a priority to support the Africa free trade agreement to enable cross-border payments.

“We see a huge opportunity and excitement across Africa for specific countries and regional plays to advise payment interoperability,” he said of the foundation’s efforts.



How Digital Payments Improve Financial Inclusion

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