A digital revolution for financial inclusion

A digital revolution for financial inclusion

High inflation, lack of economic growth and food shortages hurt, above all, the poorest. The current multiple crises, added to the uneven effects of the covid-19 pandemic, have caused drastic setbacks in development and a significant increase in global poverty.

On the positive side, the coronavirus crisis encouraged big changes, mainly in industries with a considerable digital component. The digital revolution increased the accessibility and use of financial services in developing economies, and transformed the forms of payment, financing and savings.

The changes are clear in the latest edition of the Global Findex database, created from a survey of more than 125,000 adults in 123 economies, with data on employment in financial services until 2021. According to this survey, the 71% of adults in developing economies now have a formal financial account (at banks, regulated institutions such as credit unions or microcredit institutions, or through mobile money service providers). In contrast, a decade ago, when the first edition of the database was published, the figure barely reached 42%. In addition, the difference between the percentages of men and women who have an account was reduced, for the first time, from nine to six percentage points.

This transformation allows people to receive salaries, send remittances and pay for goods and services in an easier, safer and cheaper way. Mobile money accounts better handle high-volume, small-denomination transactions; which increases the accessibility of services and the savings capacity of users in the face of possible crises. In addition, the possession of an individual card gives women more privacy, security and control of their money.

The proportion of adults in developing economies making or receiving digital payments grew from 35% in 2014 to 57% in 2021. In sub-Saharan Africa, 39% of mobile money account holders now use them to save. In addition, after the start of the covid-19 pandemic, more than a third of people in low- and middle-income countries paid their utility bills through this resource for the first time.

In sub-Saharan Africa, 39% of mobile money account holders now use them to save

An important aspect of this revolution is that it is also a powerful tool against corruption, as it helps increase transparency in the flow of money from the state budget, through public agencies, to the citizenry. State social programs can now reduce delays and losses by channeling transfers directly to beneficiaries’ mobile phones. During the pandemic, millions of people in developing countries received payments through this channel, which helped cushion the impact of the coronavirus on their economies.

It is crucial to take advantage of these encouraging trends in view of the economic difficulties that the world is going through. Expanding people’s access to finance, lowering the cost of digital transactions, and channeling the payment of wages and social transfers through financial accounts will be essential to mitigate development setbacks from the current turmoil.

Governments and the private sector can help with this transformation in several critical areas. First, they must create a favorable policy and operating environment. For example, establishing interoperability of systems, so that it is possible to make payments between different types of financial institution and between different mobile money service providers. Improving access to finance depends much more on the mobile phone system than on the physical banking system. The availability of cheap and functional mobile phones and affordable internet access is a prerequisite for the expansion of digital finance. Consumer protection mechanisms and stable regulations are also needed to foster safe and fair practices that underpin confidence in the financial system.

Another essential element is to generate digital identification systems, because the lack of verifiable identity is one of the main reasons that keep some adults excluded from financial services. We know from the experience of countries like India and the Philippines that state identification programs can go hand in hand with financial inclusion programs to provide official identity documents and, at the same time, bank accounts to marginalized populations. India, for example, introduced a successful universal biometric identification system, with a focus on security and privacy.

865 million account holders opened their first account at a bank or similar institution to receive money from the state

Promoting the digitization of payments should be another priority. The digital transfers of the State serve as the basis for the creation of credible social registries and the identification of gaps and overlaps. Global Findex data for 2021 shows that 865 million holders opened their first account in a bank or similar institution to receive money from the State. This helped the families directly and also collaborated with the development of the digital financial ecosystem, since many people who received transfers in one of them later used it to make payments and access other services.

The digital revolution offers an opportunity to increase employment in the formal sector without making regulatory compliance too complicated. As digital payments become more widespread and less expensive, many private companies will be able to pay their employees and suppliers electronically. Likewise, in times of greater government budgetary restrictions, digital payment can also help broaden the tax base, by reducing tax avoidance and evasion.

Finally, the authorities will have to do more to include marginalized sectors. The gender gap in access to financial services is smaller today, but it still exists. It is more common for women to lack a personal ID or mobile phone, live far from bank branches and need help opening and using an account. For this reason, it is necessary to create financial education programs based on collaborative learning (for example, in women’s self-help groups).

The World Bank is strongly committed to expanding financial inclusion through digitalization. We will continue to help countries improve their mobile phone networks, modify regulations to promote access to finance, adopt e-Government platforms, and modernize social protection systems. For the many millions of people who still don’t have an account, we need to redouble our efforts and find creative ways to connect them to the financial system, build economic resilience, and reap the benefits of inclusion.

Rachel Maga
Rachel Maga is a technology journalist currently working at Globe Live Media agency. She has been in the Technology Journalism field for over 5 years now. Her life's biggest milestone is the inside tour of Tesla Industries, which was gifted to her by the legend Elon Musk himself.