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How to Bring Financial Services to the Poor: Go Digital

Jason Lamb's picture

Most of us in the developed world don’t think twice about how we conduct our financial lives. Our paychecks appear automatically in our checking accounts; bills are paid with the tap of a few keys; we swipe our debit card and a barista hands us a cup of coffee. Simple. Convenient. Low cost. Digital. For people in the developing world, it’s another story. It’s much more complicated. It’s hardly ever convenient. And rarely digital.

I’m speaking at the Alliance for Financial Inclusion’s Global Policy Forum today to share the results of a new report from the Gates Foundation and McKinsey & Company, Fighting Poverty, Profitably: Transforming the economics of payments to build sustainable, inclusive financial systems, completed about payment systems around the world. We wanted to learn more about the costs associated with current payment systems and find ways to provide poor people in developing countries with affordable, efficient and secure ways to send and receive money.

What we learned is that digital payments can reduce transaction costs by up to 90 percent, and that the current system could be made more efficient, sustainable and accessible to the poor while also lowering costs for financial providers. But how?

 Go Digital

Right now, there’s a dearth of financial services available for poor people in developing countries. More than two-thirds of people in developing countries don’t have access to a bank account of any kind. That number grows to nearly 80 percent in rural sub-Saharan Africa. Without access to financial services, poor households operate almost entirely in the informal economy, using cash or physical assets like jewelry and livestock. Essentially, they are forced to keep their money under the proverbial mattress.

In the current system, there is no real incentive for banks to serve the poor, because they can’t do so sustainably. For example, the costs of a single credit card transaction in Nigeria can cost upwards of $4.50 USD. When transaction amounts are small, that doesn't pencil out for banks.

Frankly speaking, if we were to build an ideal payment system from scratch today, it would look very different from what has evolved over the years. New innovation, sources of revenue and business models provide insight on how to modify the current payments infrastructure and market dynamics to reach the poor sustainably. One of the ways this can best be accomplished is by adopting a digital transaction model – think direct deposits and transferring money on mobile phones. By moving the poor away from cash, it allows them a more affordable and secure way to spend and transfer money. And because digital transactions can reduce costs to financial providers by up to 90 percent, it becomes an attractive business proposition.

The great news about this is that there is an existing infrastructure we can build upon. Mobile phone usage in the developing world is exploding. The World Bank says that 90 percent of the globe is now covered by a mobile signal. Making financial services available through phones is a way to extend access to more people, even in remote areas, where it’s unlikely that residents have access to a bank.

But to do so, we need financial institutions need to step up and change the way they do business. There’s a huge market out there waiting for them — more than 2.5 billion people. Until now, many banks had viewed these markets as requiring too much infrastructure investment. However, we found that if steps are taken to increase efficiency in payment methods and reduce costs in the current system, even the poorest markets can be worthwhile investments.

I encourage you to look at the report and its supporting documents to gain more insight into how payment systems can be transformed to serve the poor and help countless families lift themselves out of poverty.  

Comments

Submitted by B. Yerram Raju on

Stats and surveys apart, if we see the reasons for slow pace of banking penetration in rural areas at least in India during the last eight years of financial inclusion agenda, it is more because of the banks' inability to see beyond their nose. If they could view the more they reach, the more the rural area consumption increases and the more it increases, the more the banks can earn. Second, as long as the banks take a truncated view of banking transactions alone as their bread earner and do not see the need for effective participation in the improvement of basic infrastructure in education and health, they would be keeping off the incentive for their new urban educated recruitees to flock to rural side for work and thus get caught in the vicious cycle of limited or no staff, idle systems, and loss making instrumentality for financial inclusion. The mobile payments when supported by proximate and convenient payment and settlement solutions faster, would make the inclusive growth happen that much quicker.

Submitted by Edson Twinamatsiko on

I agree in totality that the digital model can go along way to reduce transaction costs. However, i think their other determinants not being considered here. In Kampala where i am writing from, cases of fires burning large sums of money in shops and markets are common. there are also studies that have shown that 60% of our people do not touch something called money all year around. in this case i tend to think that such innovations have to also deal with the demand side. Do people actually understand the need for such services, why do business people in Kla keep money in shops where there more than 28 banks with several branches,why do educated employers pay their workers cash and not use banks.

Submitted by Roshini on

I agree, mobile services for people with scarce resources can make services more accessible and will reduce the digital divide. The use of mobile banking should be one of multiple options that people should have so that they can choose the one that is right for them.

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