Digital financial transactions matter for development

What key insights have emerged from development economics in the past decade, and how should they impact the work of the World Bank? A new working paper Toward Successful Development Policies: Insights from Research in Development Economics from the Bank’s research department captures 13 of the most significant insights in the world of development economics.

Here’s insight #12 – on how the widespread access to digital financial transactions have improved outcomes for users reducing poverty. See all previous insights here: Thirteen insights for successful development policies

Recent research has shown that a range of development benefits follow from using digital financial transactions instead of cash.  But these services must be delivered sustainability and responsibly. This research has direct implications for World Bank work on safety nets, service delivery, and poverty reduction. 

Digital transactions improve service delivery

In high-income countries, most safety net programs – such as social security or subsidies for the poor – are delivered digitally. In low-income countries, they are commonly made in cash.  Using cash creates enormous costs. For example, governments must spend money bringing truckloads of paper currency to remote areas; these trucks also need to be insured and protected by armed guards. Cash payments also require people to spend time traveling and waiting in line to get their payments at government offices.  Digital transfers improve efficiency and remove corruption opportunities—a relevant finding for the World Bank's efforts to promote safety net coverage and improve service delivery.

• When Andhra Pradesh used biometric smart cards instead of cash to distribute social security payments, the government saved nearly $40 million annually, which was nine times greater than the cost of implementing the program. Theft of funds went down, people spent less time collecting payments, and recipients got more money because less was being stolen.^ref1
• In Niger, using mobile phones rather than cash to distribute payments for an anti-hunger program reduced administrative costs by a fifth, lowered costs for recipients, and allowed households to feed their children more and purchase more protein-rich food.^ref2

Digital transactions help prevent people from falling into poverty

Most development interventions aim to help people escape poverty. But escaping poverty is no guarantee of not falling back in.  Every year millions of people fall into poverty due to unexpected shocks such as natural disasters, high medical bills, or sudden unemployment. In poor countries, safety nets are often absent, so people rely on their social networks for emergency funds. Mobile money accounts let people send money through simple text messages, which makes it easier to collect funds from faraway friends and relatives.   As a result, they are less likely to become poor during an economic emergency. These findings are relevant to the World Bank's work on resilience and poverty reduction.

• When hit with an agricultural shock, Kenyan households with no mobile money access suffered a 7 percent drop in use of goods and services, while those who did have mobile money experienced no such drop on average.^ref3
• In Tanzania, rainfall shocks resulted in 6 percent lower consumption on average, but mobile money users were able to maintain consumption due to improved risk sharing. ^ref4

Digital transactions help people build savings 

People are more likely to build savings when they are paid directly into accounts instead of in cash, in part because the money is protected from theft, loans to family members, and the temptation to spend.  This money can be invested in educational and business opportunities and has implications for the World Bank's work on employment and poverty reduction.

• In Afghanistan, workers who automatically deposited part of their salary into a mobile savings account had higher savings and financial security than workers who received a mobile savings account but did not sign up for automatic deposits.^ref5
• In India, weekly payments resulted in significantly higher savings for a group that received the payments into accounts, but not for a group that received them in cash.^ref6 
• In Malawi, farmers who had their earnings deposited into a savings account had higher savings before the next planting season, spent more on agricultural equipment, and increased crop sales.^ref7 

Digital transactions require comprehensive consumer protections

Digital financial services can offer many development benefits, but there are also risks which need to be managed. Adults need the digital skills and confidence to engage with technology.  There is also an important role for public policy to establish sound and enforceable regulatory and supervisory frameworks for financial consumer protection, to create more transparency and comparability in products, including requirements to disclose product prices and terms in clear language, and effective dispute resolution mechanisms.^{ref8, ref9}