Digital Financial Inclusion

This summary is based on the G20 Global Partnership for Financial Inclusion (GPFI) Issues Paper produced by the Consultative Group to Assist the Poor (CGAP) and disseminated for the 2nd GPFI Conference on Standard-Setting Bodies and Financial Inclusion that was held on October 30-31, 2014 in Basel, Switzerland.

" Universal access to financial services is within reach—thanks to new technologies, transformative business models and ambitious reforms... As early as 2020, such instruments as e-money accounts, along with debit cards and low-cost regular bank accounts, can significantly increase financial access for those who are now excluded. "

Jim Yong Kim

President, World Bank Group

President Kim's optimism is shared by the leaders of the G20 countries and the members the global financial sector standard-setting bodies (SSB) from over 50 countries that are committed to the financial inclusion agenda both globally and domestically.

Mobile Banking | © GPFI/CGAP
With the prospect of reaching billions of new customers, banks and a widening array of non-banks have begun to offer digital financial services for financially excluded and underserved populations, building on the digital approaches that have been used for years to improve access channels for those already served by the formal financial sector. Digital financial services — including those involving the use of mobile phones — have now been launched in more than 80 countries, with some reaching significant scale. As a result, millions of formerly excluded and underserved poor customers are moving from exclusively cash-based transactions to formal financial services — payments, transfers, savings, credit, insurance, and even securities — using a mobile phone or other digital technology to access these services. And the picture is continuing to shift rapidly with the emergence of ever more new technologies. 

Digital financial inclusion involves the deployment of the cost-saving digital means to reach currently financially excluded and underserved populations with a range of formal financial services suited to their needs that are responsibly delivered at a cost affordable to customers and sustainable for providers.

While the years of experience with digital financial services often give providers significant advantages, the particular risks introduced by the new services result from, among other things:

  • introduction of non-financial firms deploying new technologies; 
  • new contractual relationships between financial institutions and third parties, including the use of agent networks and other outsourcing arrangements;
  • different regulatory treatment of deposit-like products (compared to deposits);
  • unknown and as-yet unpredictable costs to inexperienced and vulnerable consumers; and
  • use of new kinds of data—and new uses of data—introducing both new privacy and data security issues.

Digital financial services kiosk in Bangladesh | © GPFI/CGAP
The essential components of digital financial inclusion are as follows:

  • Digital transactional platforms enable customers to make or receive payments and transfers and to store value electronically through the use of devices that transmit and receive transaction data and connect to a bank or non-bank permitted to store electronic value
  • Devices used by the customers can either be digital devices (mobile phones, etc) that transmit information or instruments (payment cards, etc) that connect to a digital device such as a point-of-sale (POS) terminal.
  • Retail agents that have a digital device connected to communications infrastructure to transmit and receive transaction details enable customers to convert cash into electronically stored value ("cash-in") and to transform stored value back into cash ("cash-out").
  • Additional financial services via the digital transactional platform may be offered by banks and non-banks to the financially excluded and underserved — credit, savings, insurance, and even securities — often relying on digital data to target customers and manage risk.

For the 2.5 billion adults who transact exclusively in cash due to lack of effective access to formal financial services, having digital access to financial services may be transformational. The benefits of digital financial inclusion for the financially excluded and underserved are the following, among others:

  • access to formal financial services – payments, transfers, savings, credit, insurance, securities, etc. Migration to account-based services typically expands over time as customers gain familiarity with — and trust in — a digital transactional platform. Government-to-person payments, such as conditional cash transfers, that can enable digital stored-value accounts may provide a path for the financially excluded into the financial system
  • typically lower costs of digital transactional platforms — both to the provider and thereby the customer — allow customers to transact locally in irregular, tiny amounts, helping them to manage their characteristically uneven income and expenses
  • additional financial services tailored to customers' needs and financial circumstances are made possible by the payment, transfer, and value storage services embedded in the digital transaction platform itself, and the data generated within it
  • reduced risks of loss, theft, and other financial crimes posed by cash-based transactions, as well as the reduced costs associated with transacting in cash and using informal providers
  • it can also promote economic empowerment by enabling asset accumulation and, for women in particular, increasing their economic participation

Mobile cash agent | © GPFI/CGAP
Digital financial inclusion also carries risks for the same vulnerable financially excluded and underserved customers that benefit from the opportunities, mainly:

  • novelty risks for customers due to their lack of familiarity with the products, services, and providers and their resulting vulnerability to exploitation and abuse.
  • agent-related risks due to the new providers offering services are not subject to the consumer protection provisions that apply to banks and other traditional financial institutions
  • digital technology-related risks can cause disrupted service and loss of data, including payment instructions (for example, due to dropped messages), as well as the risk of a privacy or security breach resulting from digital transmittal and storage of data

Customer uptake of digital financial services in many markets suggests that on balance these risks may not be perceived to outweigh the benefits of being financially included. Nonetheless, the case is strong for appropriate regulation and supervision.

The key regulatory issues raised by digital financial inclusion relate to agents, anti-money laundering and countering financing of terrorism (AML/CFT) rules, regulation of e-money, consumer protection, payment system regulation, and competition. Many of these issues fall within multiple regulators' competencies, requiring effective communication and collaboration among them.

The models of digital financial inclusion emerging in countries around the world introduce new market participants and allocate roles and risks (both new and well known) differently from the traditional approaches to retail financial service delivery. Some risks are common to most or all approaches to digital financial inclusion. The engagement of mobile network operators (MNOs), whether as e-money issuers or as a channel for a bank or similar provider, presents certain potential risks that differ from approaches without MNOs. Some risks are triggered by the model of the digital transactional platform in question. Finally, some risks relate to the provision of additional financial services beyond the payments, transfers, and value storage services offered by the digital transactional platform itself.