Digital financial services and fight against poverty

Digital Financial Services (DFS)- the emerging phase in the quest to deepen financial inclusion, payments system efficiency and transparency, has been described as a veritable tool that would benefit billions of people. It will also spur inclusive growth by $3.7 trillion to the Gross Domestic Product (GDP) of emerging economies within 10 years.

But the awareness level and adoption have become due for accelerated increase, as estimated two billion individuals and 200 million micro, small, and midsize businesses in emerging economies today lack access to savings and credit, according to McKinsey Global Institute.

DFS refers to ways in which basic financial services- payments, savings, loan or insurance products are provided, particularly to the poor, through mobile phones, the Internet and/or electronic cards/payment platforms.

Deputy Director, Financial Services, The Bill and Melinda Gates Foundation, Kosta Peric, said the digital payment system, besides enthroning efficiency, will reduce corruption, which is associated with cash payment.

For Nigeria, he said the sluggish growth in adoption of the system is associated with lack of access to payment points, regulatory challenges that has deterred growth of operators and cost/profitability issues.

Corroborating these, the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, quoting McKinsey, said with improved and consistent adoption of digital financial services in the country’s payment space, no less than $88 billion will be added to Nigeria’s Gross Domestic Product (GDP) by 2025.

The development, he said, will bring about substantial benefits for financial services providers and the economy, apart from boosting financial inclusion level.

“There will be increased productivity through the time and cost savings of businesses and financial services providers and reduced leakages in government expenditure; increased investment in physical capital through additional formal deposits and lending; and increased time savings of individuals,” he said.

Meanwhile, Peric, in an exclusive interview with The Guardian, pointed out that The Bill and Melinda Gates Foundation, is not concerned about its monetary contributions but rather driven by impact.

“We aim to play a catalytic role in broadening the reach of robust, open, and low-cost digital payment systems, particularly in poor and rural areas—and expanding the range of services available on these platforms.

“Until the infrastructure and customer base are well established, this might involve a combination of mobile banking services that are accessible on digital devices and brick-and-mortar facilities where subscribers can convert the cash they earn into digital money (and vice-versa).

“Our approach has three mutually reinforcing objectives- increase poor people’s capacity to weather financial shocks and capture income-generating opportunities;

“Generate economy-wide efficiencies by digitally connecting large numbers of poor and low-income people to one another and to financial services providers, government services, and businesses; and

“Reduce the amount of time and money that poor people must spend to conduct financial transactions,” he said.

According to him, the Foundation, as philanthropy, has funded a financial inclusion secretariat at the CBN, providing grants to some banks to develop products that would deepen financial knowledge.

Noting that the pace of financial knowledge is shallow, given the 2020 target, he expressed optimism that there would be a dramatic turn of events, adding that the country is sitting atop growth enhancing initiative that needs to be tapped for the overall good of the economy.

But the Foundation’s partner in the project, Lagos Business School (LBS), in its study- Digital Financial Services in Nigeria: State of the Market Report 2016,” also noted worrisome developments.

“The under-banked and unbanked citizens of Nigeria are predominantly women and youths between the ages of 18 and 35 with minimal education and either unemployed or in low-income earning jobs.

“Aside financial services – payments, savings and credit products, additional value proposition components include usage (accessibility, affordability and the lack of complications) and system (reliability and security) attributes.

“By current mobile telephony adoption estimates, Nigeria’s mobile money market should be in the mid-stages of development. With 21 licensed mobile money operators and an adult population with 40 per cent financially excluded, DFS adoption rates have fallen below estimates deduced from population volumes,” the LBS study noted.

It identified lack of awareness, products-needs gap, product complexity and usage difficulty as major constraints to penetration and adoption.

“Monetary costs, which include direct charges/fees for transactions, account registration and minimum balance maintenance are constrained by consumer socio-economic status.

“Amongst these under-banked and unbanked citizens, non-monetary costs are attributed to perceived cumbersome and complicated bank processes that amount to usage difficulties and delays, access to identity documents and travel costs resulting from distance of service locations, most especially in rural locations,” it added.

To ease these challenges, Peric noted that the Foundation has not limited its interventions on a particular product or distribution channel, but rather on finding innovative ways to expand access and encourage markets to determine which products and channels are most effective.

“We are aware that interventions in this and other areas too often involve technologies that are made available to the intended users, but are then not adopted. To address this demand-side challenge, we are supporting research and product design experiments to identify design features, price incentives, and marketing messages that will encourage poor people to adopt and actively use digital financial services.

“We are also supporting policymakers as they work to develop policies and regulations that facilitate these developments and provide oversight and accountability.

“We believe that the combined effect of these interventions will accelerate the rate at which people can transition out of poverty and build their financial security.

Our strategy also recognises that countries are at different stages in developing an inclusive digital financial system and that any solutions must be appropriate for the cultural and economic context,” concluded.