How digital finance can reduce cost and increase productivity

Dr Olayinka David-West, a senior fellow in the Operations, Information Systems and Marketing Division of the Lagos Business School (LBS), currently directs the LBS’ Sustainable and Inclusive Digital Financial Services (SIDFS) Initiative. SIDFS, in the last two years, has conducted research, convened industry stakeholders and articulated policy amendments to enhance digital financial services in Nigeria. David-West authored the Digital Financial Services in Nigeria: State of the Market Report 2017, a research report providing evidence-based insights on financial inclusion that was recently launched in Lagos. In this interview with The Guardian’s News Editor, Marcel Mbamalu, she explains, among sundry issues, how governments and companies can reduce processing costs and increase productivity by encouraging digital payments.

What challenges in Nigeria’s digital financial services space gave rise to this report?
Some of the challenges that gave rise to the initiation of the Sustainable and Inclusive Digital Financial Services Initiative included the low financial inclusion rates, the lack of a substantive evidence base and the thought leadership of financial inclusion gaps in the country. Hence, since 2015 we have been engaged in research activities that provide evidence of sustainable business models for delivering digital financial services to low-income Nigerians that are usually unbanked and poor.

In 2016, we launched the first State of the Market Report on Digital Financial Services in Nigeria. This current edition is our second.
The reports address three fundamental questions: What characteristics distinguish the customers? What business models and assets, resources and capabilities are required for operators to deliver DFS to low-income Nigerians? What market-enabling policies are necessary to enhance DFS and financial inclusion?

What specific challenges did you encounter while preparing the report
In this report, we present market-enabling policies for digital financial services (DFS) and financial inclusion. Our approach to soliciting the policy proposal recommendations involved various stakeholder consultations and involvement.

However, I must say the most challenging was the convening of the consultative working group session we hosted in August 2017. This workshop brought together stakeholders across the ecosystem and government ministries, departments and agencies to identify and discuss policy solutions to enhance financial inclusion through DFS. We held this event at the Radisson Park Inn in Abeokuta and the logistics, I believe were the most challenging. In addition to the logistics, we also had to ensure the discussions were holistic and progressive towards identifying inclusive solutions.

Over two billion people worldwide are said to lack access to formal financial services; what is Nigeria’s share of this problem and to what extent would you say this challenge has slowed down economic growth, considering that financial services remain the bedrock of personal development and economic growth?
According to the demand-side survey conducted by EFInA in 2016, Nigeria’s share of this problem is about 60 million adults that are financially excluded. The low financial inclusion rates have several implications for the economy. The first of these is the limited credit pool for lending that leads to the unavailability of long-term credit facilities for micro, small and medium enterprises (MSMEs) and subsequently higher interest rates.

As we know, MSMEs are the engine of growth for the economy and the inability to fund these entities limits job creation and capital accumulation that ultimately impact on real economic growth (GDP) and income. Furthermore, in a bid to estimate the impact, McKinsey Global Institute (MGI), projects that formal financial inclusion could increase GDP by up to 12 percent (about $88 billion).

Few years ago, the Central Bank of Nigeria (CBN) launched the cashless policy how successful do you think it has been in changing things?
I would not entirely agree that the cashless policy focuses on driving financial inclusion. I believe the concepts are interrelated but different. While the cashless policy seeks to digitise payments and reduce the amounts of cash in circulation, financial inclusion mandates aim to provide underserved citizens access to formal financial services either through bank accounts or digital wallets. Thus, once citizens are included, then the intention is to have them conduct their transactions digitally, hence reducing their need and usage of cash.

Therefore, financial inclusion precedes cashless. To further enhance the cashless policy, we need to have more payments conducted digitally. Hence, if you think of the ability to pay for goods and services digitally using Point of Sale (PoS) terminals, how can we also digitise payments at all types of retail storefronts? Not just the payments at large and formal storefronts? How can we digitise payments in our open markets where the lion share of our transactions take place? The ability to efficiently digitise such payments will broaden the concept of cashless beyond deposit and withdrawal restrictions.

Digital finance is the future; to what extent can businesses leverage this?
Yes, digital finance is the future, and we believe that businesses and governments can leverage this by employing digital payments. By digitising, these payments use cases, governments and companies can reduce processing costs and increase productivity. For example, the digitisation of business-to-person (B2P) payments such as wages and dividend payments could amount up to $56 billion while business-to-business (B2B) payments like supplier/distributor payments, investments could total up to $317 billion. Hence, the transaction estimates demonstrate the value of the demand-side market for digital payments.

On the supply-side, we are also witnessing the emergence of new technology businesses providing financial services – fintechs. These new companies are developing new business models and technology-based financial products and services, leveraging on meeting consumer needs beyond the capabilities of conventional financial services providers. For example, these fintechs are providing platforms for low-value credits to individuals and MSMEs. The agility and innovation these fintechs bring to the financial services ecosystem offers an opportunity for traditional services providers depending on the engagement models implemented. We believe the entire financial services ecosystem leverage the innovations and products fintechs provide.

Could you comment on the cryptocurrency, especially the Bitcoin that is fast becoming a global currency. How can we benefit from the adoption or use of a distributed and decentralised payments system using Blockchain technology that powers Bitcoin?
The fiat currency of Nigeria remains the Naira. Bitcoin is not fiat currency of any country but an independent currency. Bitcoin is one of the most popular use cases of Blockchain technology, but Blockchain technology is itself a powerful software technology that represents a ledger or registry of peer-to-peer transactions. In the financial services industry, Blockchain financial service use cases include wholesale payments, capital markets and securities servicing and trade finance and transaction banking. Thus, the concerns should be use case specific. I feel the overemphasis on Bitcoin diminishes the benefits of Blockchain and how the distributed and decentralised capabilities can significantly reduce the cost of international remittances (money transfer). A good example is SureRemit that has recently launched a tokenised remittance service using Blockchain technology.

Poverty and literacy issues are major challenges in developing countries and they do not go smoothly together with digitization. How much of a problem do they present for ongoing efforts at driving financial inclusion through digital financial services in Nigeria?
Poverty is a global scourge that is more prominent in developing countries. Digitisation as we know it is beneficial to all and is truly inclusive. Hence, from a reach perspective, I would argue that digitisation goes smoothly with poverty. Nonetheless, let’s dig deeper as to how digitisation benefits poverty. Digitisation is really about the access to and use of digital products and services. The emergence of GSM in Nigeria broke this barrier, and if we look at our internet usage statistics, the majority of Nigerians access using mobile devices.

The impact of poverty and literacy on financial inclusion vary. Let’s take poverty. The poverty classification thresholds defined by the World Bank are based on the household income. Current statistics indicate that over 90 percent of Nigerians live below the poverty threshold of $2.50 per day. Notwithstanding the earning power, all Nigerians (rich and poor) are all conducting various types of economic activity, albeit at lower values. For example, even poor people buy goods and services like transportation, airtime, petrol, etc. Hence the big challenge for financial inclusion is how we can ensure we can cost-effectively digitise these low-value payments?

We see the emergence of this with the widespread availability of USSD payment systems; the ecosystem just needs to double up on merchant acquisition. So why can’t a bus driver be a merchant and accept USSD payments from passengers? Regarding literacy, our analysis of the data reveals that majority of Nigerians have basic literacy and numeracy and are educated up to primary/secondary school level.

However, what I believe we need to focus more on is the user interface that will help overcome our literacy issues. By this, we mean that can we redesign the user interfaces of these financial products and services to take into consideration the user challenges. For example, can we have these services in the various Nigerian languages? Can we use more visual cues that make it easier to relate to the application? These human-centred design (HCD) techniques are practices that some providers are beginning to employ to ensure the target audience more efficiently uses their products and services.