Digital payments and financial inclusion: issues and challenges

The poor coverage of banking institutions in developing economies is a major challenge to financial inclusion. Mobile payments enabled users to engage in transactions simply through a mobile handset, in the absence of traditional banking channels, promoting both financial inclusion and development.

Nobel laureate economist Amartya Sen identified ‘economic facilities’ as one of the key elements that drive socioeconomic development. However, a long-standing issue for people across the globe is the lack of access to banking institutions, thus bringing financial inclusion into question. This is related to the massive unbanked population in the developing economies and the poor coverage of bank branches in rural regions. In the last decade, mobile payments have emerged in various parts of the world as a promising driver to financial inclusion. This technology provisioned financial transactions easily through a mobile phone, without the need for traditional banking channels. A notable success was witnessed in Kenya with the introduction of M-Pesa, a mobile payment technology, serving a bulk of Kenya’s unbanked population. Another interesting example of money transfer without traditional banking is Coins.ph in the Philippines, a system built on blockchain technology. Here, the underlying transactions are carried out through cryptocurrencies, which are later converted to cash.

Besides easy access, mobile payments provide swift money transactions during times of need. Various mobile payment providers, such as Orange and Safaricom in Afghanistan, the Philippines, Kenya, and other nations, facilitated rapid transfer of remittances from migrants working in foreign countries to their homes. People in distress during disasters have also received relief funds in unapproachable locations through digital transfers. During the cash crisis triggered by demonetization in India, the sustenance of smaller businesses was made feasible by digital wallets, acting as an alternative to cash. A more recent phenomenon can be observed in Venezuela, as citizens invest in cryptocurrencies to fight the heavy inflation when traditional banking incurs financial losses in the crisis economy.

While these bring promises of inclusion and socioeconomic development, the barriers to usage of digital payments are glaring. First, digital penetration is still notably low in most developing countries. Second, the emerging economies have high sensitivity to financial losses, and digital transactions carry the risk of failure and theft. Third, the operation of digital wallets needs basic technical competency. A high rate of digital illiteracy in developing regions poses an obstruction to usage. Fourth, there is a major concern related to surveillance. Users are faced with the risk that their transaction history could be misused by third-party merchants or even by the government for inspection.

To ensure the further proliferation of digital payments, it is essential to identify these barriers and address them. The latest advances in artificial intelligence include sophisticated financial fraud detection algorithms. These can be utilized for reducing the risk of potential theft. After introduction, the sustainability of digital payments holds major responsibility for ensuring greater financial inclusion.

Prof. Dr Raghav Rao is speaking on this subject at Connecta Bern.