Courtney C. Lipsey For some time, the World Bank has known that increasing digital financial products and services benefits economic growth and poverty reduction. We’ve seen in our work with developing nations around the globe that those with more advanced financial systems have higher economic growth and can reduce poverty and income inequality faster.
In the face of the COVID-19 Crisis, providing secure, low-cost, and contactless financial services for citizens and governments is more important than ever. In a report released this week, the authors explain how accessing essential financial services, such as transaction accounts and credit products, can help people experiencing poverty increase their incomes and become more resilient. Women can benefit from saving money, sending payments, receiving them, and getting credit to expand their businesses.
Access to essential financial services, such as transaction accounts and credit products, insurance, and savings products, helps people experiencing poverty increase their incomes.
Digital technologies allow people who previously needed the opportunity to access these services. This includes almost two-thirds of adult adults in the developing world. The technology is lowering the costs through economies of scale. The technology increases the speed, transparency, and security of transactions and allows for the development of sustainable financial products tailored to people with low and irregular incomes. The technology removes barriers to financial services, such as the need for formal gain, identification, and geographical distance.
Mobile money is a digital financial service launched in the “first wave” of developing countries due to the high penetration of mobile phones. Over 850 million mobile money accounts are registered in 90 countries. $1.3 billion is transacted daily through these accounts. Sub-Saharan Africa is a leader when it comes to mobile money. Over a fifth adult population has a mobile version. These accounts have also provided the basis for more advanced financial services such as digital insurance and lending. Telecom operators and large e-commerce platforms have used digital finance’s ability to facilitate payments to offer services like lending, insurance, and “pay-as-you-go” solar energy.
Sub-Saharan Africa is a leader when it comes to mobile money. Over a fifth (or more) of adults in the region have a mobile account.
Pula, an established microinsurance company in Nairobi, Kenya, that has been in business for four years offers protection to low-income individuals, including 1.7 million smallholders in 10 African countries and India. Satellite and other data combined with artificial Intelligence are used to calculate premiums and determine if an insured event occurred. Pula’s innovative business model involves designing and selling bundles of weather and yield index insurance. The insurance policy is embedded into the seed, fertilizer, or credit price. Having an adjuster visit the field to settle a claim is optional. Text messages are used to make payouts.
IrisGuard is a client of IFC and an Anglo-Jordanian tech company. They are using its financial platform and iris scanning software to authenticate refugees’ identities in Egypt, Iraq, and Jordan. This technology allows refugees to receive cash-based aid, medical treatment, and remittances with less risk of identity theft or corruption.
COVID-19, the current pandemic COVID-19, has increased the urgency to use digital financial services.
Fintech helps governments reach out to businesses and people quickly with financial assistance. People can transfer money, including cross-border remittances, and pay their bills without physical contact, whether at home or in a store or market.
But the potential of digital financial services is far greater than what we have achieved. Digital financial services have many benefits and are critical to Sustainable Development Goals. The following are essential elements to accelerate this development:
- Investment in the prerequisites for developing digital financial services, such as mobile broadband infrastructure–especially in remote areas, and development of agent networks that meet individuals’ local need to cash in and cash out;
- Expanding digital identification systems, including biometric systems
- Open application programming interfaces (APIs) are a publically available way for developers to gain access to proprietary software, allowing new applications and programs to communicate with each other.
- The legal and regulatory frameworks should allow most people to take advantage of digital financial services and create a competitive environment. An important question is whether or how non-banks can have access to payment infrastructures and issue electronic currency.
- Access to Government Data Platforms
It is also essential to manage risks. The data trails left by digital financial services expose users to discrimination, unauthorized disclosure, and misuse of their data. Uneven access to technology and the “digital divide” can prevent low-income people from gaining benefits. Financial literacy programs will help ensure that new users of financial products and services do not fall victim to predatory lending or over-indebtedness.
The World Bank continues to work with the public and private sectors to expand access to digital services for financial purposes in more countries. The World Bank’s efforts to accelerate the resolution of health emergencies, support economic recovery and ensure the return to growth are all valuable short-term benefits. In the long term, this is expected to impact economic development and poverty reduction significantly.
