> Posted by Jeffrey Riecke, Communications Assistant, CFI

Those of us living in higher-income countries rarely think about something that dominates our financial services: everything’s digital. From checking balances, to transferring money, to making payments, nearly everything’s digitized and accessible with an internet connection. However, for the 2.5 billion people who don’t have an account at a formal financial institution, making a payment or receiving money isn’t as simple as a few computer mouse clicks or a few seconds at an ATM machine. Managing finances the old fashioned way, with cash for transaction and jewelry, livestock, etc. for savings, creates numerous challenges and limitations. In A Digital Pathway to Financial Inclusion, a new report from Dan Radcliffe and Rodger Voorhies of the Bill & Melinda Gates Foundation, the divide between cash and digital is examined, and a portrait of digital financial inclusion, and how we might reach it, is presented.

Compared to those using digital financial services, those using physical methods incur storage risks, transport costs, and psychological barriers to saving, Digital Pathway claims. On top of these, handling finances physically effectively drives a wedge between unbanked individuals and the formal economy as it’s more costly for the organizations and institutions of the formal economy to transact with people who are not “hooked in.”

Achieving digital financial inclusion and connecting these unbanked people to digital financial services will require low-cost “on-ramps” that enable easy conversion of physical assets to digital money, and integrating these on-ramps into formal financial institutions. Digital Pathway lists the following infrastructural components as essential.

  • Connectivity – such as a telecoms network – that enables customers to communicate with the provider’s transaction system through a mobile phone or other digital interface.
  • Cash-in/cash-out (CICO) networks that enable poor customers to convert their physical cash into digital money (and vice versa).
  • A system for capturing and verifying the identity of customers.
  • A virtual account that enables digital payment connectivity.
  • A payment platform (or multiple interconnected platforms) that enables customers to transact with any chosen counterpart, regardless of their payment provider.
  • Common business rules and technical standards that enable providers to settle and clear cross-platform payments.
  • Common business rules and technical standards that enable data sharing and analytics across providers, both to facilitate product development and prevent fraud.
  • A payment platform that is cheap enough to serve sub-$2/day users and can accommodate a range of customer uses beyond money transfer.

Certainly converting 2.5 billion people from cash to digital financial services is an enormous undertaking, and one that will require lots of considerations unique to each market and client segment. There will be many stages of development along the path to achieving full digital financial inclusion. The research behind Digital Pathway supports that, in aggregate across all countries, such development will tend to pass sequentially through the following stages: connectivity in poor and rural areas; digital remote payments; digital savings, credit, and insurance services; and digital in-store purchases.

Image credit: Siemens

Figure credit: Dan Radcliffe and Rodger Voorhies, Bill & Melinda Gates Foundation

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