How Digital Finance Could Boost Growth in Emerging Economies

The impact of mobility goes much more than facilitating on-the-go online transactions. Mobility powered digital commerce has the potential to give a big boost to financial inclusion, throwing open banking facilities to people hitherto cut off from the same. At a macro level, it can propel growth, boosting the economy and the GDP of the country itself.

“Emerging economies,” such as India, Brazil, Philippines, and others are neither here nor there in terms of the economy. While such countries do have a strong banking system, generally the system is archaic in nature, with limited number of savings and credit products, and high fees. Moreover, a good chunk of the populace and small businesses, 1.6 billion people and 200 million micro, small and mid-size businesses to be precise, do not have access to such credit and savings products altogether. The mobile phone is a panacea to such woes, offering both the deprived and those already in the conventional banking system access to digital finance.  

Digital payments and financial transactions, conducted through smartphones and other mobile devices are now a vital cog in the financial infrastructure of modern, developed economies such as the US and the Eurozone.

How Digital Finance Benefits

Digitization of financial transactions extends the traditional mobility benefits to finance, facilitating anywhere, anytime transactions, and flexibility in sending and receiving payments. It improves efficiency of the process, and offers a world of convenience as well. This apart, the widespread adoption and use of mobile phone powered digital finance is a win-win for everyone.

• Individuals and small businesses gain easy, wider, and often cheaper access to loans, over and above traditional and informal sources. McKinsey estimates an additional $2.1 trillion of loans would be available to individuals and small businesses, from current levels.
• Loan providers not just gain access to a whole new customer base, but also stand to save $400 billion a year in direct costs, considering digital accounts are 80% to 90% less expensive to service compared to traditional accounts.  Overall, financial services providers could increase their balance sheets by an estimated $4.2 trillion.
• Digital finance can reduce leakages in collection of taxes, delivery of public services and transfer of subsidies. Governments gain a potential by $110 billion per year on these fronts.
• Service providers, such as telecommunications companies, payments providers, financial-technology start-ups, retailers, and others have a huge business opportunity on their hands. Even within banks and financial service providers, digital finance offers a new level playing field, giving everyone a more-or-less equal opportunity to establish dominance.

Consider the case of a farmer in rural India, who travels for kilometers and spends almost the whole day, just to make a utility payment. The same farmer gets paid just once or twice a year, during the time of crop harvest, but has no access to banks, to save the money. His business is highly risk-prone, at the mercy of monsoons or droughts, but he has no access to insurance. The smartphone can transform his life, by allowing him to accept payment in bank account, make utility payments in just a few minutes through the mobile wallet linked to the bank account, and likewise buy crop insurance on-the-fly.

Digital finance also allow small businesses integrate themselves to the formal mainstream economy, without being dependent on the local middleman. For instance, 70,000 small e-tailers from remote and desolate rural communities in China now sell on the Taobao marketplace, accepting payments digitally.

At a macro-level, digital financial inclusion has the potential to increase the GDPs of emerging economies by around 6%, or by $3.7 trillion, by 2025. This figure equals the size of Germany’s GDP. The resultant growth has the potential to employ 95 million people. The potential however varies from country to country, with countries such as India, Ethiopia and Nigeria having the potential to add as much as 10% to 12% to their GDP, whereas countries such as China, Brazil, and Mexico could add about 4% to 5% to their GDP.

The Long Road Ahead

Realization of such benefits was a long drawn out process in the developed countries, with digital finance maturing over time, in sync with the development of mobile internet infrastructure. Emerging economies can gain similar benefits while fulfilling the pressing need of financial inclusion, without going through similar efforts, since the mobile infrastructure is already in place in most parts of the world. About 80% of adults in emerging economies already have a mobile phone, whereas only 55% of them had a bank account, as on 2014.

However, there is still considerable ground to cover in most emerging economies before they can realize the full benefits of digital finance.

• Individuals may need to purchase a smartphone, or would need to upgrade their mobile phones. While this may sound obvious for the urban educated elite, it is still a tall ask for the rural poor, the primary targets of financial inclusion.
• Mobile service providers may need to roll out 3G and 4G networks over a wide area, before mobile powered digital finance can become widespread.
• Businesses would need to roll out digital financial products that offer better value and cost less than conventional financial tools and products. If they import digital financial products from the developed economies, they need to localize it as well, and ensure it meets local compliance regulations.
• Digital payments could unlock new finance and business models, such as peer-to-peer lending. There is a pressing need for regulatory innovation to facilitate such new models.
• There is also a need to change behavioral patterns and preferences, to make digital finance acceptable. NGOs or other agencies need to take the lead in educating the masses on smartphone usage and how to gain benefits from digital finance.

The onus is on the governments and stakeholder businesses to make a concerted and coordinated effort in such direction.

Efforts are already underway in several emerging economies to facilitate digital finance. For instance, in India, the “Pradhan Mantri Jan Dhan Yojana” (PMJDY) aims to establish the backbone of digital payments initiative by opening bank accounts for all citizens.

However, much work still needs to be done. Financial and banking apps emerge as major conduits for digital finance transactions. Players who aim to grab a pie of the lucrative digital service market need to roll out intuitive apps that enable various possibilities and make  digital transactions easy. It pays to partner with an established provider who have  considerable experience in developing financial apps and software. We fit the bill perfectly on all counts, offering app and software solutions to enable your business gain new ground.