Digital technology, a word that has completely rewired the way we work, is not a new term at all. It already has been recognized as a turning point for many industries, enabling them to change their entire game. And now, digital technology has started to show similar kind of impact on the financial sector as well, with the emergence and adoption of digital finance technology.

One of such impact can be seen in the Tanzanian market,  where the number of adults having bank account increased from 17% in 2011 to 47% in 2017, all thanks to the rise in the use of mobile phones  used to access financial services. Earlier, availing banking services generally meant taking a day of one’s time and a considerable portion of earnings just to travel to the nearest branch of a financial institution.

Similarly, another fun fact is that digital financial services  is estimated to result in $1 trillion of increased revenue and cost savings in the financial sector –  equivalent to about 17% of the ENTIRE global financial services industry revenue.

So, when it comes to financial inclusion i.e., a process undertaken to ensure the ease of access, availability and usage of the formal financial system for all members of an economy, digital financial services definitely has boundless potential. With newer tools and technologies being developed, financial services can be provided to majority of the population with enhanced speed, reliability and efficiency.

Fintech for financial inclusion

(Representative) Photograph Courtesy: RSS

Impact of Digital Finance Services

Digital financial services have brought in quite astounding innovations in the market. To name a few, there are mobile wallets which enable customer experience in terms of savings and payments, biometrics data which enhance the customer identification verification process for account opening and payment authorization, and digital platforms within mobile phones that enable last-mile access technologies which facilitate financial access to people in rural areas without the need for physical bank branches.

Along with such innovations, digital finance has also brought in various positive impacts on the existing market in context of financial inclusion. As per the recent study conducted by Asian Development Bank (ADB), named Accelerating Financial Inclusion in Southeast Asia with Digital Finance, there are five key areas in particular, where digital finance can have positive impact. They are:

1. Demand-side Entry Constraints – Digitally Enabled Customer Identification and Verification

Know your customer (KYC) is the process of a business identifying and verifying the identity of its clients. In case of financial institutions, KYC plays a vital role in terms of management of risk associated with verification. Saying that, customer identification and verification still is a challenge for financial institutions.

Nonetheless fast, low-cost and convenient customer identification and verification process is a possibility today via digital finance solutions.  There are two alternative approaches as per the digital solutions: Automated agent-enabled customer identification and Automated individual-enabled customer identification.

Automated agent-enabled customer identification allows an agent to acquire a customer’s identification document digitally using mobile apps where the acquired data is automatically verified against databases linked to the financial services of the provider’s backend platform. On the other hand, automated individual-enabled customer identification allows an individual to provide identity proof such as a fingerprint to financial service providers located miles away in real time.

2. Supply-side Entry Barriers – Scalable Delivery By Tackling Last-mile Distribution

Due to the unavailability of the financial institutional infrastructures such as traditional banking branches and ATMs in the low-density rural areas, a number of people are financially excluded.

Nevertheless, digital financial solutions have the possibility to lower the provider’s’ distribution and servicing costs for basic financial services by introducing alternative platforms and channels. They are  low-cost, widespread points of physical access that are digitally enabled, such as mobile phones, point-of-sale devices, and agent networks.

3. Payments and Transfers – End-To-End Digitization 

Although cash is still prevalent in most of the countries,  an enabling economy i.e., an economy which has rapidly evolving business landscape,  can actually create a platform for electronic payment.

One of the ways to do so is to drive critical volume payments through digital government-to-person payments (G2P) and person-to-all payments (P2All ).  Digital G2P payments and P 2 All payments ensure efficient, safe and secure transfers which further help reduce leakages.

4. Credit – Risk Reduction Via Digitally-enabled Data Analytics

Credit access has the potential to create human capital and bring businesses into existence. However, due to various reasons, commercial banks are less likely to cater to the credit needs of the unbanked and underbanked people.

Digital technology on the other hand can considerably enhance access to credit via the use of alternative sources of data, for example data from payment transactions and telecoms providers, collaborated with analytics which helps in improving  customer profiling, credit risk assessment, and fraud detection. There actually number of Fintech players that have been using such digital solution. One of such fintech company is Lenddo,  a Singapore-based software-as-a-service company which uses non-traditional data comprising social media and smart phone records in order to ascertain customers’ financial stability.

5. Savings – Cost Effective Mobilization

Savings in formal financial institution is one of the most prominent aspects of financial inclusion. Digital financial services can help mobilize the savings value chain.

Financial service  providers can present access to larger group of population through mobile devices. Users can have access to savings account at a licensed deposit taking institution and also earn interest by linking dedicated savings accounts to mobile money or e-wallets.

Cover Photograph: UNCDF