Access to digital technologies, in particular, mobile phones, internet connectivity and biometric authentication, allows for a wider range of financial services, such as online banking, mobile phone banking, and digital credit for the unbanked. Digital financial services can be more convenient and affordable than traditional banking services, enabling low-income and poor people in developing countries to save and borrow in the formal financial system, earn a financial return and smooth their consumption. This can contribute to improvements in livelihoods and other economic outcomes:
- Poverty reduction: A study, based on a survey of households across Kenya, finds that M-Pesa (a mobile transfer system) lifted 2 per cent of households out of extreme poverty (Suri and Jack, 2016, p. 1288).
- Agricultural payments: It is easier to penetrate rural areas using mobile money. Digital financial services can provide more cost-effective and secure methods of financial transactions in the agricultural sector, particularly for rural smallholder farms.
- Savings: Mobile financial services increase the likelihood of saving and the amounts saved, particularly among the poor. There have been fewer successful findings in relation to savings, however, than in the cases of payments and credit.
- Private investment: Increases in cash flows and trade credit induced by mobile money, and reallocation of time from dealing with financial transactions to more productive activities, can lead to increased investment.
- Weathering shocks: Digital financial services can help people to handle income shocks by making it easier to collect money from friends and relatives.
- Social networks: Digital money transfers are rarely large enough to contribute to profit-seeking and investment, but they strengthen maternal kinship ties and relationships among siblings and cousins.
- Women’s empowerment: Digital financial services can give women greater financial independence and more equitable decision-making in households.
The existence of digital technology alone is not sufficient, however, to improve access to finance, and achieve improvements in livelihoods and economic opportunities. There are various challenges and barriers to uptake of digital financial services:
- Regulations: Differing approaches to regulation can either constrain or support the growth of digital financial services. Regulations are needed to safeguard consumers and to improve interoperability across digital financial service providers.
- Infrastructure: People will be less inclined to use digital payments if electricity outages, network outages or other technical problems undermine their usage.
- Awareness and understanding: Individuals with low income are more likely to have low levels of financial literacy and awareness of existing digital finance infrastructure.
- Trust: Distrust of digital finance by customers is often due to uncertainty and perceived risk in electronic financial transactions.
- Demographics: Women, poor households and those in rural areas often have lower financial literacy, ownership of mobile phones, and access to network infrastructure.
There is a growing body of literature on digital financial services, consisting primarily of peer-reviewed journal articles and donor reports. Much of the literature centres on Africa – particularly in Kenya, where mobile technology is widespread. There are various gaps, however, on the outcomes of such services (see Islam et al., 2016). While there is much literature, which asserts that digital financial services improve financial inclusion, there is little empirical evidence that establishes the links between digital finance and financial inclusion (Ozili, 2018). In addition, few studies have explored the relationship between mobile money use by firms, on the one hand, and private investment, firm profitability, and/or access to finance, on the other (Islam et al., 2016).
In this report, the terms ‘digital finance’, ‘digital financial services’, and ‘financial technology’ will be used interchangeably.
