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Research shows that digital financial services (DFS) offer clear benefits in terms of financial inclusion and contribute to economic growth and development in developing countries. Digital financial services improve access to formal financial services – payments, transfers, savings, credit, insurance, etc. – and reduce the risks of loss or theft. – and reduce the risk of loss or theft for users and other risks associated with cash transactions. They also positively impact consumers by improving their savings behaviour, contributing to their empowerment by saving them money and time, better preparing them to cope with shocks and recover more quickly, and smoothing their consumption (1) (2).
Digital financial services, when delivered responsibly and sustainably in a well-regulated environment, not only stimulate growth but also enable faster progress towards many other Sustainable Development Goals (SDGs), as shown in the UN Secretary General’s report ‘Igniting progress on the SDGs through digital financial inclusion’.
Despite the benefits of digital financial services for inclusion and growth, SFNs impose clear costs on users. A 2018 study in Uganda found a $4 cash withdrawal cost about 19 cents—nearly 5% of the amount. For a farmer earning under $2 daily, this is almost 10% of daily income. Such costs may affect users’ decisions to use these services but don’t always prevent adoption.
In addition to the monetary impact, other factors need to be considered, which we will refer to here as ‘non-monetary’ costs and benefits. For example, the time or security savings generated using digital financial services can make digital payments and money transfers more attractive to users despite significant monetary costs.
In addition to non-monetary gains, various factors, such as context, behavioural incentives and distribution models, influence the use of SFNs. The Intermedia 2012 report ‘Mobile Money in Uganda – Use, Barriers and Opportunities’ shows, for example, that although the monetary costs of digital financial services were higher than those of traditional solutions, personal recommendations were the main incentive for signing up for a mobile money account. Agents were essential in convincing 12% of users to sign up for a mobile money account. Behavioural incentives have thus helped to reduce the barriers (notably costs) generated by NFS.
But this will not necessarily be the case in another country. It is, therefore, essential to consider the impact of these costs (monetary or otherwise) on the use of SFNs and the factors that influence users depending on a specific segment and in a specific market.
Financial institutions and organisations supporting digital financial services must consider both monetary and non-monetary costs and their impact on users to offer tailored solutions. Each target segment and region is unique, so identifying risks and unintended consequences—often non-monetary costs—is crucial. Therefore, conducting a thorough diagnostic first is essential.
With the overall digital finance ecosystem in mind, a holistic approach can be used. Digital financial inclusion is a complex subject involving different stakeholders in the ecosystem, such as regulators and policymakers, financial service providers, users, etc. Barriers to digital financial inclusion must, therefore, be tackled from different angles: regulation and infrastructure, supply (financial service providers), and demand (users). According to CGAP, a market systems approach to financial inclusion means considering all aspects of a market system and striving to remove barriers that exclude the poor by incentivising market players to take on missing or weak functions in the market. This video (3) briefly explains the market system approach.
Furthermore, the end-user should always be central to financial service design. This guarantees the development of better-quality financial services that meet users’ needs responsibly and at an affordable price. The financial services developed must make sense and positively impact end-users. The products must be helpful to the target group with clear added value (time, money, convenience, etc.). This can be done using the human-centred approach (HCD) and by carefully identifying why people are excluded from SFNs.
Frankfurt School of Finance & Management’s Certified Expert in Digital Finance (CEDF) is a full distance learning course, followed in a personalised and flexible way over 6 months. It develops the key skills and knowledge that will enable professionals to succeed in various professions around digital financial services, innovation and technology implementation, and regulation or risk management related to digital financial services. In this online course on digital finance (taught in English or French), you will learn about the emerging digital landscape and the new players and products that have disrupted the market. By following this course, you can successfully use digital technologies in your institution and exploit digital financial services in your target markets.
(1) World Bank. Digital Financial Inclusion.
(2) Mastercard Foundation – Partnership for Finance in a Digital Africa. 2019. Evidence Gap Map
(3) CGAP. 2018. A Market Systems Approach to Financial Inclusion.
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