Digital Financial Inclusion

For the 2.5 billion adults who transact exclusively in cash due to lack of effective access to formal financial services, having digital access to financial services may be transformational. The benefits of digital financial inclusion for the financially excluded and underserved are the following, among others:

  • access to formal financial services – payments, transfers, savings, credit, insurance, securities, etc. Migration to account-based services typically expands over time as customers gain familiarity with — and trust in — a digital transactional platform. Government-to-person payments, such as conditional cash transfers, that can enable digital stored-value accounts may provide a path for the financially excluded into the financial system
  • typically lower costs of digital transactional platforms — both to the provider and thereby the customer — allow customers to transact locally in irregular, tiny amounts, helping them to manage their characteristically uneven income and expenses
  • additional financial services tailored to customers’ needs and financial circumstances are made possible by the payment, transfer, and value storage services embedded in the digital transaction platform itself, and the data generated within it
  • reduced risks of loss, theft, and other financial crimes posed by cash-based transactions, as well as the reduced costs associated with transacting in cash and using informal providers
  • it can also promote economic empowerment by enabling asset accumulation and, for women in particular, increasing their economic participation

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Mobile cash agent | © GPFI/CGAP

Digital financial inclusion also carries risks for the same vulnerable financially excluded and underserved customers that benefit from the opportunities, mainly:

  • novelty risks for customers due to their lack of familiarity with the products, services, and providers and their resulting vulnerability to exploitation and abuse.
  • agent-related risks due to the new providers offering services are not subject to the consumer protection provisions that apply to banks and other traditional financial institutions
  • digital technology-related risks can cause disrupted service and loss of data, including payment instructions (for example, due to dropped messages), as well as the risk of a privacy or security breach resulting from digital transmittal and storage of data

Customer uptake of digital financial services in many markets suggests that on balance these risks may not be perceived to outweigh the benefits of being financially included. Nonetheless, the case is strong for appropriate regulation and supervision.

The key regulatory issues raised by digital financial inclusion relate to agents, anti-money laundering and countering financing of terrorism (AML/CFT) rules, regulation of e-money, consumer protection, payment system regulation, and competition. Many of these issues fall within multiple regulators’ competencies, requiring effective communication and collaboration among them.

The models of digital financial inclusion emerging in countries around the world introduce new market participants and allocate roles and risks (both new and well known) differently from the traditional approaches to retail financial service delivery. Some risks are common to most or all approaches to digital financial inclusion. The engagement of mobile network operators (MNOs), whether as e-money issuers or as a channel for a bank or similar provider, presents certain potential risks that differ from approaches without MNOs. Some risks are triggered by the model of the digital transactional platform in question. Finally, some risks relate to the provision of additional financial services beyond the payments, transfers, and value storage services offered by the digital transactional platform itself.

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