Mobile phones are the key to global financial inclusion.
Susan Lund | McKinsey Global Institute
An economic development revolution lies literally in the palm of a single hand. As mobile phones and digital technologies rapidly spread around the world, their implications for economic development, and particularly finance, have yet to be fully realized. The sooner that changes, the better for people worldwide.
“Entrepreneurship, investment and economic growth suffer when savings are stored outside the financial system.”
Entrepreneurship, investment and economic growth suffer when savings are stored outside the financial system, and credit is scarce and expensive.
Fortunately, according to a recent report by the McKinsey Global Institute (MGI), digital technologies – starting with mobile phones – can rapidly fix this problem and foster faster, more inclusive growth.
Mobile phones and the internet can reduce the need for cash and bypass traditional brick-and-mortar channels. This dramatically reduces financial-service providers’ costs and makes their services more convenient and accessible for users, especially low-income users in remote locations.
MGI estimates that if digital finance is widely adopted, it could add $3.7 trillion to emerging countries’ GDP by 2025. That amounts to a 6 percent increase above business as usual. In low-income countries with low financial inclusion rates, such as Nigeria, Ethiopia and India, GDP could increase by as much as 12 percent.
“Mobile phones and the internet can reduce the need for cash and bypass traditional brick-and-mortar channels. ”
Another one-third would come from increased investment throughout the economy, as personal and business savings are moved into the formal financial system – and then mobilized to provide more credit. The remaining gains would come from people working more hours – the time they would have spent traveling to bank branches and waiting in lines.
Expanding access and reducing costs
As for financial inclusion, digital finance has two positive effects. First, it expands access. In emerging markets in 2014, only about 55 percent of adults had a bank or financial services account, but nearly 80 percent had a mobile phone.
That 25-percentage-point gap could be closed by making mobile banking and digital wallets a reality. But a gender gap also needs to be closed. Worldwide about 200 million fewer women than men have mobile phones or internet access.
“In emerging markets, about 55 percent of adults had a bank account, but nearly 80 percent had a mobile phone. ”
Using digital channels makes it feasible to meet the needs of low-income customers. Financial inclusion becomes profitable for providers even when account balances and transactions are small.
With digital finance, as many as 1.6 billion unbanked people – more than half of whom are women – could gain access to financial services, shifting about $4.2 trillion in cash and savings now held in informal vehicles to the formal financial system.
This would allow for an additional $2.1 trillion to be extended as credit to individuals and small businesses. Businesses could also save on labor costs, to the tune of 25 billion hours annually, by swapping cash transactions for digital payments. And governments could take in an additional $110 billion every year – to invest in growth-enhancing public goods like education – because digital channels make tax collection cheaper and more reliable.
New mobile-money services are already demonstrating digital finance’s potential. In Kenya, M-Pesa – which transforms one’s phone into a mobile wallet – has leveraged powerful network effects to bring about a vast expansion in the share of adults using digital financial services. That share grew from virtually nothing to 40 percent in just three years and had risen to 68 percent by the end of last year.
Traditional financial services accounts tend to grow at the pace of national income, but M-Pesa’s adoption rate has been dramatically faster, demonstrating that digital finance can achieve significant market penetration rapidly even in the world’s poorest countries.
But such success stories do not happen in a vacuum. For starters, everyone needs a mobile phone with an affordable data plan. While businesses can help, it is incumbent upon governments and non-governmental organizations to extend mobile networks to low-return areas and remote populations.
“ Nearly 20 percent of unbanked women in emerging countries do not have the documentation necessary to open a bank account. ”
Governments must establish universally accepted forms of identity as well so service providers can control fraud. In emerging economies, one in five people are unregistered, compared to only one in ten in advanced economies.
Nearly 20 percent of unbanked women in emerging countries do not have the documentation necessary to open a bank account. Even when people have recognized IDs, they must be amenable to digital authentication. Digital IDs that use microchips, fingerprints or iris scans could prove useful – and are already gaining popularity – in emerging economies.
Finally, governments must implement regulations that strike a balance between protecting investors and consumers, and giving banks, retailers and financial-technology and telecommunications companies room to compete and innovate.
Because regulations often shut out non-bank competitors, governments should consider a tiered approach, whereby businesses without a full banking license can provide basic financial products to customers with smaller accounts.
A good model for this is the United Kingdom’s “regulatory sandbox” for financial-technology companies, which imposes lower regulatory requirements on emerging players until they reach a certain size.
Financial inclusion is vital for inclusive economic growth and gender equality, and it has assumed a prominent role in global development efforts, with the World Bank aiming for universal financial inclusion by 2020.
With billions of people in emerging economies already using mobile phones, digital finance makes this goal achievable.
This article originally appeared on Project Syndicate and was republished with permission.