The benefits of digital payments go beyond mere convenience: they can transform the financial lives of those who use them. Mohamed Dabo reports on the obstacles to their growth faced by developing countries
In low-income economies with less developed banking systems, developing an adequate physical network to deliver digital payments to all corners of the country is a significant challenge.
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By GlobalDataFurthermore, digital payments face significant infrastructure challenges. Lack of electricity to power mobile phones and cell towers, limits in mobile network coverage, and poor transport networks all hinder the expansion of digital financial services in rural areas. Ultimately, while digital payments can be more cost-effective in the long term, building an adequate physical infrastructure for reliable payments will require significant up-front investments.
Moreover, while 54% of adults in high-income OECD countries reported using the internet – on a mobile phone or computer – to make online payments in 2015, only 10% of adults from developing economies reported doing so.
Two billion people worldwide lack formal identification
Poor network quality and coverage can lead to dropped connections and transaction failures that can erode confidence among users of such services, especially in rural areas.
To open a bank or mobile money account or to make the most digital financial transactions, customers generally need to submit relevant documents like government-issued identity cards or birth certificates.
However, according to the World Bank more than two billion people worldwide do not have any formal identification. This can limit entrepreneurs’ access to formal registration, labour contracts, and financial services. It can also prevent employees from opening an account to receive electronic wage payments.
Even though countries such as India, Pakistan and Kenya are working toward creating a database using a national identity card system, many people still lack a government-issued identity document.
Illiteracy makes the use of digital products harder
Low levels of financial literacy and numeracy among entrepreneurs and employees can make it harder for them to use digital financial products efficiently. As an example, only 33% of adults in more than 140 countries could answer questions correctly on three of the following four topics: inflation, risk diversification, simple interest and compound interest. Low financial capability makes it harder for entrepreneurs and employees to make financial decisions.
There is mixed evidence on whether financial knowledge can be improved through classroom or online training. A meta-analysis of 188 papers studying the impact of financial education concludes that such schooling can influence some financial behaviours, including savings and record keeping. However, the evidence is mixed on how much general financial literacy training changes actual behaviour.
The need for adequate consumer protection laws
Consumer protection laws and dispute resolution mechanisms related to digital financial transactions can bolster consumer confidence and the proper use of such services.
Effective consumer protections include:
- Education about financial safety, such as the importance of keeping PINs private; disclosure policies to ensure financial service providers have clear and easily accessible information; and legally authorised redress mechanisms to dispute any unauthorised transactions;
- Despite the benefits of digital payments for labour force participation, most developing countries overestimate the capacity of entrepreneurs, employees, and customers to adopt such programmes;
- When a new type of payment instrument is introduced, such as point-of-sale payments, success requires simultaneous development of both the supply and demand sides for the product.
The predicament of payment providers
Otherwise, payment providers will face a dilemma: Without a large number of entrepreneurs that accept the product, customers will not be interested in signing up; but without a large number of customers who want to pay with it, entrepreneurs will not be interested in accepting it – particularly if they have to pay for using the digital service.
Reluctance among workers to adopt technologies such as electronic wage payments can also be a big challenge. Transitioning to electronic wages requires investment in technology, employee training and on-site support agents, given that workers who are accustomed to cash sometimes struggle with the switch to digital payrolls.
The effect on entrepreneurship
Entrepreneurial opportunities supported by well-functioning digital payment systems can play a key role in encouraging labour force participation in developing countries.
An electronic payment system should be supported by an appropriate financial consumer protection framework. Without this, there is a risk that recipients could lose trust in the system and financial inclusion objectives may not be achieved.
Governments should also ensure a regulatory environment that encourages innovation and competition and work with the private sector to develop reliable infrastructure that can reach rural areas. They should also ensure robust and secure digital networks as well as interoperability and competition among providers.
To accomplish these goals, governments can reform their banking and telecom policies to support digital financial services.
