The Coronavirus pandemic has shown that the trend towards greater digitalisation of financial services in the country is here to stay
Mobile finance finds itself at an inflection point as the world continues to tackle the socio-economic fallout of the COVID-19 crisis. In these critical times, mobile money has helped governments in navigating the financial dystopia and addressing the practical challenge of delivering affordable and efficient financial services. Mobile currency is as an effective and physical distance friendly option to avoid cash, which can act as a carrier of the Coronavirus. Contactless digital payments at the point of sale with the help of facial recognition, Quick Response (QR) codes or near-field communications (NFC), drastically reduce the possibility of the spread of the contagion.
Digitisation has turned a smartphone into a wallet, a chequebook, a bank branch and an accounting ledger. The ubiquity of the mobile phone has made it possible to deliver financial services to people for whom a bank account is a distant dream. Frictionless, real-time payment through smartphones is already ensuring that the financially excluded section is thinning fast. Mobile transactions can create the next wave of financial inclusion if we prudently address the concerns of consumers.
For instance, people in far-flung areas of the country and remote villages are now able to make payments, deposit money, transfer funds, receive social benefits and wages and buy rations — affordably and reliably without the hassle associated with the opening of a bank account. In emerging and developing economies, millions have cellular phones but no bank accounts, credit cards or debit cards. For them, mobile money has begun filling the gaps in financial services. It serves as a lifeline, bringing those who currently lack access to banking into the financial mainstream.
Further, the penetration of cellular phones puts developing countries in an advantageous position where making a quantum leap in financial inclusion is concerned. For communities with low literacy levels and sporadic incomes, digital money can transform the socio-economic landscape. Mobile banking is enabling women to overcome common barriers. It reduces the need to travel long distances to access banking facilities and also ensures a level of privacy and security.
In reality, despite the best of intentions banks cannot afford to set up branches in every nook and corner of the country as there are logistical, economic and security constraints. The high cost of building infrastructure for bank branches has been a major obstacle in extending financial services to the poor and the underserved in remote locations. Cellular phone banking eliminates the problem of geographical inaccessibility and high set-up cost of bank branches.
Banks, mobile operators and third-party providers are all leveraging technologies on mobile phones to offer basic financial services at a lower cost than traditional banking allows. Several new types of delivery channels are emerging such as managers, agent networks, payment aggregators and others who are helping in building a more far-reaching and efficient digital finance ecosystem.
Digital mobile finance offers at least three major advantages over traditional financial models. First, digital transactions are essentially free. In-person services and cash transactions account for a majority of routine banking expenses but mobile finance clients keep their money in digital form. They can send and receive money without incurring transaction costs from their banks or mobile service providers.
Second, mobile communication generates copious amounts of data which banks and other providers can use for developing more profitable services. It even acts as a substitute for the traditional credit scores.
Third, mobile platforms link banks to their clients in real time. This means that banks can instantly relay account information or send reminders and clients can quickly sign up for services on their own.
Further, digital footprints and transaction data can be of great help to assess individual creditworthiness. Mobile network operators are teaming up with banks, financial-tech companies and data analytics specialists to use the customer information to gauge their credit risk and offer microfinance products to some who would otherwise lack any proof of their capacity to repay a loan.
If the customer is a regular user of a digital money transfer service, the operator may also be able to assess how much disposable income they have.
In fact, mobile operators’ data can be good enough to lower the lender’s risk significantly, enabling interest rates to fall and making microfinance a more attractive proposition for small businesses and individuals.
But such success stories do not happen in a vacuum. To begin with, everyone needs a cellular phone with an affordable data plan. It is entrusted upon governments and non-governmental organisations to extend mobile networks to remote areas. Governments must also ensure that networks between banks and telecommunications companies are interoperable otherwise, widespread use of mobile phones for financial services and payments would be impossible.
Mobile money transactions will also have to address the limitations which prevent countrywide adoption of the channel. Exchanging mobile money for cash can still be expensive. And digital and financial illiteracy are known to hinder adoption of digital mobile services. People in rural and remote areas may lack network coverage, easy access to money agents, or simply electricity. A robust identification system, widespread, consistent internet access and trustworthy ways to get money into digital formats could be important for digital payments to thrive.
Women’s access to mobile finance is affected by the fact that fewer females possess a mobile phone as compared to men. The promises of mobile finance are certainly very seductive. However, the reality is much harder than we can imagine. It is easier to spread technology than to bring about extensive change in social and individual attitude.
Although mobile telephony might entail initial fixed costs, the variable costs associated with their use are significantly lower, enabling an overall reduction in transactions costs. Mobile banking can be a strong income stream for telecom operators, helping them to counter slowing subscription growth and growing competition in traditional niches. The key is information technology spending in annual fixed costs for a mobile banking system. Again, that spending is significant for small providers, but is minimal for large players. This means financial firms looking to expand into emerging markets via mobile banking would require good financial stamina.
Since success is in everyone’s best interest, mobile and financial industries and regulators should work collaboratively with each other to unlock the transformative social impact of cell phone money. It is only then that we will be able to deliver life-changing mobile financial services to millions of people across the world, who still have no access to traditional banking.
The pandemic has shown that the trend towards greater digitalisation of financial services in India is here to stay. The ongoing crisis is certainly going to test the way various players in the digital and financial ecosystems respond. Governments must close the digital divide to reap the benefits of digital financial services. This means finding the right balance between enabling financial innovation and addressing several risks: Lack of financial and digital literacy, insufficient consumer protection and unequal access to digital infrastructure and data bases.
(The writer is a well-known development professional of international repute. The views expressed are personal.)