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What is needed to make digital payments attractive for poor households?
Cash is the main way of exchanging value for most poor households around the world and is cash is generally reliable, available, and cheap in relation to alternatives. However, it comes with significant (and often hidden) risks and costs such as theft or left and requires the use of informal transfer mechanisms.
By making cash virtual, digital payment systems ought, in principle, to help people conduct financial transactions at a lower cost while also leaving more of a trail, which might help them get credit or handle business disputes. But advocates of the theoretical benefits often miss the costs incurred by users. Digital payments often come with fees and involve effort to set up accounts and learn new technologies.
Several factors affect the ability of digital payment systems to provide enough benefit to consumers to outweigh these costs such as network penetration, availability of cash in/cash out points, trust, acceptance as a store of value, and integration with other financial tools.
How will digital payments evolve?
Digital payments may be an important part promoting financial inclusion worldwide. But the needs and vagaries of local contexts within countries make it unlikely that any single company or system can adequately meet customer demands at an affordable price. Banking is simply not a mass-market offering in most developing countries. Telecom operators often serve a mass market, but are rarely familiar with the regulatory framework for providing financial services.
Digital financial services may use a such a horizontally-layered delivery model, made up of mobile operators supplying secure messaging services, banks adding complementary financial services (like commitment savings accounts, loans, and insurance products) to the basic electronic account proposition; retailers handling cash in/out services; and billers and other businesses creating additional customer value. While there is obvious appeal to such a system, it requires a support structure of contracts, investments, and enabling business models that provide security, interoperability, and low-cost services.
Can digital payments be an effective gateway to other financial services?
First, person-to-person payments in themselves can be a form of informal group-based financial services. When people can draw on person-to-person payments in situations of exceptional need, their families or social networks become informal insurance mechanisms.
On the supply side, efficient and extensive retail payment networks can be important drivers for the extension of formal financial services to previously unbanked segments. Digital payment transaction histories may serve as a supplement or an alternative to a credit rating for evaluating potential borrowers. On the demand side, the ability to receive and collect money has indeed been a strong driver for account-opening in many countries. Once those accounts are opened, customers may over time leave higher balances or be cross-sold credit and insurance products. In short, when customers are connected to an e-payment system, their range of financial possibilities may expand dramatically.
Electronic payments may be a powerful way for new-to-banking customers to come to trust formal financial services and the financial institutions that are behind it depending on how such systems are branded and what combination of service providers delivers the product.
How can regulators balance access, security, stability, and consumer protection?
When it comes to setting regulation for basic access, regulators face a number of trade-offs created by balancing the creation of new digital products for financial inclusion with protecting the interests of a wide range of stakeholders. This issue manifests itself in many ways:
- Innovation vs. Financial Stability: To enable innovation, regulations need to allow new players and business models while not imposing such high costs that innovators and investors are scared away. At the same time, regulators cannot abandon the responsibility to protect customers and the stability of the financial system as a whole.
- Growing Networks vs. Fighting Crime: Law enforcement officials worry that speedier and lower-cost electronic payment mechanisms can make it easier for criminals to engage in illegal activities. However, stiff know-your-customer rules on electronic banking may be delaying digital financial inclusion.
- Interoperability vs. Investment Incentives: The value of electronic payments will be maximized if there is a single, nationally interconnected network. But there is a risk that if interconnection were mandated at an early stage of development of a network, it might actually kill off innovation and incentives for growth.
- Consumer Protection vs. Ease of Use: Ensuring adequate financial consumer protection ought to be particularly important when people begin using formal financial services for the first time. However, consumer protection rules do sometimes have the effect of raising the cost of services and/or placing a higher burden on the customer in using them.