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OPPORTUNITIES
IN DIGITAL FINANCIAL SYSTEM

 

Digital
finance can help achieve financial inclusion

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Around
the world, about 2 billion people do not have any access to financial services.
The scenario is worst in the developing countries where only about 59% of women
and 50% of men have bank accounts. It can be observed that women, the poor, and
small businesses depend mostly on informal financial services. In India, in the
year 2015, out of 600,000 villages only about 30,000 had a commercial bank branch.
This meant that a significant fraction of the rural population did not have
access to financial activities. More than 50% of the Indian population did not
have access to bank accounts.  Digital
payment systems play an important role in driving financial inclusion. Digital
payment systems help overcome barriers in access to financial services. Mobile
money schemes enable people who have a phone but not a bank account to make and
receive payments. In the right environment, these systems can take off and
reach massive size rapidly.

Mobile money can create significant improvements in
the lives of the poor. As most of rural India relies solely on cash, they are
excluded from the formal economy. Mobile money and payment systems is a convenient
alternative to informal financial services and cash-based assets. This way
mobile money helps in financial inclusion. It reduces dependency on cash and encourages
digital payments through mobile. It provides a way for people to take advantage
of a much broader range of financial services.

 

The business case for providing mobile money services
to the unbanked in the most remote rural areas of India is not appealing to
banks. Banks are interested in providing additive mobile banking services for their
existing client base, where mobile is simply an additional and more convenient
access channel. Until now, transformational mobile money services—the use of
information and communication technologies (ICTs) and non-bank retail channels
to extend financial services to clients who cannot be reached profitably with
traditional branch-based financial services—have not given banks the right
incentives to invest in these customers long term.

Digital finance can increase women’s economic
participation. In part, this is because digital payments can more easily be
concealed by the recipient than cash, at least temporarily, which helps shift
economic decision making in favour of women. This helps in increasing female
empowerment as women start feeling more independent and they learn to make choices
of their own. There is a significantly positive relationship between female
labour force participation and female bank account ownership.

 

Digital
finance can increase efficiency

 

The internet reduces the cost of many financial
transactions by allowing their unbundling into separate components that can be
automated or provided by specialized entities. Digital payments help reduce
costs to recipients. Digital payments allow better control. A retail payment
consists of pre-transaction, authorization, clearing, settlement, and
post-transaction, each one again involving several steps. Specialized providers
can execute individual steps, yielding economies of scale that translate into
savings. Such service providers are becoming more widespread in developing and
emerging markets. Governments can also lower the cost of financial
transactions. Digital finance also increases the incentive to save, through
automatic deposits, text reminders, or default options. Digital payments speed
up delivery, which is especially important in case of emergencies such as
natural disasters. And they increase security as it is often not safe to travel
with large sums of cash.

Moreover, a report by McKinsey had estimated that
Indians lose more than $2 billion a year in income simply because of the time
it takes travelling to and from a bank. With digital finance, vital baking services
can be brought to 1.6 billion people. For all individuals, convenience, cost,
and the range of financial products would dramatically improve. (McKinsey Global Institute (MGI) report
‘Digital finance for all: Powering inclusive growth in emerging economies’)

Financial services providers would also benefit
from the shift from cash to digital payments, expanding their balance sheets by
as much as $799 billion in India. For financial service providers, the cost of
offering customers digital accounts can be 80 to 90 per cent lower than using
physical branches. (McKinsey Global
Institute (MGI) report ‘Digital finance for all: Powering inclusive growth in
emerging economies’)

Digital
finance reduces frauds

 

Digital payments create a clear digital record and
can be traced back to the source. Thus, the likelihood of funds not reaching
the beneficiary or of duplicate payments or payments to “ghost” recipients who
do not exist will be lower. Evidence from India also shows that using smart
cards rather than cash for social security payments halved the incidence of
demands for bribes. (World Development
Report, 2016)

 

Digital
finance enables financial innovation

 

The financial sector is transaction-intensive and
has always adopted cutting-edge new technology. Automation has helped reduce financial
transaction costs. This has encouraged innovations, such as automated credit
scoring using advanced analytics and massive amounts of data. Automating processes
enable emerging fin-tech firms to offer services costs much lower than traditional
providers.

 

Another important innovation has been the emergence
of digital currencies. The most well-known digital currency called Bitcoin was
introduced in the year 2009. Over the past years, its value in terms of
national currency has been wavering. It has not been widely accepted as a means
of exchange. There have also instances of frauds. But a study conducted by the

Bank of England states that the main innovation of
such currencies is the distributed ledger which does away with accounting and
settlement by banks. This model could also work for other financial assets such
as loans, stocks, or bonds.

Digital
finance can boost the economy

A report by McKinsey has estimated that the widespread
adoption of digital finance can boost the GDP of emerging economies by as much
as $3.7 trillion by 2025, a 6 per cent increase versus a business-as-usual
scenario. For India, digital finance is a $700 billion opportunity which can offer
a 11.8 per cent boost to GDP by 2025, benefitting millions of people. This
additional GDP could create up to 95 million new jobs across all sectors, 21
million of them in India (McKinsey Global
Institute (MGI) report ‘Digital finance for all: Powering inclusive growth in
emerging economies’)

Digital finance could be a boon to individuals, businesses,
and governments across the developing world in boosting GDP. In India, digital
finance can unleash over $689 billion in loans to individuals and small
business. This will have a good impact on the economy in the long run. With
increased loans, more capital investments can be made. This will improve productivity
and improve the economy in the long run.

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