The digital promise
Digital technologies, starting with mobile phones, can rapidly fix problems encountered when savings are stored outside the financial system and foster faster, more inclusive growth, write Laura Tyson and Susan Lund in Project Syndicate.
In emerging economies today, two billion people – 45 per cent of all adults – do not have a formal account at a bank, financial institution, or with a mobile-money provider. The “unbanked” rate is even higher for women, the poor, and people living in rural areas. Moreover, at least 200 million small- and medium-size enterprises lack sufficient credit, or have no access to credit at all.
Entrepreneurship, investment, and economic growth suffer when savings are stored outside the financial system, and credit is scarce and expensive. Fortunately, according to 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 $US3.7 trillion to emerging countries’ gross domestic product (GDP) by 2025. That amounts to a 6 per cent increase above business as usual.
Digital finance can boost GDP in several ways. Nearly two-thirds of the expected growth would come from increased productivity, because businesses, financial-service providers, and government organisations would be able to operate much more efficiently if they did not have to rely on cash and paper recordkeeping.
Another one-third would come from increased investment throughout the economy, as personal and business savings were moved into the formal financial system, and then mobilised 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 queues.
As for financial inclusion, digital finance has two positive effects. First, it expands access. In emerging markets in 2014, only about 55 per cent of adults had a bank or financial-services account, but nearly 80 per cent 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 will also have to be closed: worldwide, about 200 million fewer women than men have mobile phones or Internet access.
Second, digital finance reduces costs: MGI estimates that it would cost financial-service providers 80-90 per cent less – about $US10 per year, compared to the $US100 per year it costs today – to offer customers digital accounts than accounts through traditional bank branches. Using purely digital channels thus 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.
Source: The promise of digital finance - Project Syndicate and the McKinsey Global Institute