Digital payments key to financial inclusion, says Gates report

Digital payments systems are key to providing wider access to financial services, but customers in developing countries may have to pay each time they use them in order for the economics to stack up, according to a new report on financial inclusion from the Bill and Melinda Gates Foundation.

The report was published on the same day as the Alliance for Financial Inclusion (AFI), a global network of developing country and emerging market central banks, adopted a new accord committing to use a set of common indicators to measure progress to their financial inclusion goals.

At its fifth annual Global Policy Forum, this year hosted by Bank Negara Malaysia in Kuala Lumpur, the AFI also saw 11 further national central banks sign up to the Maya Declaration committing to work towards financial inclusion, bringing the total to 45 in total.

The meeting culminated in the signing of the Sasana Accord, which aims to strengthen the effectiveness of the Maya Declaration commitments through a focus on evidence and data-based results, and to accelerate progress and clearly measure the impact of financial inclusion policies.

The meeting also coincided with the publication of the report into the benefits of financial inclusion, written by consultancy McKinsey and the Bill and Melinda Gates Foundation, which also funds AFI.

The report, entitled Fighting poverty, profitably: Transforming the economics of payments to build sustainable, inclusive financial systems, argues there is a "growing body of evidence" that indicates poor people "could see significant improvement in their lives" if they had access to financial services such as chequing and savings accounts, loans, and insurance.

Digital payment systems, the report says, including mobile money and direct electronic account deposits, offer the highest potential for financial inclusion, but it argues that a payment model where fees are based on a customer's activity "has the best chance of sustainably reaching poor users".

Widespread access to digital transactions, either through a bank or a mobile money provider, are key to achieving high levels of financial inclusion, it continues. "In countries where more than 70% of people can pay digitally, financial inclusion is over 85%," the report says.

It concedes that currently, the economics do not work for financial service providers to go out of their way to cater to poor people in developing economies in most cases. "The reasons are simple," the report says. "Poor people usually conduct financial transactions frequently, and in small amounts… in many scenarios, the more the poor use the financial system, the bigger the losses for the providers of that system."

Nevertheless, the report's authors find reasons for optimism. Payment system providers, they say, "have the ability to lower costs, expand margins, and broaden services". Together, the report says, "these improved economics can give much larger portions of the population a first step to financial inclusion and the financial service support they can use to better their lives. The results would be a dual win for providers and consumers."