Former Secretariat Director of the United Nations Secretary-General’s Task Force on Digital Financing of the Sustainable Development Goals

Tillman Bruett

Sustainable development needs digital financial services. Here’s how they can be more relevant for the underserved. 

Blog Post

When planning UNCDF’s third global conference on digital finance in 2017, I half-jokingly proposed the theme be <a href="https://www.uncdf.org/article/4162/dfs4what---building-inclusive-digital-economies">#DFS4What</a>, which ultimately did become the 2018 conference’s focus when we convened in Dakar. The title encapsulated something we had been seeing across our work in Africa and Asia: in least developed countries, the benefits to the majority of the population of having digital accounts, particularly amongst the rural and poor, simply did not outweigh the costs. While we often attribute financial exclusion to policies, business models, product design and practices, we saw in our own data in <a href="https://www.cgap.org/blog/making-digital-payments-work-low-income-farmers">Uganda</a> and other countries that the financially excluded chose to remain financially excluded because a digital account wasn’t better than cash, and it did not solve a very real and immediate need or desire for clients. It’s difficult to move beyond the 35 to 40 percent of the population actively using digital finance accounts unless we could make digital finance more relevant for people’s daily lives.
<blockquote>It’s difficult to move beyond the 35 to 40 percent of the population actively using digital finance accounts unless we could make digital finance more relevant for people’s daily lives.</blockquote>
At the same time, the benefits to developing economies of going digital are considerable. As <a href="https://www.gsmaintelligence.com/research/?file=b9a6e6202ee1d5f787cfebb95d3639c5&amp;download">GSMA has quantified</a>, in 2018, mobile technologies and services generated $3.9 trillion of economic value (4.6 percent of GDP) globally, a contribution that will reach $4.8 trillion (4.8 percent of GDP) by 2023. In 2016, McKinsey estimated that digital finance could contribute 5 to 10 percent to a developing economies’ GDP over a decade.

It also has development benefits. The United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, UNCDF, the Better than Cash Alliance and the World Bank <a href="https://www.unsgsa.org/files/1615/3738/5820/SDG_Compendium_Digital_Financial_Inclusion_September_2018.pdf">highlighted</a> the many ways in which digital financial inclusion was igniting progress toward the SDGs.

The financial inclusion community faces a conundrum. How do we promote digital finance as something that we believe is good for development even though it may not necessarily be of great (or any) benefit for many of the world’s poor in the short and medium term?

In discussions with colleagues over the past few years, some ideas and approaches have come up that are worth considering.
<h2>1. Make it useful.</h2>
PayGo solar has shown us how a very specific use case that solves a very real need can drive digital financial inclusion. A CGAP brief three years ago pointed out how 30 to 50 percent of PAYG (pay-as-you-go) solar customers in East Africa <a href="https://www.cgap.org/sites/default/files/Brief-Digitally-Financed-Energy-Mar-2016.pdf">opened a mobile wallet</a> in order to purchase a digitally-financed energy solution. These PayGo models are ideal for small assets and services, from clean water to cook stoves to riding on <a href="https://safeboda.com/ug/">safe bodas</a>. Focusing on what digital finance is for rather than on why digital finance is important is key to reaching low income populations.
<h2>2. Make it fun.</h2>
As <a href="https://www.economist.com/leaders/2019/06/08/the-second-half-of-humanity-is-joining-the-internet"><em>The Economist</em> recently pointed out</a>, recent migrants to the digital world spend most of their time chatting with friends and streaming videos for which they happily pay. So it’s important to remember its not only about what people need (or what the development community thinks they need), it’s about what they want. I’m not suggesting that we should ignore the dangers, such as digital credit being used for betting, but we be open to the idea that the drivers of digital financial inclusion may be for social or entertainment purposes, such as downloading music and <a href="https://www.ft.com/content/74e9c2a0-1792-11e8-9376-4a6390addb44">red envelopes</a> for the lunar festival.
<h2>3. Make it lucrative.</h2>
Creating an affordable merchant acceptance network for digital payments has long been seen as the elusive magic elixir for digital financial inclusion. But it may be e-commerce, or more appropriately “<a href="https://www.investopedia.com/terms/m/mobile-commerce.asp">m-commerce</a>,” that drives usage before merchants do. E-commerce in the Asia Pacific region generated over <a href="https://www.telecomreviewasia.com/index.php/news/featured-articles/1640-in-with-the-new-how-fintech-and-e-commerce-are-driving-innovation-in-asia">$900 billion in total revenue</a> in 2017 and as Alibaba has demonstrated with Alipay, e-commerce can drive much greater access to a range of financial services. Last year, Facebook reported that it had over <a href="https://www.cnet.com/news/facebook-marketplace-is-used-in-70-countries-by-800-million-people-monthly/">800 million users in over 70 countries</a> for its Marketplace platform. In places like Myanmar, cash on delivery is the way most users on Marketplace close a deal. While the fate of Libra still hangs in the balance, other companies like Grab have moved into free digital accounts to support their ride hailing and other m-commerce offerings.
<h2>4. Make it free.</h2>
This is a counterintuitive counter proposal to the previous suggestion. The user-pays model of digital finance has always been problematic: to many low-income users, it’s a psychological and, in some cases, financial barrier. Alipay and GrabPay do not charge users directly. They make money on their core business. So too does Telesom Zaad in Somalia, which makes up the cost of managing its mobile money service through the increase in mobile and data sales. Digital finance provides so many positive externalities, efficiencies and cost savings for businesses and governments alike that there is a strong argument to move to a “freemium” model for customers for basic accounts and payments and instead let large corporate, NGO and government users bear the costs.
<h2>5. Make it easier.</h2>
The JAM trinity of India, combining identification, real-time payments, and basic accounts is a great example of how government innovation is building a backbone for businesses of all types to provide and use digital finance. The next challenge for regulators and the industry alike is to create a simple way for m-commerce firms to embed payment options to on-line and in-person payments. Interoperability is not enough. There is a need for better interfaces between m-commerce sites and payment apps and for simple, standard rules of the game and pricing so that anyone who follows and plays by the rules can be part of the digital economy.

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The advent of fintech is making digital finance happen in new ways and by new actors, which are making it useful to people in ways that go well beyond our traditional understanding of financial inclusion. We now see how digital financial inclusion is increasingly being driven by the lure of the broader digital economy in all of it chaos.

This comes at a time when the global financial sector – indeed monetary systems themselves – are in a state of flux. In my work as Secretariat Director of the United Nations Secretary-General’s Task Force on Digital Financing of the Sustainable Development Goals, we conducted a landscape study to look at <a href="https://digitalfinancingtaskforce.org/wp-content/uploads/2019/07/DFET-White-Paper-Final-08-17-afa.pdf">how the changes in finance due to digitalization were impacting sustainable development</a>. What we noted is that beyond digital retail finance and fintech, innovations in global finance are also beginning to have positive impacts on development and financial inclusion. Payments is a clear example, with new, cheaper money transfer services like Remitly and Transferwise making cross border payments cheaper, faster and more secure. Insurance is another, with global insurers deploying increasingly sophisticated index insurance models that are being used to provide small farmers in Africa with crop insurance.
<blockquote>Innovations in global finance are also beginning to have positive impacts on development and financial inclusion.</blockquote>
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Which brings me to my last suggestion:
<h2>6. Make it global.</h2>
It’s easy to get bogged down in all of the barriers to reaching the next 1.7 billion unbanked through digital finance. From connectivity to cybersecurity, the challenges are considerable. Digital finance might be a just small part of many larger developmental, environmental and business opportunities. Digital finance is key to solving energy challenges – and taking advantage of the clean energy opportunity. It is vital for the booming ride hailing and food delivery sectors around the world – sectors which hire a number of poorer members of society, if not sustainably, at least temporarily. It is critical to boosting tax collection and reducing “leakages” in government payments. In short, we have allies, a lot of them around the world, all of whom stand to benefit from digital payments. Our challenge is harnessing them and finding ways to work together to accelerate access to digital finance.

These six suggestions might go a long way toward boosting digital financial inclusion, and, in doing so, boost development and build the digital economy. Do you have any suggestions to add? Share in the comments below!

Tillman Bruett

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