In the financial inclusion discourse, the spotlight often comes on digital payments, due to the increased penetration of mobile.
The trends and pace of technology today ensure that a cash-lite society is no longer wishful thinking but a vision that countries are inching towards every day. However, the shift away from cash toward digital payments is difficult, expensive and sometimes confusing. The infrastructure implications alone are significant — resources for building or enhancing payments infrastructure, the constant security upgrades necessary to ensure system integrity, developing comprehensive financial literacy curricula as well as public sensitisation, to name a few. And at the end of it all, there’s no guarantee of the desired change within the timeframe.
So, is the drive for digital payments mere publicity or is it worth it? What are the gains of pervasive digital payments for an economy and her citizenry?
1. Digital payments power inclusive financial systems
The emergence of digital money and the ability of financial institutions to digitise their services and deliver them through digital channels has galvanised the quest for financial inclusion. As the recent World Bank Findex reports, the magnitude of progress modern banking has made between 2011 and 2017 was only possible due to digital financial services.
Furthermore, active use of a financial (transactional) account provides opportunities to access other financial services such as credit, insurance etc.
2. Accountability and social benefits
An inherent feature of digital money is that it leaves a footprint which can be traced. This is a useful feature for governance as it enables transparency, security, and accountability.
Several studies have suggested that digitising person to government payments (P2G), will enable governments curb corruption while increasing transparency and efficiency in payment flows. Same goes for government to person payments (G2P) — digital payments enhance government’s efforts to deliver social benefits to even the poorest of the poor and ensures that recipients receive the right amount. The ability to trace transactions and payments also enhances government’s tax collection efforts.
A 2016 report by McKinsey suggests that with improved and consistent adoption of digital financial services in the country’s payment space, no less than $88 billion will be added to Nigeria’s Gross Domestic Product (GDP) by 2025.
3. Gender equality
The quest for gender equality forges ahead and is seeing positive results through empowering women via access to financial accounts (either bank or mobile wallet) especially in developing markets.
In Niger, for instance, the increased privacy and control afforded women by digital financial services gives them more decision-making power on how the proceeds from the social cash transfer programme is used. As another example, the arrival of mobile money in Kenya made it easier for women in rural areas to request remittances from their husbands who migrated to urban areas for work.
4. A cash-based economy is limiting
The limitations of cash are even more pronounced today as the digital wave spreads across the world.
For one, cash is expensive. It costs money to print, costs money to distribute and is costly to keep secure. Cash is also perishable as it wears out with use, which leads central banks to manage circulation, retrieve and destroy old notes and reprint new notes. In fact, central banks are excited at the possibilities a digital economy affords since they stand the chance of increasing the ‘seigniorage’ they earn. (Seigniorage refers to the proceeds from creating money).
From the foregoing, it is obvious that digital payments offer significant benefits across the ecosystem. From the customer to the entrepreneur and service provider down the street, to the financial services institution, to the central bank and the national economy as a whole, digital payments benefit everyone.
However, to harness the full benefits of digital payments, we need to directly confront the situation. We need a coordinated effort with the Ministry of Women Affairs that encompasses closing the gender gap, fully digitising social investments payments currently managed by the Office of the Vice President, building out the telecommunications and payments infrastructure and the agent networks to provide last mile access especially in rural locations.
What other practical benefits do digital payments offer us?