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Digital Payments Can Benefit the Poor, and Be Good for Business

New study uncovers mutual benefits for making money digital

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KUALA LUMPUR – September 11, 2013 – The global marketplace for financial services is failing the poor in the developing world, but could be improved to benefit both the poor and financial providers, according to a new study released today by the Bill & Melinda Gates Foundation Fighting Poverty, Profitably: Transforming the economics of payments to build sustainable, inclusive financial systems.

The report, completed by the Gates foundation and McKinsey & Company, is the first extensive analysis of the economics of payment systems around the world and concludes that the cost of these systems could be significantly reduced, and they could be made more efficient, sustainable and accessible to poorer consumers, while at the same time boosting revenues for financial providers. 

Only 16 percent of people living on less than $2 a day have access to formal bank accounts; access for women and people in rural areas is even lower. This makes it harder for the poor to conduct basic financial transactions such as receiving income, paying bills or sending money to relatives. 

“Poor families have incredibly complex financial lives, but the tools available to them to manage their finances don’t match up,” said Rodger Voorhies, director of the Bill & Melinda Gates Foundation’s Financial Services for the Poor program. “People need affordable, efficient and secure ways to send and receive money, and this report shows how this can be achieved, especially through digital transactions that can reduce costs by up to 90 percent.”

The research shows how there is currently little economic incentive for financial providers to serve poor people, largely because they have low balances and transact in small amounts. However, lessons drawn from developed countries highlight how digital payments are cheaper, more efficient and ultimately more sustainable. 

Digital payment systems can also supply financial institutions with additional sources of revenue. For example, the data from digital transactions can help providers better understand customer needs and patterns, thereby helping create new products and offering more attractive credit terms.

The report compares payment systems in more than 30 countries incorporating insights from more than 100 interviews with regulators and payments providers from around the world, including banks and telecommunications companies. It includes in-depth investigations in six countries – China, India, Kenya, Nigeria, the Netherlands and the United States. 

Key findings include: 

  • Digital payment systems, including mobile money and electronic account deposits, offer the highest potential for financial inclusion. They are more efficient and can reduce transaction costs by up to 90 percent, and offer greater potential for generating adjacent revenues 
  • To date, no payment system has reached its full economic performance – all countries have the potential to lower costs and broaden access. 
  • A payment model where fees are based on a customer’s activity has the best chance of sustainably reaching poor users.
  • Innovations offer increasing potential for improvements in payments systems as new technology, revenue sources and business models emerge. 
  • Evidence from across the globe suggests that access to cash will remain important even after digital payments take root. For payment platforms to adequately serve the poor, they need both a viable digital payment system, complemented with traditional solutions for both collecting and dispensing cash.
  • Only countries with widespread access to digital transactions (through either a bank or a mobile money provider), achieve high levels of financial inclusion. In countries where more than 70 percent of people can pay digitally, financial inclusion is over 85 percent.

The report employs a new framework to analyze the performance of a payment system as a whole, rather than just specific elements, and looks at system-wide revenues and costs to determine what drives profitability.  The framework places a strong focus on the experience of the end users of these systems. 

Using this framework to evaluate payment systems worldwide, the Gates foundation has developed recommendations for payment system stakeholders including the private sector, policymakers, and regulators. The analysis indicates that a solid baseline should be established for any payment system to improve its oversight and measure its effectiveness. It recommends embracing “best of breed” payment systems providers to foster efficiencies and competition. It suggests that innovations from other markets should be applied to improve performance. And it shows how a focus on the system as a whole, rather than individual institutions, will improve regulation.

“We are encouraged because we see opportunities to make payment systems more efficient and more accessible to poor people,” said Voorhies. “With better access to a broad range of financial tools and services that really meet the need of the world’s poorest, they can take control of their financial lives. The results would be a dual win for people and providers.”

While the report offers recommendations that apply across geographies, it emphasizes that each country needs to understand the unique characteristics of its financial system in order to address the root causes of payment inefficiencies – and to help bring high quality, affordable financial services to those people for whom they are currently out of reach. 

To access the full report, and other supporting documents, please visit this blog post.

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