Monday, October 26, 2020

How Digitization Can Boost Financial Resilience for People in Poverty

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As the world’s poorest people struggle with the economic impact of COVID-19, a potential source of hope has been found in Kenya. Around half of the East African nation’s 52 million people use the mobile payments service, M-Pesa. Recent evidence suggests that these users have shown a higher degree of resilience to financial shocks than those who don’t use M-Pesa.

For the World Bank’s Mahesh Uttamchandani, this is a clear demonstration of the benefits of financial digitization. Speaking at Ripple Swell Global 2020–a virtual gathering of the world’s trusted leaders in financial services and blockchain technology–today, Mahesh explained:

“People living in extreme poverty, who earn less than $1.90 a day…that income tends to be seasonal. Having the ability to save that money, to transact with it, to use it for investment, helps build resilience amongst the poor. They can invest in other developmental goals like health and education if they have access to a basic financial service.”

Mahesh leads a global team focused on financial infrastructure and how it can help with the World Bank’s twin goals of reducing extreme poverty and boosting shared prosperity. Simply providing access to basic financial services has a major impact. But even when digital services exist, challenges remain, especially for women.

Evidence shows that when women have greater access to family finances, it boosts life and health outcomes. However, in many developing world countries, women’s access to the mobile devices and internet services that digital finance depends on is lower than that of men. In addition, stringent KYC  rules – while critical for ‘full use’ accounts –  put up barriers for women, who are less likely to have the required documentation. These requirements can be calibrated so that they become less stringent for simplified or ‘limited-use’ accounts.

Mahesh noted that Indonesia’s promotion of mobile phone penetration, allowing mobile providers to enter the financial services space (as also happened in Kenya with Vodafone and M-Pesa) and a simpler due diligence process for accounts limited to basic transactions have all contributed to the country’s gender parity of financial inclusion.

Opening up access to the most basic financial tools is critical and payments in particular are what Mahesh describes as “the gateway financial service for the poor.” They are also vital to the financial well-being of many families across the developing world.

In 2019, remittances from migrant workers accounted for 5% of GDP in as many as 50 developing economies. The World Bank estimates that fully digitizing the current remittance process would cut costs by more than half and put more money in the hands of those who need it the most.

The need could not be greater right now. The World Bank projects that the pandemic may have pushed 1.4% of the planet’s population back into extreme poverty. Governments that are supporting their people through the crisis with social programs could amplify the benefits by digitizing their payments.

“If every government did this under every existing social program,” explained Mahesh, “we’d probably have a hundred million more people globally with access to financial services and the gender gap for women in some countries would drop by as much as 20%. That can really be a huge game changer.”

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